The FIFO method is ... The FIFO method means

Material and production values, and simply speaking, stocks of goods and raw materials
In the warehouse, a large part of the assets of almost any enterprise. They
And represent the bulk of the costs. In addition, their structure has a decisive influence on the financial results of economic activity.

As a rule, material values are purchased by parties, arriving at the balance of the enterprise at different times and, accordingly, their price may not be the same.

After a time, the inventories are transferred to production, sales or other disposals. At this point it is very important for economists to correctly estimate the value of the released values.

Methods for estimating reserves

Currently, there are several ways to estimate the cost of transferred tangible assets:

1. At the cost of each unit.

2. By weighted average cost price.

3. At the cost of the first-time acquisition of tangible assets (FIFO).

4. At the cost of the last in time acquisition of material values (LIFO).

When making a write-off, you need to remember that the same method will be applied to tax accounting.

Choosing the right method

As a rule, the order of write-off of stocks is established by the internal policy of the company. Thus different kinds of values can be written off by various methods. But for the same nomenclature of stocks the method is unchanged.

In modern accounting, the first and the second methods became more widely used.

FIFO and LIFO cause a lot of questions for economists and business leaders. However, not taking them into account would be a serious omission.

For example, the FIFO method is a great opportunity to enhance the company's image in the eyes of partners. Calculation of the cost price of the released goods with its help is carried out simply enough, it is necessary only to understand key moments.

First In, First Out

The first arrived, the first one was dropped, so in English the four letters that represent the FIFO method are deciphered.

This is an estimate of the goods that have been disposed of, based on the assumption that the first values transferred to production (or for other purposes) previously placed on the parish are transferred to production. That is, goods are released exactly in the order in which they got to the warehouse.

It is easier to remember that it is the FIFO method that means using a household example. Imagine a large stack of anything. Let it be the applications of the applicants in the admissions office of the university. Every day, on the top of the stack, new and new completed forms are put, but the lower ones will be considered first, since they were filed earlier, despite the fact that a pile of new ones has accumulated over them. So the goods are written off at first those that arrived at the warehouse before others with the same nomenclature.

Each batch of material and industrial values should be recorded in the accounting as an independent group, if it is subsequently applied FIFO method. This condition is mandatory, even if the goods of such nomenclature have been entered earlier.

When the FIFO method is applicable

An example of the most successful use of this method is the writing-off of fast-spoiling goods. It is about food (vegetables, fruits, dairy products) or raw materials with a limited shelf life. In order to avoid damage, in the first place, previously received stocks must be realized (or recycled).

Disadvantages of the FIFO method

Since under the influence of inflation over time, purchase prices can grow, when using the FIFO method, the cost of goods sold may be somewhat understated. This contributes to an artificial overstatement of financial results of economic activity and, as a result, an increase in the amount of profit tax.

Advantages of FIFO

Artificially high profit rates are the main plus, which gives the company the FIFO method. This at first glance surprises, because the same factor was recorded in the shortcomings. However, the company's great successes increase its creditworthiness and attractiveness in concluding new contracts, attracting investors.

FIFO method. Example solution

You can calculate the cost of inventory that has left the warehouse in two ways:

1. The total value of all stocks of this nomenclature entered in the warehouse for the entire period is calculated and the cost of material resources is subtracted from it at the end of the reporting period.

2. The calculation is made based on the value of a unit of goods in the first (in time) lot, if the stocks of this income do not cover the retirement in full, the value of the goods from the second, third installment, etc., is taken into account.

Detailed study of both options will help a simple task.

The enterprise arrives at the price of the supplier, and the write-off from the warehouse is made using the FIFO method.

At the beginning of the reporting period, 100 boxes of nails remained at the warehouse of the enterprise at a price of 300 rubles each. Total material values of 30,000 rubles.

In a month, two more nails were delivered to the warehouse at the following prices: 120 boxes of 400 rubles and 200 boxes of 450 rubles each. In the same period, 180 boxes of nails were dropped from the warehouse for production purposes.

In accordance with the rules of write-off according to the FIFO method, we assume that 100 boxes of nails were used for 300 rubles (for the amount of 30,000 rubles) and 80 boxes of 400 rubles (for a total of 32,000 rubles).

At the end of the month, 40 boxes of 400 rubles (worth 16,000 rubles) and 200 boxes of 450 rubles (worth 90,000 rubles) remain in the warehouse.

We perform the calculation using the first method. Calculate the average value of the remaining boxes in the warehouse:

(16 000 + 90 000) / (40 + 200) = 441.66 rubles.

The resulting value is multiplied by the quantity of goods in the warehouse at the end of the reporting period:

441.66 * (40 + 200) = 105,998.40 rubles.

For the sake of simplicity of calculations, we round up the sum to 106,000 rubles.

We calculate the cost of the values that have left the warehouse:

((100 * 300) + (120 * 400) + (200 * 450)) - 106 000 rubles = 62 000 rubles

The total for the reporting period from the warehouse dropped 180 boxes of nails for a total of 62,000 rubles. Consequently, the average cost of one unit was 345 rubles.

Now, once again, we will calculate the cost price of the goods that were disposed of, using the second method. In this case, the calculations will be simple and take less time.

100 * 300 + 80 * 400 = 62 000 rubles.

The cost of one released unit also amounted to 345 rubles.

The results of the calculations coincide, and this proves that both methods are correct.

This example is simple enough, so it makes the calculation easier for the second option. But, if it is required to carry out accounting of a large range of goods that were entered and released during the reporting period several times, the first variant of calculation according to the FIFO method will come to the rescue.

The LIFO method

This method of accounting is the exact opposite of the FIFO method. Also, as in the latter, each new batch of goods comes as a separate group. However, when you write off the retired values, first of all, the unit cost of the last arriving party is taken into account.

Let's compare the LIFO method with the already familiar stack of statements. Now a member of the selection committee will begin processing documents from the top.

The LIFO method is most effective in conditions of growing inflation. In this case, the financial result displayed in the financial statements will be more real, and the company will not have to pay taxes at inflated rates.

Based on the above written, we can say that the FIFO method is a convenient and effective way of accounting for material and industrial values that left the company's warehouse in the reporting period. Of course, it is not deprived of a number of shortcomings, but in certain situations its use brings unexpected benefits.

A professional economist must masterfully master all four ways of accounting.