All companies must carry the accounting of their products. And therefore also the accounting of your stocks. In this sense, the decision on which criterion is the most convenient to value stocks in the case of a specific company is essential. The reason is that accounting is governed, among others, by the uniformity principleTherefore, the criterion cannot be changed without just cause.
The methods that are usually used for the valuation of stocks are in FIFO, the LIFO and the weighted average price. Also known as the FIFO method and the UEPS method in Spanish.
When is the LIFO or LIFO method used?
First, this criterion should be defined. It comes from the English, "last in, first out", so, in this criterion, it is considered that the goods that are sold first are the last ones that are bought. In Spanish it is called UEPS, "last entries, first exits".
Initially, it could be considered to be a somewhat illogical criterion. However, a second, more detailed analysis will lead us to understand that, since, as a general rule, goods increase in value over time, using this method real income and expenses are more equated, in such a way that the Rating Inventory it is usually inferior to other methods such as FIFO.
It is precisely the relationship between current income and current expenses that is the strong point of this system. The reason is that, in this way, the real cost of the goods sold is taken into account, so there is no overvaluation of stocks, and the income obtained from the sale of the goods is not as great as in other methods. Ultimately, what will be sought with this system is the sale, in the first place, of the most expensive products.
The LIFO examples need to take into account, not just stocks of materials, but also the purchase and sale operations carried out in a certain period of time. For accounting purposes, the stock valuation must be done at least annually.
Evaluate your stock in Excel with FIFO and LIFO