馃攳
FIFO Inventory Method - Meaning, Example, Calculation, What is First In First Out Accounting? - YouTube
Channel: WallStreetMojo
[10]
hello everyone hi welcome to the channel
of Wallstreetmojo.Watch the video
[15]
till the end also if you are new to this
channel then you can subscribe us by
[18]
clicking the bell icon. Friends today we going to learn a concept which is known as FIFO
[24]
first-in first-out
inventory method this is one of the
[27]
inventory method of which has been used
it's a qualitative factor a qualitative
[31]
analysis which an analyst will conduct
while analyzing the company's
[38]
financial statement. FIFO is one such
method there is another called LIFO and
[42]
VAM so today we are going to study FIFO
we'll be studying with the help of an
[47]
example over here as you can see there
is an extract over here and the extract
[52]
shows couple of details inventory raw
material this is basically the notes and
[58]
in the notes accounts it shows us that
raw material purchased finished goods
[61]
are valued at lower of the purchase cost
calculated using the FIFO so this is the
[66]
method so by this method an analyst will
be able to figure out couple of
[71]
analysis which he has to make in the
ratio analysis and the net realisable
[75]
values the work-in-progress
sundry supplies and he manufactured
[79]
finish goods are valued at lower of the
weighted average cost and the NRA which
[83]
is the formal accounting policy the cost
of the inventory includes the gain and
[88]
losses on the cash flow hedges on the
purchase of the raw material in the
[91]
finished goods. As you can see there is a
raw material in and finished goods
[94]
details and the allowance for the write
down of the NRI details that has been
[99]
given let's understand this method in a
complete detail forma.t Now what exactly
[104]
is this FIFO methodology FIFO accounting
method stands for the first in first out
[111]
method and is one of the most common
method it is one of the most common
[117]
method to value the inventory at the end
of the accounting period and does it
[120]
impacts the cost of the goods sold
during the particular period now
[125]
inventory is the cost and are reported
either on the balance sheet or they are
[131]
transferred to the income statement and
as in basically in the income statement
[136]
as an expense against the sales revenue
so when an inventory are used up in the
[142]
production or are sold their cost is
transferred from the balance sheet to
[146]
the income statement as a cost of goods
sold okay. Now how exactly this thing is
[155]
the calculation is done now the
beginning plus the additions that have
[161]
been made this writing plus over here
the additions that we make is equal to
[166]
the sold plus what we have is going to
be the ending inventory so this both of
[176]
them are what we let me just merge this
and I'll write what we have for selling
[189]
now this is what we sold right and this
is what we end up with so under FIFO
[202]
method of accounting inventory valuation
the goods which are purchased at the
[207]
earliest word is very important for this
method earliest are the first one to be
[213]
removed from the inventory column so
this results in remaining inventory add
[217]
books to be valued at the most recent
price
[223]
for which the last stock of the
inventories purchase and this results in
[227]
inventory assets recorded on the balance
sheet as the most recent assets I hope
[235]
you're getting some idea regarding what
we a talk know conversely this method
[239]
also results in older historical
purchases or purchase price allocated to
[244]
the cost of goods sold and matched
against the current period revenue I
[248]
mean FIFO method of inventory
valuation results in many a time
[253]
overstatement
of the gross margin this is the one
[260]
big analyst is an analyst does when he
sees FIFO method in an inflationary
[266]
condition and therefore does not
necessarily reflects a proper matching
[270]
of the revenue and the costs for example
in an environment where the inflation is
[274]
in the upward trend then the current
revenue will be matched against the
[280]
older and the lower-cost inventory item
and this will result in higher possible
[285]
gross margin.
[288]
Now the FIFO inventory valuation is
commonly used under by both the IFRS
[294]
which is known as the international
financial reporting standard and the gap
[298]
that is the generally accepted
accounting principles now we'll take one
[302]
example to understand this now we are
going to take a first in first out
[306]
method example let's say there is a
company called ABC corp
[311]
or let's say KG CAP uses a FIFO method
of inventory valuation for the month of
[317]
December now during that month it
records the following transaction the
[321]
opening value sale one purchase sale
purchase and inventory ending inventory
[326]
so the quantity is getting see in the
opening it is positive then the sale
[330]
negative purchase again it goes positive
sale negative part is positive and
[334]
ending inventory is the net amount of
all now the actual unit cost over here
[340]
have been taken the actual total cost
details have been given right so a unit
[345]
cost or the unit of the goods sold over
here in the beginning is one thousand
[350]
plus two thousand that has been
purchased
[354]
as we can see 1500 and 500
which is 2000 less the
[359]
ending inventory 1250 is
equal to 1750. Let's
[364]
let's do it over here the opening that
is available to us is 1000 the
[370]
purchase that is 1500 plus
500
[375]
and the closing inventory that is
available with us is 1250
[378]
so the unit of the goods sold is going
to be 1750 units
[383]
calculation by the FIFO method see the
controller uses the information in the
[388]
about able to calculate you know the
cost of goods sold for the month of
[391]
December as well as the inventory
balance at the end of the December you
[395]
see over here the FIFO layer one unit
1000 the unit cost is 21
[400]
and it is multiplied the the layer two
is 750 so what they are trying to do is
[405]
the initial purchases have been taken
the first in that is the opening opening
[411]
quantity has been sold first 1,000 *
21 right and the FIFO layer to
[415]
750 because our sale let me just delete
this rose yeah so what we see over here
[421]
for the sale over here of 750 1000*21
and 750 *28
[427]
because it is taken
from the second purchase total 1750
[432]
the layer two is again 750 and
the balance which is 500 which
[438]
has been sold at 28 and 30 price so what
we can see is you know 42000
[443]
is the cost of goods sold and
36000 is the ending
[450]
inventory equals two forty two plus
seven thirty six is seventy eight
[454]
combined the total beginning inventory
and the purchases during the month so
[458]
this will be recorded something like
this on the assets as 42,000 as the cogs
[464]
which is equal to your assets assets
equal to your liabilities plus the
[471]
shareholders equity the SE so here the
42,000 as the cost of goods sold will be
[479]
in the negative it will go reduce and on
the shareholders equity side 42,000 will
[484]
flow through the income statement as an
expense so this was a very clear example
[491]
by which you can understand how things
flow out now the reason for using this
[497]
method see is a business which are in
trading or the perishable item generally
[501]
sells the item which are purchased
earliest or FIFO method of inventory
[504]
valuation and it generally gives most
accurate calculation of the inventory
[508]
and
sales profit now other example includes
[510]
our a retail business that sales foods
or other products with an expiry
[514]
expiration date so on a final conclusion
note this is just one method that we
[521]
have learned from the inventory
valuation there are the method also like
[525]
LIFO and VAM which are also the part of
the inventory valuation method so that's
[532]
it for this particular topic if you have
learned and enjoyed watching this video
[537]
please like and comment on this video
and subscribe to our channel for the
[541]
latest updates
thank you everyone Cheers
Most Recent Videos:
You can go back to the homepage right here: Homepage