Fuel Dealers Account Inventory
Fuel dealers can utilize various approaches to track their Fuel Dealers Account Inventory of coal, oil, and wood, employing three distinct methods: first-in, first-out (FIFO), weighted average cost, and last-in, first-out (LIFO).
FIFO:
This method assumes that we sell the earliest acquired items first. Consequently, we base the cost of sold inventory on the expense of the oldest items in stock.
Weighted Average Cost:
This method computes the average cost of all inventory items. Thus, the cost of sold inventory is determined by the average cost across all items in stock.
LIFO:
This method presumes that the most recently obtained items are the first to be sold. As a result, the cost of sold inventory is grounded in the expense of the newest items in stock.
The choice of method hinges upon multiple factors, including the business’s nature, fuel price fluctuations, and tax implications inherent in each approach.
In India, the prevalent method among fuel dealers to manage inventory is the weighted average cost technique. Its popularity stems from its simplicity and its relatively accurate approximation of the actual inventory cost.
FIFO may also be adopted, especially in situations of volatile fuel prices. This method tends to yield lower profits during ascending price periods and higher profits during descending price periods.
LIFO, rarely favored by fuel dealers, leads to elevated taxable profits when prices rise.
Illustration using coal:
FIFO:
Imagine a fuel dealer procures 100 tons of coal at Rs. 1000 per ton on January 1, 2023. On February 1, 2023, 100 more tons are purchased at Rs. 1200 per ton. Subsequently, on March 1, 2023, 150 tons of coal are sold.
Under FIFO, the cost of the 150 tons of sold coal amounts to Rs. 1,150,000 (100 tons * Rs. 1000 + 50 tons * Rs. 1200).
Weighted Average Cost:
The weighted average cost for the 200 tons of coal equals Rs. 1100 per ton (200000 / 200). Hence, the cost of the 150 tons of sold coal is Rs. 165,000 (150 tons * Rs. 1100).
LIFO:
With LIFO, the cost of the 150 tons of sold coal is Rs. 1,200,000 (100 tons * Rs. 1200).
Selecting an inventory method holds substantial influence over a fuel dealer’s financial statements. FIFO can lead to diminished profits during price surges, while LIFO can cause increased profits in such periods.
The chosen method should align with the business’s needs and yield a precise reflection of financial performance.
Additional factors for consideration include:
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Fluctuations in fuel prices.
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Tax implications associated with each method.
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Matching inventory cost with revenue from sales.
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Ensuring a fair, accurate portrayal of financial performance.
Fuel dealers can utilize various approaches to track their inventory of coal, oil, and wood, employing three distinct methods: first-in, first-out (FIFO), weighted average cost, and last-in, first-out (LIFO).
To visit: https://www.mca.gov.in/
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