LIFO method

accounting

The UEPS method consists of carrying out the exits of products of the company in the order of "last in, first out" in what refers to the inventory of the warehouse.

In other words, the merchandise units that have been in the warehouse for the least time will be the first to be sold or marketed. This method is also known by its acronym in English as LIFO (Last Inputs, First Outputs).

What is it for

This method is useful for small and medium-sized companies, since by not having a large volume of merchandise in stock, it will hardly be noticed if they perform one method or another because the product turnover is usually high.

On the other hand, there are other methods such as FIFO (or FIFO) or the weighted average price (PMP) method.

Each method has its function depending on the business model and the company's sector, although it is rare for a company to adopt the LIFO method, it is usually FIFO and PMP that are implemented in most companies that base their ordinary activity on commercialize merchandise.

The reason for the little use of the LIFO method is due to the ability to manipulate the expenses charged in a company, in order to declare fewer profits and therefore less tax payments.Thus, the use of the LIFO method is prohibited by IFRS (International Financial Reporting Standards), which are implemented in the vast majority of countries in the world.

Example of using the LIFO method

Next, we are going to perform a simulation of how the LIFO method would be performed on a random inventory.

Departure orderNumber of unitsIndividual costTotal value
505€250€
1004€400€
1010€100€
3003€900€

If we sell 310 units of product, the inventory update would be such that:

Departure orderNumber of unitsIndividual costTotal value
505€250€
1004€400€

Then, the value in the company's internal accounting of the sale of the products sold is € 1,000 (€ 900 + € 100). This happens because when performing the LIFO method, the last 310 units that were available for sale have been selected in the order of preference. In other words, the newest units in the warehouse have been put up for sale.

Tags:  finance economic-analysis Colombia 

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