If you are looking for powerful inventory software that’s easy to use, and provides you visibility to your COGS and margins, then try InFlow inventory management software for free: inflow.grsm.io/LIFOvsFIFO
Interesting example. We are always told LIFO always results in lower Gross Profits than FIFO as prices increase. However, in your May example you show how it can be higher in a given month.
Hello! There are several things that are unique for this example. 1) Inventory is built up in Q1, and then decreasing in Q2 as sales happen with no new purchases from suppliers. 2) The example uses monthly COGS/inventory accounting using FIFO and LIFO side by side for illustration purposes, whereas in real world corporate life a FIFO or LIFO adjustment tends to happen less frequently (quarterly or annual basis). If you do FIFO or LIFO on an annual basis, with starting inventory units around the same level as ending inventory units (which tends to be the case for a lot of manufacturing companies), then the outcome you described (LIFO resulting in lower Gross Profits than FIFO as prices increase) holds true.
I purely added that for illustration purposes. In other words, I made up the $10 selling price, and the 50 units sold, to show the effect under FIFO vs LIFO (same revenue number under both systems, but different COGS).
Hi Austin! 50 units sold, times $10 selling price per unit. It's an example that I put together, not necessarily representative of real world retail prices for such items.
Good catch! Sorry about that. I was focusing so much on the COGS and ending inventory numbers, that I did not update the beginning inventory values correctly.
Why do you for FIFO assume that it's 200 x 6$ for February when you said before that only 100 were sold for that month? And why is it 200 for march then, if it were 200 originally? I don't understand !!!
Hi David! My apologies if the video was not totally clear. The company builds up its inventory by purchasing goods in January, February and March. This I refer to with "January buy", "February buy", "March buy" as in the goods that were originally bought in January, etcetera. Then the company sells goods in April, May and June, and with FIFO and/or LIFO has to figure out which month these goods originate from. Did they take the goods that were now sold from the January buy, the February buy, or the March buy? More details in the individual videos on FIFO ua-cam.com/video/RAj94EUmm6g/v-deo.html and LIFO ua-cam.com/video/Tq4oZA_npWM/v-deo.html
Total monetary value of the inventory, which is $2150, divided by number of units, which is 350, gets you to $6.14 per unit. It is the weighted average cost per unit of the prices listed above it.
If you are looking for powerful inventory software that’s easy to use, and provides you visibility to your COGS and margins, then try InFlow inventory management software for free: inflow.grsm.io/LIFOvsFIFO
Interesting example. We are always told LIFO always results in lower Gross Profits than FIFO as prices increase. However, in your May example you show how it can be higher in a given month.
Hello! There are several things that are unique for this example. 1) Inventory is built up in Q1, and then decreasing in Q2 as sales happen with no new purchases from suppliers. 2) The example uses monthly COGS/inventory accounting using FIFO and LIFO side by side for illustration purposes, whereas in real world corporate life a FIFO or LIFO adjustment tends to happen less frequently (quarterly or annual basis). If you do FIFO or LIFO on an annual basis, with starting inventory units around the same level as ending inventory units (which tends to be the case for a lot of manufacturing companies), then the outcome you described (LIFO resulting in lower Gross Profits than FIFO as prices increase) holds true.
Thank you, I just saw a meme about this and decided to learn about it. That’s actually really useful information for a small business owner
Glad you liked it! The third method is average costing, some inventory use that one as the default.
Thank you sir your explanations are simple and awesome
You are most welcome! Thank you for watching and commenting, Kajanan!
Thanks alot, it helps me in this subject
Happy to help!
Another great video! Thank you very much!!
Thank you for the kind words, Jason! :-)
Thank you.. lecture.🙏
Most welcome! Related videos available in this playlist: ua-cam.com/video/RAj94EUmm6g/v-deo.html&pp=gAQBiAQB
Prefect video thank you!!!!
That is wonderful to hear. Thank you for watching and commenting.
Thank you for making this great video, very help! Tot Zeins : )
You're welcome, Derek! Happy to hear you enjoyed it.
How did you get revenue 50 *10 = 500? where did you get unit price 10 from? how did you calculated that? please explain, thanks.
I purely added that for illustration purposes. In other words, I made up the $10 selling price, and the 50 units sold, to show the effect under FIFO vs LIFO (same revenue number under both systems, but different COGS).
Thank you for clarifying that @@TheFinanceStoryteller
Enjoyed this video? Then subscribe to the channel, and watch my related video on inventory turnover next: ua-cam.com/video/uhJV5fbVNYE/v-deo.html
Hello:
where does the $10 in 50 * $10 = 500 in revenue for both Lifo and Fifo?
Hi Austin! 50 units sold, times $10 selling price per unit. It's an example that I put together, not necessarily representative of real world retail prices for such items.
On @6:41 how is the jan 50* $5 500? the math should equal it to 250
Good catch! Sorry about that. I was focusing so much on the COGS and ending inventory numbers, that I did not update the beginning inventory values correctly.
Very nice
Thanks 😊
Thanks
Welcome
excellent 👌
Thanks a lot 😊
@@TheFinanceStoryteller Do we use Purchases account when we use perpetual system ?
Why do you for FIFO assume that it's 200 x 6$ for February when you said before that only 100 were sold for that month? And why is it 200 for march then, if it were 200 originally? I don't understand !!!
Hi David! My apologies if the video was not totally clear. The company builds up its inventory by purchasing goods in January, February and March. This I refer to with "January buy", "February buy", "March buy" as in the goods that were originally bought in January, etcetera. Then the company sells goods in April, May and June, and with FIFO and/or LIFO has to figure out which month these goods originate from. Did they take the goods that were now sold from the January buy, the February buy, or the March buy? More details in the individual videos on FIFO ua-cam.com/video/RAj94EUmm6g/v-deo.html and LIFO ua-cam.com/video/Tq4oZA_npWM/v-deo.html
Thank you for the great explanation! Keep it up!
You are welcome! Glad it was helpful!!!
At minute 5:38, why the january is zero?
Under FIFO, 50 units from the January buy are taken into COGS in April and the other 50 in May, so the ending inventory from that "tranche" is zero.
Hi. Where did the $6.14 come from?
Total monetary value of the inventory, which is $2150, divided by number of units, which is 350, gets you to $6.14 per unit. It is the weighted average cost per unit of the prices listed above it.
is the $10 per unit the price to sell per unit?
Hello Trevor! Yes, that is correct.
How is the Revenue 200 in June calculation ? Please explain
Hello Nimisha! The revenue in June is $2000, which is 200 units times $10 per unit.
Why are you using $50 with FIFO and LIFO
Each box holds 50 units of the product. If 1 box is sold, that's 50 units. 2 boxes = 100 units. 3 boxes = 150 units. Etcetera.