What is inventory?
Three production stages of a company’s items are referred to as inventory (zapasy):
- Basic supplies are known as raw materials (surowce) and are employed in the production of completed goods.
- A work-in-progress (praca w toku) is something that is being produced but isn’t yet finished.
- Finished goods (wyroby gotowe) are those that can be ordered, sold, and delivered to customers.
FIFO vs LIFO
The First-In, First-Out (FIFO) (pierwsze przyszło, pierwsze wyszło) method assumes that the first unit making its way into inventory–or the oldest inventory–is the sold first.
The Last-In, First–Out (LIFO) (ostanie przyszło, pierwsze wyszło) method assumes that the last or more unit to arrive in inventory is sold first. The older inventory, therefore, is left over at the end of the accounting period (okres sprawozdawczy).
Differences between LIFO and FIFO (During Inflationary Periods)
- The first item to be sold is the newest stock item.
- Net income (zysk netto) is frequently less.
- Selling prices are frequently greater.
- Ending inventory is frequently lower on the balance sheet.
- LIFO frequently misrepresents how inventory actually moves (as companies try to sell the items at the most risk of obsolescence).
- The oldest item in the inventory is the first to sell.
- Net income is frequently greater.
- Often, the cost of sold goods is lower.
- Ending inventory is frequently greater on the balance sheet.
FIFO more accurately depicts how inventory actually moves (as companies try to sell the items at the most risk of obsolescence).
CAN I USE LIFO UNDER IFRS?
International Financial Reporting Standards (IFRS) forbid the latest in, first out (LIFO) technique of inventory valuation, although the United States, which employs generally accepted accounting standards, allows it (GAAP).
Due to the potential for distortions in a company’s profitability and financial statements, IFRS forbids LIFO. For instance, LIFO might inflate a company’s earnings to reduce its taxable income. It may also lead to outmoded and obsolete inventory valuations. Finally, in a LIFO liquidation, dishonest managers can be tempted to sell off inventory with low carrying costs in order to falsely exaggerate earnings.