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FIFO vs LIFO | Top Differences You Must Know | Examples - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell ican friends today we
are going to learn tutorial on FIFO vs
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LIFO for that is in first out and
last in first out that is an inventory
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valuation methodology we are going to
discuss some of the examples in this
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particular scenario advantages and what
are the differences in this two
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scenarios so let's get into the
nitty-gritty of the same now the for
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for most thing what is the
difference between FIFO and LIFO for see
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if we start with FIFO over here FIFO and
as just said LIFO over here so first in
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first out and last in first out are the
two methods of basically accounting for value
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of the inventory held by the companies
so by accounting for the value of the
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inventory becomes practicable to report
the cost of goods sold or any invent
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related to expenses on the profit and
loss statement and to report basically
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the value of the inventory of any kind
on the balance sheet in this to tutorial
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will be looking at various aspects of
FIFO and LIFO examples advantages and
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so on and so forth so let's get into the
nitty-gritty of the same puts first to
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end the foremost thing let's discuss the
definitions of FIFO and LIFO method see
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basically over here FIFO stands for first
in first out and
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which implies they know that the
inventory which was first added to the
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stock will be removed from the stock
first so the inventory will leave the
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stock in order to in an order same as
that in which it was added to the stock
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it means that whenever the inventory
will be reported as sold either after
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the conversion or to finish goods or as
it is its cost will be taken equal to
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the cost of the oldest inventory present
in the stock this in turn means that the
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cost of inventory sold as a report on
the profit and loss account the P&L
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account basically has been known as the
profit and loss of P&L account will be
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taken as that of the oldest invented
present in the stock so on the other
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hand on the balance sheet the cost of
inventory still in this talk will be
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taken equal to the cost of the latest
inventory added to the stock now what is
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LIFO means last in first out so
lief o stands for last in first-out which
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implies you know that the inventory
which was added last so the stock will
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be removed from the stock first so the
inventory will leave the stock in an
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order reverse of that in which it was
added to the stock it means that even
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that whenever the inventory will be
reported as sold either after the
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conversation or conversion of the
finished goods or as it is its cost will
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be taken equal to the cost of the latest
inventory added to the stock so this in
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turn means that the cost of the
inventory sold as reported in the profit
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and loss account will be taken as that
of the latest inventory that has been
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still in the stock will be taken equal
to the cost of the oldest inventory
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present in the stock so both of this
method FIFO and LIFO are purely methods
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of accounting for reporting the value of
the inventory which method is adopted
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whichever method you is adopted it does
not govern the actual addition or you
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can say deletion which method is adopted
I mean basically does not go on the
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actual additional removal of the
inventory from the stock or further
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processing or selling another inventory
cost accounting method that is also
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widely
used by both the public and the private
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company is the known as the average cost
method in many country it is also known
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as WAM that is weighted average method
ok people call it van so this method
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takes the middle path between the FIFO
and LIFO I'll just put this in the
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middle so that you know it sounds in
that fashion
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it is actually in the middle of FIFO
LIFO by taking the weighted average of
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all the units that is available in the
stock during the accounting period and
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then uses the average cost to determine
the value of cost of goods sold and the
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ending inventory but in this tutorial
our focus is only on FIFO and LIFO so
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we'll just cancel this out this was just
for your sake of convenience that you
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learn now let's understand the example
FIFO vs LIFO suppose that
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company produces and sells its products
in a batches of let's say 100 units ok
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so if the inflation is positive if the
inflation is positive the cost of the
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production will go on increasing with
time so assume that one batch is equal
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to 100 units of units is produced within
each time period and the cost of
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reproduction increases after each
successive period so if the cost of
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production for producing one unit if
cost of production of one unit is let's
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say $10 in the first period it
could be close enough to $15 in the
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second phase and it could be $20 in the
second period and so on and so forth in
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the third period sorry so this is
summarized you know basically in a table
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let me show you that now we can see
over here there is batch number 1
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batch number 2 there are number of
units 100,100 and 100
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the total is 300 the cost of
production per unit is 10,15
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20 and the total is 4500
so consider the details you know
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basically for all the above and you know
suppose the batch number in our in order
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of the
of the production of the batches it
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should be obvious that the company won't
be able to sell exactly 100 ok units of
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the production during each period so it
will have to sell them as for the orders
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it receives and also as for the ability
of the product in its stock or finished
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goods so suppose that the company gets
order of total close enough let's save
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150 units ok so after after producing the
third batch of 100 units okay so now
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let's understand the inventory
valuations that goes about FIFO & LIFO
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FIFO for the first we are going to
discuss with the FIFO so let's discuss
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now if a company let's say chooses to
use a FIFO method of inventory
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accounting and the cost of the goods
sold will be taken equal to the cost of
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the first 150 units of product produced
remember you know it is first in first
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out so out of all the 300
units remember we had available in the
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stock now the first 150 units produce
includes the hundred units of the batch
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number 1 plus 100 units of batch
number 1 plus any 50 units that will
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be off batch number two from the table
that we just noted right hence the cost
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of the goods sold will be 100 into 10 +
bracket open 50 into 15 okay so this
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over just our over here is equal to and
will you have the answers 1750 also the
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value of the remaining inventory of the
finished product will be equal to the
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cost of the remaining in the stock so
300 was the total 150 utilized
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150 is the balance so 150 units in the
stock that is remaining 50 units in the
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batch 2 and 100 units in the batch 3
hence the value of the invent of the
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finished goods will be reported on the
balance sheet of the company which will
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be equal to 50 you can say is equal to
50 into 15 right plus 100 into 20 which
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gives us 2750 now let's see the
inventory
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LIFO for the table that we
noted so in case of LIFO what will
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happen if a company over here chooses to
use LIFO method instead of its FIFO
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for the accounting the cost of the goods
sold will take an equal to the cost of
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the last 150 units okay this is the
change produced okay remember it is last
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in first on so out of all the 300 units
of 1 2 and 3 available in the
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stock now the last 150 units produce
includes the 100 units off over here
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the first would be 100 units of batch
three okay you should this should be
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clear clear the second is 50 units of
batch - right because batch 3
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complete units have been utilized got it
so hence the cost of the goods sold that
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is COGS will be equal to how much is
equal to 100 into 20 close the
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bracket + open the bracket 50 into 15
okay close the bracket that will give us
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2750 and also the value
of the remaining inventory of the
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finished goods will be equal to the cost
of the remaining 150 units in the stop
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that is the remaining 50 units in batch
to pick of 50 unit is still pending and
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100 units in the batch one so hence the
value of the inventory of the finished
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goods that will be reported on the
balance sheet of the company would be
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equal to is equal to 50 units of batch
to that into 15 plus you have to open
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another bracket 100 into 10 that gives
us our final answer as 1750 the unit
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data is 10 15 20 over here batch 1
batch 2 to batch 3- I hope you have got the
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idea the total nitty-gritty what we had to
discuss this over here so why are there
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more than one method of inventory cost
accounting that is very important query
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which can anyone can have in the mind so
the route cost why there are more than
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one method for the purpose of accounting
for the cost of inventory is inflation
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very important if inflation somehow
ceases to exist then we won't require
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different methods to find out the value
of the inventory and you know a company
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expense or it can keep in its warehouse
this is because if the inflation is not
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there this is completely not
then the cost of the material purchased
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today would be exactly equal to that of
the purchase last year so the material
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caused going into the production of the
finished good will also come out to be
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the same for the particular type of the
product so the cost of the inventory
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added to the stock today will be exactly
equal to the cost of inventory to the
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stock 1 year ago hence you can say the
whether you use LIFO method or FIFO
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method the value of the inventory
expense you can say the value of the
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inventory expensed or even the stock
will also come out to be exactly the
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same in any case but since inflation is
reality this is completely reality the
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value of the inventory comes out to be
something when we use FIFO and it comes
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out something when it we use LIFO so
this is the different still why do some
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company use FIFO and some company use LIFO for there must be some reason behind
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this for calculating the value of the
inventory the answer to this is that
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company uses different methods of
inventory accounting for benefits and
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convenience offered by both of this
method in different situation while the
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above is true what we discussed in most
of the countries the IFRS that is
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the international financial reporting
standard accounting are followed which
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do not allow the usage of LIFO so
there are companies they do not allow
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that choices let me show you FIFO
that is as per the IAS two you can see
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over here that things have been outlined
and you know outlet acceptable methods
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of determining cost including specific
identification first in first out method
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or weighted average cost so now finally
let's make a summary of FIFO versus LIFO
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for
this is over here FIFO versus LIFO for and
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let's discuss some of the points of
difference and we'll start with the
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first point of difference as material
flow this is the final summary that we
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are going to learn see the material
purchase in case of the FIFO is first is
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used first and material purchase in LIFO
his last is used first now what
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happens the things in case of during
inflation during inflation so low you
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know you can say there will be low COGS
in this particular scenario hence high
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tax low COGS will will result 2 is
equal to high tax right and high
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inventory values hence higher worth high
earnings higher net worth and it
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attracts the investors now LIFO
there'll be high cost of goods sold and
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hence there will be low tax which will
in amount toward low inventory values
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hence low net worth over here so lower
earnings and lower net worth which
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repels the investor this is the case in
case of the LIFO let's discuss the
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third what in case of deflation so over
here there's the there was low COGS just
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third it will be high COGS over here
hence low tax so high tax over here or low
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tax completely vice-versus are the case
will be over here and over here the low
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inventory hence lower native worth or
you can say lower earnings and lower net
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worth repels the investors over here
there'll be low COGS that is the cost
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of goods sold and that will tantamount
to amount higher
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inventory valuation and a higher tax
over here
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higher tax higher net worth high
earnings high net worth attracts
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investors now let's see the restriction
on the usage the restriction on usage
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see what exactly happens over here is
that there is no restriction by any
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accounting standard in case of FIFO and
IFRS does not allow using LIFO
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accounting the next one the
record-keeping in case of the
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record-keeping what happens the oldest
items are the number of the records to
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be maintained decreases and in case of
LIFO the newest items are sold first
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so the oldest item may remain in the
inventory for many years this increases
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the number of the records to be
maintained and the last is the
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fluctuation in the reporting that is
fluctuation in reporting so what happens
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over here there are only recently
purchased item in the inventory so the
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cost of goods sold does not fluctuate
and it increases smoothly depending upon
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the inflation but in case of the LIFO
there could be very old item present in
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the inventory so the cost of goods sold
may fluctuate when those old item from
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from the part of the goods sold by
the company so after discussing all this
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let's make defining conclusion FIFO and
LIFO are due methods of accounting and
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reporting the value of the inventory
FIFO Tech Center it takes into account
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the cost of material purchased first as
the cost of goods sold and cost of
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material purchase last as the cost of
the item still present in the inventory
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in case of LIFO what happens is that
LIFO takes the cost of material
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purchased most recently as the cost of
goods sold and the cost of material
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purchase first as the cost of items
still present in the inventory
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the benefits of using LIFO you can see
LIFO method are that it is helpful in
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deferring tax lower inventory write downs
during the period of high inflation the
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benefits of using FIFO over here is that
it results into a higher valuation value
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that it is to be reported earnings and
company's net worth attracting more
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investor this affects are this effects
are completely opposite when there is a
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deflation but in most of the countries IFRS standards are
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been used in most of the countries the
IFRS standard is enforced under it
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using LIFO is not at all allowed and
only few countries include like us over
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here only few countries like us a that
is United States of America uses this
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allows the uses of LIFO for taxation
purpose but also requires require its
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usage while reporting the results to the
investor so however FIFO for is much
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more popular method out of the - because
of the because of being more logical for
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most industry so that's it for this
particular topic if you have learned and
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enjoyed watching this video please like
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