Miller had a warehouse full of sports articles. As days passed, he quickly discovered that his most high-demand, fastest-selling sports articles generated the highest profit figures.
It so happened that football boots were a huge hit and brought in favorable revenue. However, when it was time to restock the warehouse inventory, his dealer suddenly increased prices.
Although several products are exposed to fluctuating price changes, dealing with inflation when replenishing inventory is obvious.
Therefore keeping track of your inventory is vital no matter what you sell. Here raises the question of how I should keep track of fluctuating inventory value over time?
It so requires a proper method to ensure accurate inventory records. FIFO (first in, first out) is one of the most widely used methods all over the world that refers to the oldest inventory that is sold first, and the value is calculated accordingly. Though some do not follow it in black and white, they still continue to do so.
THE ADVANTAGES OF FIFO
FIFO is a method used in many industries and is acclaimed as a successful method for inventory management. It does have many advantages. They are:
- Universally accepted and an easy-to-understand method.
- Keeping inventory is a natural process, i.e., the oldest products are sold first.
- Easy to keep book records with fewer mistakes.
- It does not allow you to hold the waste for a long time.
- It helps you to cope with the market value and move things accordingly.
- High-profit margins.
- Transparent process.
- It helps you to plan for future management.
THE DISADVANTAGES OF FIFO
Unlike any other method, FIFO has a few disadvantages only. One of the primary and should-take-care disadvantages is that it can result in higher income tax for a business to pay. While enjoying the benefits, this also needs to be taken care of.
FIFO & LIFO
Before diving into classifying the difference between FIFO and LIFO, let us be sure about what LIFO is. LIFO (last in, last out) is one of the inventory methods used mainly by US-based businesses. Unlike FIFO, the LIFO method refers to the newest inventory or purchased products being sold first, and the value is calculated accordingly.
The two main advantages you can enjoy following the LIFO method for your inventory management are that you pay less tax than FIFO, and the sales are quicker than when you are following the FIFO method.
However, FIFO is the standard method used by many countries for better and more accurate inventory valuation management. This method is accepted by International Financial Reporting Standards Foundation (IRFS) regulations.
When compared, FIFO is seen as the most transparent and perfect method for inventory management. It never fails to fetch higher profit than LIFO.
- FIFO is a widely accepted and used method for managing inventory. It helps the companies to sell inventories before they become old. And it helps reduce inflation when companies sell older inventory at current, inflated market prices.Ignorance is a dangerous disease; it is the right time to get rid of it. Not all those who read this article are familiar with the FIFO method. It is used even in small shops. To learn more about how the FIFO method is presented, you can always visit SlideEgg, which provides colorful and informativeFIFO PowerPoint.