ACCOUNTING

FIFO,LIFO AND WEIGHTED AVERAGE COST

Group Members
Aqeel Butt Salman Junaid Muzaffar Hammad Saeed Malik 12002001009 12002001019 12002001011 12002001003

INTRODUCTION
At the end of each period (month or year) one should do a physical inventory count to determine the number of inventory on hand. Then you need to place a value on the goods. One would think this would be easy - the value of the goods is simply how much they originally cost. Unfortunately there is a bit more to it than just this.

EXAMPLE
Awais runs a candy shop. He enters into the following transactions during July: July 1 Purchases 1,200 lollypops at $1 each. July 13 Purchases 500 lollypops at $1.20 each. July 14 Sells 700 lollypops at $2 each. First of all, how many lollypops does he have at the end of the month? Answer: 1,200 + 500 700 = 1,000 lollypops

WAYS OF VALUING A STOCK

There are three ways that Awais can use to value his stock 1: FIFO ( First in First Out) 2: LIFO ( Last in First Out) 3: Weighted Average

FIFO ( FIRST IN FIRST OUT)

This method assumes that the first inventories bought are the first ones to be sold, and that inventories bought later are sold later.

USE OF FIFO METHOD

It is very common to use the FIFO method if one trades in foodstuffs and other goods that have a limited shelf life, because the oldest goods need to be sold before they pass their sell-by date. Thus the first-in-first-out method is probably the most commonly used method in small business.

LIFO ( LAST IN FIRST OUT)

This method assumes that the last inventories bought are the first ones to be sold, and that inventories bought first are sold last.

USE OF LIFO METHOD

The LIFO method is commonly used in the U.S.A.

WEIGHTED AVERAGE
This method assumes that we sell all our inventories simultaneously.

USE OF WAIGHTED AVERAGE METHOD

The weighted average cost method is most commonly used in manufacturing businesses where inventories are piled or mixed together and cannot be differentiated, such as chemicals, oils, etc. Chemicals bought two months ago cannot be differentiated from those bought yesterday, as they are all mixed together.

ANY INTELLIGENT QUESTIONS??

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