Formula for the LIFO Method and Its Importance

LIFO Formula

LIFO is an inventory value that refers to selling first the items that arrive at the warehouse last. The latest goods received at the warehouse are sold or removed first.

The LIFO Method Formula and its Significance

FIFO is the preferred method for valuing inventories. LIFO is more beneficial than FIFO.

• LIFO can help to produce high COGS (cost of selling goods)
• This leads to a smaller balance of leftover inventory
• You can also save taxes due to a lower profit margin.

LIFO Method Formula: Applications

LIFO is better suited for businesses that have regular supplies to ensure that they stock up all of their items. The LIFO method can help companies in a number of ways.

• When prices increase, the LIFO method allows companies to match their revenues with the latest costs.
• The COGS increases and the taxable income decreases.

An Example to Help You Understand

Imagine you purchased tablets (or tabs), at different times, at different prices. You receive the first batch of 10 tablets at $1000 per tablet. You received a second stock of five tablets at $1100 each after receiving the first. You were given an order of four tablets. You need to calculate the total.

According to the LIFO system, the second, newest stock will be removed first. Therefore-

Four tablets at $1100 each = 4 * 1100 = S$4400

The total cost is 4.

The first stock has ten remaining tablets and the second one. When you calculate the balance of your inventory, you will get:

10*1000= S$10000

1*1100= S$1100

1100+ 10000= S $11000 of the accounting balance of the inventory account .

Inference

LIFO is a method of inventory used to value inventory. LIFO can cause a change to the net profit due to inflation and deflation. This also helps determine your tax liability as the cost of the goods sold is a key factor in calculating the tax.