Most companies use FIFO or LIFO
Last in - First out (LiFo)
Among the storage methods is LIFO (English: "Last in - First Out") the most frequently chosen or unconsciously used. With the LIFO procedure, the products that were last stored are used first. In addition, the LIFO procedure has an important role in accounting. In commercial law, it is one of two permissible methods; in tax law, it is the only permissible method for inventory valuation.
In this lesson we explain the topic of storage strategies to you. The focus is on the Last In - First Out procedure. For a better understanding, we provide you with practical examples. We will also explain the use of the LIFO method in accounting. Finally, you can test your knowledge with a few practice questions.
Storage strategies are used in a company to plan storage and retrieval. In detail, it is about thinking about the order in which products are stored and which storage locations come into question. It always plays a role which storage systems can be used in the company.
The LIFO procedure is very often used, especially in companies that do not plan their storage strategies. In most companies, the FIFO procedure (First in - First out) is desirable, as this means that stock products are regularly exchanged. The food industry in particular uses the FIFO method.
The LIFO procedure
With the LIFO procedure, the last stored Products are the first to be retrieved. Such a procedure is used automatically in companies that do not have a separate storage strategy. The products that have been purchased are placed in front of other pallets in the warehouse or stacked on top of other items. When they are removed, these products are immediately in the first place, so that the LIFO process is used consciously or unconsciously due to its simplicity.
However, this method is possible only in companies that have correspondingly insensitive storage products. It can happen that some items in a warehouse are always in the rearmost storage locations and are therefore never used. However, since this method allows storage without prior planning, LIFO is a simple and inexpensive method.
Advantages of the LIFO process:
- Organizational savings
- Reduction of routes
- Space savings through wall shelves
- Cost savings through simple shelving systems
- Cost savings through fewer warehouse staff
Areas of application
The LIFO procedure is used when a company doesn't care about the order of storage or when it simply doesn't matter. This is possible for products whose properties have not changed in any way despite being stored for a long time.
For this purpose, bulk materials such as sand and gravel are available, for example. In addition, some metals and building materials are permanent inventory items. These products must be in good condition even if they are needed after a long time. Corrosion must not occur. The LIFO process is therefore not suitable for all products, so that the stored products must be checked for resistance in advance.
For this purpose, products are stored in front of or on top of remaining stocks. The construction sand is located in a pit, for example, and is poured up from above and also removed. The newly procured weatherproof clinker bricks are placed in front of the old pallets in pallets using the LIFO method and removed again when they are needed.
The common storage systems are suitable for the LIFO process. This has the advantage that no special shelves have to be purchased and thus the costs remain low. The same applies to the costs of storage and retrieval, as there are no goods movements in older stocks.
Storage systems for the LIFO process
- Shelf storage: A simple system in which shelves are used that are distributed around the warehouse to save space and can therefore also be attached to the wall
- Open air storage: A system for bulk goods in which the products are stored on the floor in open spaces. Pits may also be used
- High-bay warehouse: The high-bay warehouse has storage spaces, which means that each product has its own space. The method is possible for LIFO, but not economical.
LIFO as a method of inventory valuation
Products in stock are valued on a company's financial statements at the end of the year. One evaluation method is the last in - first out method. A distinction is made between usage according to commercial law and tax law.
Accounting according to LIFO for commercial law is possible according to § 256 HGB. According to this, values of similar assets may be assessed collectively. In the LIFO procedure, it is assumed that the most recently purchased products are withdrawn first.
It does not matter which method is used in practice in the warehouse. In addition to the LIFO procedure, the FIFO procedure is permissible under commercial law, in which it is assumed that the products procured first are removed first.
According to tax law § 6 Abs. 1 Nr. 2a EStG, the LIFO procedure can be used as the only valuation method. For this, however, the prerequisites must be ensured that the profit is determined according to § 5 EStG, the LIFO method is also used in the commercial balance sheet and the principles of proper bookkeeping are adhered to. If the products to be assessed can be clearly identified with their acquisition costs, the consumption sequence assessment LIFO must not be used.
Permanent LIFO and period LIFO
The permanent LIFO records all incoming and outgoing goods, which means that the current stock levels are always known.
This procedure is simplified with the period LIFO. The closing stocks are recorded and these are multiplied by the starting prices until all products are priced. The reason for this is that it is assumed that the last goods purchased have already left the company.
Strict lowest value principle
Since a balance sheet must never be based on assets that are too high, lower values must be used if they are known. For this reason, the value from the LIFO procedure is compared with the current market value on the balance sheet date. The lower value from this comparison must be used for the balance sheet according to the strict lowest value principle.
The following movements took place:
The final inventory of 700 barrels is to be valued according to LIFO. 500 barrels at $ 63.21 / barrel and 200 barrels at $ 68.77 / barrel are added to the balance sheet, giving a value of $ 45,359.
This amount flows into the balance sheet according to commercial law and tax law. The current market value is USD 49,223, which means that the lowest value principle has been adhered to.
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