LIFO Inventory Calculator
Learn pros and cons of LIFO method
Last In First Out, or LIFO, is one of three accounting methods used in managing inventory. It’s based on the model of selling the newest goods in the inventory first. This might not be very intuitive to some businesses, but it definitely has its perks in specific cases.
Calculating inventory value is essential in many ways. It reflects on company valuation, income statements, balance sheets, and net taxable income.
It’s advisable to compare LIFO and FIFO valuations, especially at unpredictable times. The sharp rise and dips in material prices, inflation, and supply chain issues are all causes of comparing and contrasting inventory management methods.
In this article, we’ll explain how the CalcoPolis LIFO inventory calculator works. In addition, we’ll discuss the main differences between LIFO and FIFO. Also, when to use each.
What Is LIFO?
According to the Generally Accepted Accounting Principles (GAAP), there are three methods to calculate inventory value:
LIFO is a system where a company sells the newest items added to its inventory. This is rather unusual, as it means that they opt for the goods with the highest prices and least profits.
Additionally, if the goods are perishable, easily affected by storage conditions, or might go out of fashion, then this method is clearly not too practical.
Another downside is that the inventory value is consistently on the lower end. This affects the overall valuation of the company, which is critical if an IPO is imminent.
The main attraction of LIFO is the substantial reduction in taxable income. There’s an added perk when the market experiences high inflation or steep deflation. As the prices change, the value of inventory and cost of goods sold COGS remain relevant.
How to Calculate Inventory Value Using LIFO?
You can calculate inventory value based on the LIFO model using these simple formulas:
The initial inventory before any items are sold is assumed to be INV-initial
INV-initial = P1Q1 + P2Q2 + …. + PiQi
- P1: oldest unit price.
- Q1: the number of items purchased at that price.
- P2: the second unit price.
- Q2: the number of units purchased at that price
- Pi: the last unit price.
- Qi: the number of units purchased at the latest price
After selling some of the last items, the active inventory (INV=active) becomes:
INV-active = P1Q1 + P2Q2 + …. + Pi-3 Qi-3
- Qi-1: the number of units purchased the time before last.
- Qi-2: the number of units purchased two times before the last.
- Qi-3: the number of units purchased three times before the last.
This repeats for ‘n’ sold products.
n = Qi-2 + Qi-1 + Qi
The Pi values are the corresponding prices.
How to Calculate the Cost of Goods Sold Using the LIFO Method?
The goods sold are just as easily calculated using the LIFO method, and here’s how:
COGS = PiQi + Pi-1Qi-1 + Pi-2 Qi-2
This is simply the sum of products of the prices and relevant quantities of the latest items.
To further illustrate this, here’s an example:
Company XYZ purchased the following batches of bricks at the corresponding prices:
November 11th: 1000 bricks at $500
November 15th: 1000 bricks at $600
November 16th: 1000 bricks at $800
November 22nd: 1000 bricks at $900
If the company sells 2500 bricks on November 23rd, then the COGS calculated with LIFO would be:
COGS = 1x900 + 1x800 + 0.5x600 = $2000
INV-active = 0.5x600 + 1x500 = $800
It’s clear here that the selling price is pretty high while the inventory value is at its lowest.
The best part is that you don’t need to go through all this math yourself. The CalcoPolis LIFO inventory calculator would do all the heavy lifting on your behalf.
Difference Between LIFO and FIFO
FIFO is the exact opposite of LIFO when it comes to moving old inventory. While LIFO uses the last items that go into the inventory, FIFO takes out the first ones.
This usually makes more sense, and it’s sometimes necessary. For instance, if a company deals in perishable products, sensitive items that could be damaged by long storage, or fashion items that quickly become dated.
In the case of using the FIFO model, the profits become higher, the inventory value maximizes, and the taxed income is often higher.
Additionally, the IFRS implementation follows that FIFO is accepted internationally, while LIFO is limited to the US. Some companies operating overseas can still use the LIFO model, but that has to be stipulated in their legal documents.
When Is It Better to Use LIFO Than FIFO?
LIFO is the best method to use when prices aren’t stable. Spikes, hikes, and steep dips require a flexible system that keeps track of the latest changes.
It’s also pretty clever at reducing taxable income. This is especially important with big-bill items with fluctuating prices. Industries like oil & gas, automobiles, and various ores often follow the LIFO model.
If you wish to calculate inventory value at the end of accounting period you may use our ending inventory calculator.