First-In: First Out Inventory Valuation Method

Table of Contents

Introduction 3

First In, First Out Definition 4

First In, First Out Advantages and Disadvantages 4

FIFO and other inventory valuation methods 6

Practical exercise 7

Conclusion 8

Bibliography 9

 Introduction:

Inventory is one of the important elements that companies must give interest, as its effect on the company liquidity and expect to generate future benefits. . IAS 2 defines inventories: “Items that are held for sale in the ordinary course of business; in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of services”. In other words, inventories can take different aspects based on the type of the company, for example,

 First-in, First-out Definition: First In, First out method is the most popular method used for inventories valuation, and its states that the goods purchased first must be sold first, and any recently purchases will be added to the inventories. This method is permitted under both the US GAAP and IFRS. Choosing this method will effect on the balance sheet and income statements, which will be reflected on the company profitability, taking in consideration of the fluctuation in the economy. This method is useful when the company has less transaction, and the prices are steady.

According to the IFRS, First-in, first-out defines: “A process costing methodology that assigns the earliest cost of production and materials to units being sold, while the latest costs of production and materials are assigned to units still retained in inventory” .

 First-in, First-out advantages and

Different rates for the cost of production for one unit, and this will create also different rates for the selling price for the same product.

6. This method makes the comparison for the units costs more difficult.

 FIFO and other inventory valuation methods:

The below table shows a comparison between the FIFO, LIFO and average cost based on different standards: FIFO LIFO Average cost

US GAAP and IFRS Accepted in both Accepted only at US GAAP Accepted in both

Units sold include Oldest cost Newest cost Average cost

Ending inventory include Newest cost Oldest cost Average cost

Income statements effect Cost of goods sold less and high income Cost of goods sold higher and less income Cost of goods sold and income are between FIFO and LIFO

Balance sheet effect Ending inventory is close to market price Ending inventory is not close to market price Ending inventory between FIFO and LIFO

Taxes Better to use when taxes are low Better to use when taxes are high Taxes between FIFO and LIFO

 Practical exercise:

Europe Company sold 1,400 units from tables during the month of March at price $35, compute inventory on March 31 and cost of goods sold for the month of March using following inventory costing methods:

1. First in, first out (FIFO) method

2. Last in, first out (LIFO)