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Page 1 Fundamentals of Accounting INVENTORY VALUATION Page 2 Fundamentals of Accounting INVENTORY VALUATION Inventory Inventory is the one of the largest current asset of a retail store or of a whole business merchandise. The sale of this inventory is the main source of revenue. Inventory contains materials/Products in three forms of conditions Page 3 Fundamentals of Accounting INVENTORY VALUATION Inventory Inventory is the one of the largest current asset of a retail store or of a whole business merchandise. The sale of this inventory is the main source of revenue. Inventory contains materials/Products in three forms of conditions ?Raw Materials The materials needed to make anything are called raw materials. The initial condition of any material is its raw form. Some work is needed to make a raw material into something useful Consider we were making something using steel Steel in raw form Page 4 Fundamentals of Accounting INVENTORY VALUATION Inventory Inventory is the one of the largest current asset of a retail store or of a whole business merchandise. The sale of this inventory is the main source of revenue. Inventory contains materials/Products in three forms of conditions ?Raw Materials The materials needed to make anything are called raw materials. The initial condition of any material is its raw form. Some work is needed to make a raw material into something useful Consider we were making something using steel Steel in raw form ?WIP (Work in process) The process of making raw materials into some useful things Steel is melted to reshape it into something useful Page 5 Fundamentals of Accounting INVENTORY VALUATION Inventory Inventory is the one of the largest current asset of a retail store or of a whole business merchandise. The sale of this inventory is the main source of revenue. Inventory contains materials/Products in three forms of conditions ?Raw Materials The materials needed to make anything are called raw materials. The initial condition of any material is its raw form. Some work is needed to make a raw material into something useful Consider we were making something using steel Steel in raw form ?WIP (Work in process) The process of making raw materials into some useful things Steel is melted to reshape it into something useful ?Finished Good The finished product formed after doing some work on raw material. The price of finished product is considerably high from raw material We can make numerous useful products using same raw materialRead More
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FAQs on PPT - Lifo and Fifo - Cost Accounting - B Com
| 1. What is LIFO and FIFO in accounting? |  |
Ans. LIFO (Last In, First Out) and FIFO (First In, First Out) are inventory valuation methods used in accounting. LIFO assumes that the most recently purchased items are sold first, while FIFO assumes that the oldest items are sold first.
| 2. How does LIFO affect a company's financial statements? | |
Ans. LIFO can have a significant impact on a company's financial statements. It generally leads to lower reported net income, as the cost of goods sold is higher when using LIFO compared to FIFO. Additionally, LIFO can result in higher inventory carrying values, which can affect the balance sheet.
| 3. What are the advantages of using FIFO? | |
Ans. FIFO has several advantages. It aligns with the natural flow of inventory, as it assumes that older inventory is sold first. This method can result in a better match between the cost of goods sold and revenue, especially during times of rising prices. FIFO also tends to lead to higher reported net income compared to LIFO, which can be beneficial for financial statement users.
| 4. How does LIFO impact a company's tax liabilities? | |
Ans. LIFO can have a significant impact on a company's tax liabilities. By assuming that the most recently purchased items are sold first, LIFO often results in higher cost of goods sold and lower reported net income. This, in turn, can lead to lower taxable income and potentially lower tax liabilities.
| 5. Are there any limitations or disadvantages of using LIFO or FIFO? | |
Ans. Yes, both LIFO and FIFO have limitations. LIFO can lead to inventory carrying values that may not reflect current replacement costs, which can be misleading for users of financial statements. Additionally, LIFO can result in inventory liquidation during periods of inflation, potentially causing supply chain disruptions. FIFO, on the other hand, may not accurately match costs with revenue during times of rising prices, leading to potential overstatement or understatement of income.
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