If you want to accurately estimate COGS (costs of goods sold) and your inventories, you need to use our FIFO calculator. This smart tool allows you to determine the current inventory valuation in just a few simple clicks. With this easy-to-use calculator, you will also be able to evaluate the amount that should be reported as COGS.
As you may guess, we will review the FIFO calculator in this article. We will also explain what FIFO stands for and how to utilize this valuation method when calculating the ending inventory. As an investor, you should know how to use FIFO to make more money. So, if you want to invest and earn more, you are in the right place!
FIFO – What Is It?
First things first, you need to know what FIFO means. FIFO stands for first-in, first-out. This method allows you to calculate a company’s inventory value in case the inventories have been transformed, acquired, or produced at different prices. Besides, FIFO can help determine COGS (costs of goods sold).
How Does It Work?
First-in, first-out is a method of inventory management that involves the rotation of products to maximize their utility. In other words, the first products to be received are used before the last ones to be received. It is also called “first come, first served” and “oldest on the shelf”. This is a method in which the first items to be received are the first items to be sold.
This inventory management technique is often used in food production and distribution. It is also used by some manufacturers and distributors of consumer goods, such as clothing, books, and electronics. The FIFO method is one of several inventory methods that can be applied to an organization’s inventory management system. It has been used for centuries and is still a popular choice for many businesses.
What Are the Advantages and Disadvantages of the FIFO Method?
The benefits of FIFO are that it ensures that the oldest goods are sold first, which prevents overstocking and reduces wasted space. This also helps to ensure that newer products have more time to sell before they expire. One disadvantage of this system is that it can lead to shortages if demand exceeds supply because older goods will be depleted before newer ones.
How Does This Method Impact Taxable Profits?
After subtracting operating expenses, production costs, and interest on debts, it will be required to tax a company on its profits. The amount that is recorded as the cost of goods sold (COGS) will affect the profit margin.
If the COGS is lower, this means the company has to pay higher taxes in addition to reporting a higher net margin. On the other hand, a higher value of COGS indicates lower profitability, so the company is going to pay lower taxes.
How Does It Impact the Financial Ratios of a Company?
As for the FIFO method, it is important to note that the change in price plays a vital role in determining the value of the ending inventory. This applies to every product and unit. Prices of products and supply tend to vary because of pressures during the inflationary or deflationary periods. It has an impact on the financial ratios.
Inflation causes the prices of products to go up. As a result, ending inventory is higher while COGS is lower. An increased inventory valuation affects different financial indicators, including the debt-to-assets ratio and current ratio. These indicators mean a company’s financial position is better in the case of larger inventories.
FIFO Formula: How to Calculate FIFO for Inventories?
Now that you know more about the FIFO method, it is time to learn how it’s used. Basically, there are two types of calculations:
- Cost of Goods Sold (COGS), and
- Ending Inventory (Inventory Remaining)
Let’s see how FIFO is used for these calculations!
Cost of Goods Sold (COGS)
In order to calculate COGS, it is necessary to know the amount or number of items sold. You should deduct it from your inventory. That’s because FIFO will assume that you sell the items that are purchased at the respective price. In fact, you need to add up all these costs and subtract them from the sales revenue for the same period.
As you may already know, COGS is a term that is used in accounting to represent the cost of goods sold during a specific period. It includes all costs associated with the sale of goods, such as manufacturing, advertising, transportation, and warehousing. Below is the formula you need to use when calculating the cost of goods sold:
COGS = Total Units Sold * Units Purchased Price
We will assume that you have purchased 10 office chairs and want to sell 4 chairs you no longer use. Let’s say the purchase unit price is $100. In this example, the cost of goods sold will be as follows:
COGS = 4 * $100
COGS = $400
Ending Inventory
Inventory is a critical aspect of any business and it is important to know the ending inventory for your business, especially if you are trying to grow or maintain a certain level. There are two ways of determining the ending inventory for your business:
- Inventory at the end of the month – This will provide you with an estimate of how much inventory you have left.
- Inventory at the end of an accounting period – This will provide you with an estimate of how much inventory has been sold during that time period.
You can also use FIFO when recording the value of your inventory. It will help you get a better idea of how much inventory is acquired. Here’s the formula you need to use:
Inventory Remaining = (Number of Units Purchased – Total Units Sold) * Units Purchased Price
Example:
- Units Purchase Price: $100
- Number of Units Purchased: 10
- Total Units Sold: 4
Inventory Remaining = (10 – 4) * $100
Inventory Remaining = 6 * $100
Inventory Remaining = $600
While these calculations are not difficult, we recommend using our calculator to evaluate inventory remaining and the cost of goods sold quickly. This amazing tool can do the math for you and save you time. Why not give it a go?