Lifo

he following are the points of distinction:
(1) In case of FIFO, the materials which are
received first are issued first, where as in case of
LIFO, the materials which are received last are
issued first.
(2) In conditions of rising prices, due to difference
in values of closing stock, better profit is given by
FIFO than LIFO. But opposite will be result in
conditions of falling prices.
(c) Emphasis on the balance sheet is placed by
FIFO where as emphasis on the income statement
(i.e. profit & loss account) is placed by LIFO.
FIFO should be chosen by anybody, who desires
that inventory should correspond to the current
cost. On the other hand, LIFO should be chosen
by another whom desires that the current cost
should be matched with the revenue.
(3) Current cost is not matched with current
revenue by FIFO but in the balance sheet, the
working capital is correctly shown by it. Whereas,
on the other hand, current cost is matched with
current revenue by LIFO but the working capital is
shown incorrectly. In that case, since matching is
very essential, LIFO may be used, but by way of
footnote, the current costs of the closing stock
may be mentioned so that the working capital
position is made clear.
1(B)(iii) Highest-in-First out (HIFO) Method:
The method may be termed Highest-in-first-out
or HIFO simply, when it is desired to charge the
issues at the highest cost of purchase in stock so
that purchases made at lower rates may be
represented by the closing stock. No importance
is gained by this method. The application of this
method may be noticed only in monopoly
concerns & in case of cost plus costing. Since
lower cost is represented by the closing stock, it
helps to create secret reserve. Under this method,
comparison of costs, as in the case of FIFO &
LIFO, becomes unreliable.
1(B)(iv) Next-in-First out (NIFO) Method:
Under this method, at the rate of next price, which
is yet to arrive, the issue is charged. To see that
the charge corresponds to the market price is the
object of this method. Thus this is similar to
market price method, but as the rate of next
purchase can be easily known from the purchase
order placed, the application of this method is
easier than that method. If due to any reason
whatsoever, at the time of making the payment,
the rate of next purchase is changed, the
complications will arise. For general application,
the method has not been accepted. As in the case
of FIFO, LIFO & HIFO, comparison of costs
becomes unreliable.
1(B)(v) Base Stock Method:
A fixed quantity of materials is always maintained
at original cost under this method & out of the
stock in excess of that fixed quantity, all issues
take place using either FIFO principle or LIFO
principle. The fixed quantity so maintained at
original cost is called base stock. It is obvious
that, if such a situation arises, where the
production flow will be stopped, unless the issue
is made out of the base stock, the issue has to
be made; otherwise, the purpose of maintaining
the base stock will be lost. The base stock will be
permanently reduced in such an exceptional case.
Base stock should not be considered as
independent method since either FIFO or LIFO
principle is to be used. As a separate technique
only, this method may be regarded. Normally, in
base stock technique, FIFO is used
.
Advantages:
(a) This technique may be suitably used by
process industries like leather industry, refinery,
non-ferrous metal industry etc. where basis raw
materials are used.
(b) This technique is applicable in industries
where, for a long time, a considerable quantity of
basic material is to be kept in process.
(c) The valuation of closing stock becomes easy
by this technique.
(d) In both theory & practice, the technique is
simple.
(e) The mode of closing stock valuation makes
the profit or loss most conservative.
Disadvantages:
(a) In this case, all the disadvantages of FIFO or
LIFO, whichever is used in base stock technique,
shall apply.
(b) Base stock is a part of the stock of materials
which is an item of current asset. Therefore, why
in the balance sheet, the base stock is treated as
an item of fixed asset & shown at original cost?
(c) Sometimes in the balance sheet, base stock
appears at most unbelievable price & as a result,
at the time of winding up, the partners &
shareholders may be cheated.
Illustration 3:
Prepare a stores ledger account assuming that a
base stock of 600 units @ $ 5 per unit is
maintained & FIFO method is applied on the basis
of the following records of the receipts & issues of
materials in March 2011.
March 01 Purchased 4000 units @ $ 5
08 Issued 1200 units
12 Purchased 2000 units @ $ 6
15 Issued 2400 units
19 Issued 600 units
25 Purchased 2400 units @ $ 5.50
27 Issued 2600 units
30 Purchased 1400 units @ $ 6.50