The FIFO and LIFO methods are queuing rules and are used for the circulation of goods.
1- FIFO method
FAIFO stands for first in first out, which means that the one who enters first will be the first to leave; For example, consider that a supermarket has some yogurt in the refrigerator and receives a new load of yogurt. Due to the fact that the previous yogurts are approaching their expiration date, new yogurts should be placed behind the old yogurts so that the customers take the old yogurts first.
Another example that can be mentioned are the bakeries where people stand in line to buy bread. Anyone who arrives at the bakery earlier gets bread and leaves earlier.
The FIFO method has many uses, one of the uses of the FIFO method in industry is for warehousing. Companies must use the raw materials they buy according to one of the above methods. Raw materials that have an expiration date should be consumed by the FIFO method. They should use the above methods even to sell products.
In the FIFO method, because the materials and goods made are older, their cost is less for the company and we sell them first, the company will recognize more profit if it uses this method.
2- LIFO method
Laifoo stands for last in first out, which is translated as: the last one in, the first one out.
The LIFO method is opposite to the FIFO method; In the example of the supermarket, suppose that every time a new batch arrives, the previous yogurts stay in the refrigerator and get spoiled and thrown away. It makes sense to use the FIFO method for goods that have an expiration date.
Now suppose you have a spare parts store and every time new items are sent to you, you use the Lifefo method and keep the previous items at the end of the warehouse. You know that their purchase price is related to the past several periods and you can now sell your goods at the daily price; Naturally, the profit you recognize from this method is more. (Of course, in the trade laws of most countries in the world, the use of this method is prohibited. This is because the cost price of the sold products increases and the company pays less tax.
LIFO and FIFO methods affect the company’s profitability in such a way that if it uses the LIFO method in the use of raw materials, the inventory of the warehouse is always the purchases related to previous periods that were purchased cheaper and when they are used with They sell the product at a lower cost.
Also, when the manufactured goods enter the warehouse to be sold, it is more profitable to use Lifefo.
Also pay attention to this example:
A tire importing company sells the first purchase of tires at a cost price of 2 million tomans and a 20% profit for 2 million and 400 thousand tomans. The second purchase of the company with the cost price of 3 million tomans for each tire ring and 20% profit, sells for 3 million and 600 thousand tomans.
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