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In periods of rising prices, FIFO leads to higher net income. Oldest cheapest unit is used
in the calculation of cost of goods sold. Higher reported incomes may favorably affect
investor attitudes toward the company. Similarly, higher reported income may lead to
higher salaries, higher bonuses, or higher status for the management of the company.
Example:
Beginning inventory Jan 1
Purchases
Jan 20
April 8
September 5
December 12
Total purchase
Total cost
11
12
13
14
Since it assumes that the last units in are the first ones sold cost of goods sold can
be calculated by starting with the most recent inventory and working forward:
December 12
September 5
April 8
January 20
Units sold
Cost of goods
sold
100
200
400
200
900
14
13
12
11
11,000
Example 4
The B Oil Company, a well known distributor of fuel oil closes its accounts at the
end of each month.
The following information is available for the month of June, 2005
Sales
Rs. 2,50,000
Administrative expenses
5,000
Inventory, June 1
50 tons @ 1,000
Purchases (including carriage inward)
June 10
150 tons @ 800
June 20
150 tons @ 900
Inventory june 30
100 tons
Compute the following data by the FIFO method:
Do example 5 in LIFO