Fifo Lifo Avco

Topics: Inventory, FIFO and LIFO accounting, Price Pages: 2 (470 words) Published: May 23, 2012
KASHFIA TABASSUM AHMED
ROLL: RH-42
SECTION A
IBA BBA 2OTH BATCH
ACCOUNTING
SUBMITTED TO: MELITA MEHJABEEN
SUBMITTED ON: 30/ 04/ 2012

FIFO [ FIRST IN FIRST OUT ]|
ADVANTAGES| DISADVANTAGES|
* If the business trades perishable goods with the use of FIFO it can avoid obsolescence of stock. * Closing stock valuation is done upon the most recent prices paid for stock which takes into account the rate of inflation. * The method is more realistic as the inventory is issued in the order in which they have been received. * FIFO is acceptable method of inventory valuation as per Accounting concepts and conventions. * Inventory is issued to production at the price actually paid purchase them.| * At times of high rate of inflation FIFO values closing stock at the latest price which is high and hence the profit gets overstated as the cost of goods sold gets reduced. * Higher income taxes may have to be paid as FIFO results in profits being inflated. * Manufacturing firms do not issue raw materials at the latest prices and hence it forms a barrier to setting realistic price for the final product. * Identical inventory is issued to production at a different price simply because they are deemed to be made out of different batches of production. This makes the calculation of unit cost difficult as it varies for different batches of production.|

4

LIFO [ LAST IN FIRST OUT ]|
ADVANTAGES| DISADVANTAGES|
* The inventory is issued to production at the most recent prices paid to acquire them. * The profit is usually understated in LIFO which causes to impose a lower amount of tax on the profit. * Raw materials are issued to production on the latest prices in a manufacturing firm. * Inventory is issued to production at the price actually paid purchase them.| * The method is unrealistic as the most recently acquired inventory is sold before the old ones. * Closing stock is not...
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