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FIFO Inventory Method - Material Cost, Cost Accounting Video Lecture | Cost Accounting - B Com

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FAQs on FIFO Inventory Method - Material Cost, Cost Accounting Video Lecture - Cost Accounting - B Com

1. What is the FIFO inventory method?
Ans. The FIFO (First-In, First-Out) inventory method is a cost accounting method used to calculate the value of inventory by assuming that the first items purchased or produced are the first ones to be sold. This means that the cost of the oldest inventory is assigned to the cost of goods sold, while the cost of the most recent inventory is assigned to ending inventory.
2. How does the FIFO method determine the cost of goods sold and ending inventory?
Ans. The FIFO method determines the cost of goods sold by using the cost of the oldest inventory first. This means that the cost of the earliest purchases or production is matched with the revenue from the corresponding sales. The cost of goods sold is then calculated by multiplying the quantity sold by the cost of the oldest inventory items. The cost of ending inventory is determined by using the cost of the most recent inventory items, which remain unsold.
3. What are the advantages of using the FIFO inventory method?
Ans. The advantages of using the FIFO inventory method include: - It provides a more accurate representation of the current value of inventory, as it assigns the most recent costs to ending inventory. - It is easy to understand and apply, making it a popular choice for many businesses. - It is more suitable for industries where the cost of inventory tends to increase over time, such as in inflationary periods. - It results in a higher net income during periods of inflation, as the older, lower-cost inventory is assigned to the cost of goods sold.
4. Are there any limitations or disadvantages of using the FIFO inventory method?
Ans. Yes, there are some limitations or disadvantages of using the FIFO inventory method, such as: - It may not reflect the actual physical flow of inventory in certain situations, especially if the business uses different storage locations or handling methods. - It may not accurately represent the cost of goods sold during periods of deflation, as the older, higher-cost inventory is assigned to the cost of goods sold. - It can result in higher income taxes during periods of inflation, as the higher net income generated by the method may lead to higher tax obligations. - It requires a detailed record-keeping system to accurately track the cost of each inventory item purchased or produced.
5. How does the FIFO method impact financial statements and ratios?
Ans. The FIFO method can impact financial statements and ratios in several ways, including: - It can result in a higher value of ending inventory, which in turn increases the value of assets on the balance sheet. - It can lead to a higher net income on the income statement, as the cost of goods sold is based on older, lower-cost inventory items. - It can affect the calculation of inventory turnover ratio, as the cost of goods sold is based on the oldest inventory items and may not accurately reflect the current inventory turnover rate. - It can impact the calculation of gross profit margin, as the cost of goods sold is based on older, lower-cost inventory items, which may result in a higher gross profit margin.
106 videos|173 docs|18 tests
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