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I could give you a book explaination Asif, but honestly, FIFO is the only realistic way things work in the real world. LIFO is an excellent accounting rule that helps them justify situations,.
First In First Out (FIFO) is a best method to adopt especially for perishable goods and non-bulky goods. In this method you'll be issuing the oldest stock first so your warehouse will always remain with stocks with longer expiry dates.
Last In First Out (LIFO) - only adopt this method in the case of very bulky non-perishable goods.
FIFO Basics and Benefits
FIFO is an acronym that stands for "first-in, first-out." With this inventory valuation approach, the company accounts for the value of inventory received first when sales are made. One of the more common reasons a company chooses FIFO is because it is a more natural straight-line approach since you account for your first inventory in as the first items sold. This makes it especially useful when tracking inventory items is simple.
FIFO Disadvantages
A major disadvantage with FIFO is that, assuming costs of inventory have inflated over time, your taxable income is typically higher because the cost basis on initial inventory received is typically less. Another challenge associated with this approach occurs when the company purchases varying amounts of inventory at different times that are hard to track. Also, accounting for costs when inventory is returned or exchange is quite complex, according to the "Accounting for Management" website.
LIFO Basics and Benefits
LIFO is an acronym that stands for "last-in, first-out." Thus, you are accounting for your most recently received inventory with first items sold. This actually gives a more realistic look at the market costs of the inventory you sell since it is sold shortly after received. A main reason companies choose LIFO during periods of inflation, though, is that it helps keep current taxable income low since your more recent purchases typically have a higher cost basis.
LIFO Disadvantages
A main disadvantage with choosing a LIFO valuation approach is that you generally cannot change to FIFO for several years without IRS permission, according to "Accounting for Management." As you sell more inventory, you work back toward earlier inventory received, often causing a bigger discrepancy between current market prices and cost basis on initial inventory. This can make it more difficult to accurately interpret the current operating activities and inventory activities of the company.
Good question! My answer would be from two different angles
1. Store management,
In most cases FIFO is applied for the store management which is basically aims to preserve quality of the stored items as long as possible under the first in first out rule.
2. Accounting inventories,
Under FIFO the assumption is that the oldest inventory is used first. The cost of goods sold is based on a lower cost since older and therefore cheaper items are assumed to be the items sold.
Under LIFO the assumption is that the last items purchased are the items sold, meaning the more expensive items were used. The cost of goods sold is therefore relatively higher and the value of goods remaining on the balance sheet is lower since those are older items purchased at a lower price. (Again, assuming that prices have increased over time.)
FIFO....
Thanks for the invitation
Agreed with both answers given by
Mr.:Jetley & Mr.:Kooli as well too
It all depends on the storage system, material expiry, demand & profitability.
Both systems are applicable every where in the world, depending on the situation of your feasibility.
fifo is used for perishable items
LIFO is used to make sure that actual items prices are reflected in yoyr production especially when you have old cheap stock
average pricing per item is used to solve this issue
FIFO is the only realistic way things work in the real world. LIFO is an excellent accounting rule that helps them justify situations,
I agree with all answers given by colleagues.
