Fifo ex 6-3 permanent inventory
The data above suggests that it is reasonable to assume inventory levels to be lower using last-in/first-out (LIFO). LIFO is an inventory valuation method used to measure the cost of goods sold and determine a company’s gross profit margin. The LIFO method assumes that the items are being sold in reverse chronological order. Thus, the most recent item is sold first. It means any inventory items that are purchased at a greater price than the current item will be considered as being sold first, thereby decreasing their value.
Example: If 5 units are purchased per month at $55, $45, $40 and $35 respectively, the LIFO process would result in five monthly sales of 5. The fifth unit will be sold first. However, this transaction costs only 30 dollars. In other words, it is cheaper than 50. Last-in-first-out can help lower business costs for different transactions. However, it could lead to outdated stock in inventory due to lack of timely rotation based on market fluctuations during the particular time period. The final decision is made by the company based on its unique circumstances.