If expenses are rising, the final products sold will be the costliest as a result, your cost of goods sold will increase, you'll report fewer profits, and you'll pay less in income taxes in the short run. When expenses rise, the first products sold are the least costly as a result, your cost of goods sold declines, you report higher profits, and you, therefore, pay more income taxes in the short run. Most of the time, LIFO will cause a decrease in closing inventory and an increase in COGS.įIFO is more popular since it is a globally recognized accounting concept and because firms often seek to sell their oldest inventory before bringing in new stock.īusinesses with big inventories tend to choose LIFO because it allows them to benefit from larger cash flows and reduced taxes while prices rise. You now know that you are ending this year with 152,500.00 worth of inventory. The LIFO approach is based on the belief that the newest items in your inventory will be consumed first.įIFO results in a larger closing inventory and lower COGS. To calculate ending inventory, you use the formula: Ending inventory Beginning Inventory + Net Purchases COGS. The FIFO approach is the reverse since it utilizes lower cost figures when computing COGS and believes the oldest goods in your inventory will be sold first. Ending inventory was made up of 75 units at 27 each, and 210 units at 33 each, for a total FIFO perpetual ending inventory value of 8,955. The FIFO Ending Inventory Formula (short for First-In, First-Out) is a technique used to determine the value of inventory at the end of an accounting period. T he value of the remaining or ending inventory (130 boxes) is then calculated: Ending Inventory Value Remaining Units x Their Value.
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