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FIFO or LIFO Inventory Methods

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FIFO or LIFO Inventory Methods

Good inventory management is essential in any company, but the number one rule in every company is “do not talk about inventory”. However, there is plenty of room for improvement, and you may be surprised to know the lengths some companies will go to in order to improve their inventory management.

When you work in a company, you may find yourself working on a production line, an assembly line, a warehouse or another type of location where you need to count things. You have to know the number of things at each location and how many are in stock at each location. This article will help you to know better about the two types of inventory methods and their advantages and disadvantages in different situations.

Home economics FIFO or LIFO inventory methods

15. September 2020
Accounting Adam Hill

Gross profit is the money a business earns from sales after paying for the cost of producing or purchasing inventory or products, but before paying for operating expenses. The formula for gross profit – net sales minus cost of goods sold – is the same regardless of the inventory system used by the company. However, the calculation of the cost of goods sold in the cycle system differs from other systems. Companies use one of two inventory management methods – periodic and unlimited.

The cycle count is checked manually and counted at the end of the reporting period. Continuous inventory is designed for large companies using point-of-sale technology. After the inventory of 31. In December 2016, 1,300 items were found in the warehouse.

Companies can use a perpetual or periodic inventory management system. In the recurrent system, goods purchases are booked in the purchase account and the balance of the stock account is only updated at the end of each accounting period. The periodic inventory system is ideal for small businesses that hold a minimal amount of inventory. Inventories are easy to carry out, small businesses can estimate the cost of goods sold over certain periods. The company takes inventory at the end of each reporting period to determine the number of items in ending inventory.

The company then applies the FIFO method to calculate the cost of closing stock. The FIFO (First in First Out) method is a cost flow method in which the value of ending inventory is calculated on the basis that goods bought first are sold first. In a periodic FIFO inventory, the company begins by physically counting the inventory. The cost flow assumptions in a periodic inventory system are somewhat similar in formulas to the perpetual inventory methods. However, the calculation method is different because cycle counting inventory does not involve continuous recording of sales.

Instead of debiting the stock, the company debits a temporary purchase account. All adjustments relating to these purchases of goods are credited to the general ledger settlement account, e.g. purchase discounts or purchase refunds and reserves. When the balances of these three purchase accounts are combined, the resulting amount is called the net purchase.{“@context”:”https://schema.org”,”@type”:”FAQPage”,”mainEntity”:[{“@type”:”Question”,”name”:”Which is the better inventory method LIFO or FIFO?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” LIFO”}},{“@type”:”Question”,”name”:”Which inventory method is best?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” The best inventory method is the one that will help you to keep track of your inventory and make sure that you have enough on hand.”}},{“@type”:”Question”,”name”:”Why FIFO method is better for inventory management?”,”acceptedAnswer”:{“@type”:”Answer”,”text”:” FIFO method is better for inventory management because it is easier to track the inventory.”}}]}

Frequently Asked Questions

Which is the better inventory method LIFO or FIFO?

LIFO

Which inventory method is best?

The best inventory method is the one that will help you to keep track of your inventory and make sure that you have enough on hand.

Why FIFO method is better for inventory management?

FIFO method is better for inventory management because it is easier to track the inventory.

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