Proper Inventory Management with LIFO Method
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What is the LIFO method?
The LIFO method is a convenient inventory management method. The warehouse supervisor is responsible for the proper management of all types of goods stored in the warehouse. He must have a check and balance of all such goods. Here, the newly purchased or newly manufactured goods are sold first.
This method ensures the sale of most recent products for generating revenues. The last entered ones are sold at first until they get cleared from the inventory. Cash flow is dependent primarily on such recently added goods.
1. LIFO Reserve:
LIFO reserve is one of the most popular terminologies that you may have heard about. It is basically the accounting term that is often utilized in inventory management.IT is characterized by the difference between LIFO and FIFO. Such value gained from the difference of such inventory method is kept saved for booking purposes and to determine the progress of the business.
2. LIFO Reserve Formulas:
Are you looking for the method of LIFO reserve? It would help you to manage the stock amazingly. Keep yourself aware of such accounting details to take your business on the road of success. Negligence or lack of knowledge to these can make your business outdated. Calculating the LIFO reverse is massively easily when you use the LIFO reserve formula which is given as:
LIFO Reserve = FIFO inventory – LIFO inventory
3. Dollar Value LIFO:
How to calculate LIFO is of keen significance? Accountants need to master the techniques and methods of inventory management. One of the popular methods for calculation of inventory is Dollar value LIFO. Do not need to panic when your boss says you to provide him a detail of dollar-value LIFO.
Well, it is pretty simple! In this case, you simply need to mention all the figures pertaining to goods and cost in terms of dollar amounts. Here, the accountant would not use the inventory units but utilize the dollar amounts.
How to Calculate LIFO?
Hopefully, the theory regarding the LIFO method is cleared to you. Now, let us figure out how to calculate LIFO. This method is mostly adopted at such stores, shops, and businesses where the customers get the latest stock. He purchases the latest stock, which may be due to a number of reasons, such as the demands of such products.
For calculation of the LIFO method, you need to calculate the value of the cost of goods sold (COGS). This value would let you know about the amount of current inventory. Last but not the least step is the multiplication of inventory sold with the COGS. The resulting value would depict LIFO.
LIFO Liquidation:
Not all companies utilize the same method for managing their inventory. If your company is working on the basis of LIFO, then you must disclose the value of it in the footnotes of the financial statements. Sustainability and profitability of the business are analyzed when there exists a decline in the LIFO reserve. Such information is necessary for the stakeholders in order to determine the level of profitability of the company. Hence, they can make decisions in investing in a business or not as per the financial ratios mentioned on the business financial footnotes.
Application of LIFO Method:
The LIFO method is being utilized by businesses that experience fluctuations in their product cost. The most popular of such business are supermarkets as well as oil companies. Cost of all such business increases frequently, and they cannot work on previous costs. They have to adopt the means which potentiate maximum revenue to them. It is none other than the LIFO method.
Most commonly, such type of inventory management is utilized in electronic shops such as those selling laptops, mobile phones, etc. Gadgets of the latest models are sold first, and hence they are displayed on the shelves at the front. Such kinds of products get the proper place at the main front shelves. In such kind of method, there exists no association between cost method and physical inventory movement.