Ad

October 17, 2019

Last in First out (LIFO) Method with Example

October 17, 2019


The last in first out (LIFO) method assumes that inventory purchased last is first sold and the oldest inventory remains unsold. In other words, the oldest cost of inventory remains in the balance sheet while the newer cost of inventory is assigned to the cost of goods sold. As such FIFO method does not follow most companies’ natural inventory flow. Therefore, this method is not allowed by International Financial Reporting Standards (IFRS), however prevalent across US.

The LIFO method is exactly opposite to FIFO method. Under LIFO method, when prices of goods increase, the cost of goods sold become higher and the cost of inventory becomes lower and the net profit also becomes lower. This result fewer income tax to pay. This is the reason a company would choose to use LIFO method.

Last in first out (LIFO) method can be used in periodic inventory system and perpetual inventory system. Let’s use LIFO method in both inventory systems.

Example 1: (Periodic Inventory System)


Find cost of ending inventory, cost of goods sold and gross profit using LIFO method under periodic system. Take data from the given below table:

Date Description Units Per Unit Cost Amount
1-Jan Inventory 100 20 2000
10-Mar Purchased 200 25 5000
15-May Purchased 100 25 2500
20-Aug Sold 200 30 6000
10-Sep Purchased 100 25 2500
15-Oct Sold 200 30 6000
20-Nov Purchased 100 25 2500
5-Dec Purchased 200 25 5000

Computation for ending units/Units in hand:

Opening units 100
Total purchased units 700
Total units available for sale 800
Total sold units 400
Ending units 400

Computation for cost of ending inventory:

Abc Corporation
Cost of Ending Inventory
By using Last In First Out Method

Date Description Units Per Unit Cost Amount
01-Jan Inventory 100 20 2000
10-Mar Purchased 200 25 5000
15-May Purchased 100 25 2500
Cost of ending inventory 9500

Computation for Cost of Goods Sold:

Opening Inventory 2000
Purchases 17500
Cost of goods available for sale 19500
Ending inventory 9500
Cost of goods sold 10000

Computation for Gross Profit:

Sale 12000
Cost of goods sold 10000
Gross profit 2000

Example 2: (Perpetual Inventory System)


Find cost of ending inventory, cost of goods sold and gross profit using LIFO method under perpetual system. Take data from the above table:

Computation for cost of ending inventory and cost of goods sold:


Inventory Card: Last in First out (LIFO) Method

Computation for Gross Profit:

Sale 12000
Cost of goods sold 10000
Gross profit 2000

We can see both periodic and perpetual inventory system provide same cost of ending inventory, cost of goods and gross profits using LIFO. The periodic and perpetual are different inventory methods but yield same results. 
Share:

0 comments:

Post a comment