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LIFO COGS Formula:
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LIFO (Last-In, First-Out) is an inventory valuation method where the most recently acquired items are assumed to be sold first. The COGS calculation under LIFO uses the latest costs for inventory valuation.
The calculator uses the LIFO COGS formula:
Where:
Explanation: This formula calculates the cost of goods sold by considering the oldest inventory plus purchases, then subtracting the most recent inventory that remains unsold.
Details: Accurate LIFO COGS calculation is crucial for financial reporting, tax purposes, inventory management, and understanding the true cost of sales during periods of inflation.
Tips: Enter ending inventory (oldest), purchases, and ending inventory (recent) in USD. All values must be non-negative numbers representing monetary amounts.
Q1: What is the main advantage of LIFO method?
A: LIFO matches current costs with current revenues, which can result in lower taxable income during periods of inflation.
Q2: When is LIFO most commonly used?
A: LIFO is primarily used in the United States by companies experiencing inventory price inflation, particularly in industries like automotive and petroleum.
Q3: What are the limitations of LIFO?
A: LIFO can result in outdated inventory values on the balance sheet and is not permitted under IFRS accounting standards.
Q4: How does LIFO affect financial ratios?
A: LIFO typically results in lower inventory values and higher cost of goods sold, which can affect current ratio, inventory turnover, and gross profit margin.
Q5: Can companies switch between LIFO and FIFO?
A: Companies can change inventory methods but must follow specific accounting rules and disclose the change in their financial statements.