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Accounting: Accounting Methods: LIFO v. FIFO 2 Views
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Transcript
- 00:00
Accounting Allah shmoop accounting methods Life O V Fi Foh
- 00:08
So there's a war It's not in the White House
- 00:10
It's not in China It's not in the Middle East
- 00:12
It's not in the hallowed halls of accounting firms everywhere
- 00:15
Life O V Fye Foe the smackdown in this corner
Full Transcript
- 00:19
Meet life Oh last in first out and in this
- 00:22
corner Meet Fife Oh first in first out Let's rewind
- 00:25
a moment to illustrate in Deadpool fashion SHMOOP West Airlines
- 00:29
buys jet a fuel for its fleet by the mega
- 00:32
ton It typically stockpile six months fuel at a time
- 00:35
So there just in case there are any global supply
- 00:38
issues Shmoop West can still keep flying the somewhat friendly
- 00:42
skies In the beginning of the year January ish Shmoop
- 00:45
West was paying two dollars a gallon for jet eh
- 00:48
But of course a bomb went off somewhere in an
- 00:50
oil rich country and jet A prices spiked in March
- 00:53
two three fifty a gallon Shmoop West kept using the
- 00:57
same fuel in the same plains along the same routes
- 01:00
and all the fuel got more less mixed together in
- 01:03
the same tank So think about a given flight from
- 01:05
Phoenix to Austin with one hundred nerds paying two hundred
- 01:09
dollars each on that plane That's twenty thousand dollars of
- 01:12
revenues with expenses of five grand for well everything else
- 01:16
but fuel And we're just taking an average allocation from
- 01:19
pilot Stu's peanuts landing fees insurance wear and tear on
- 01:22
the plane and so on Then fuel burned is eighteen
- 01:25
thousand pounds or about three thousand gallons of fuel And
- 01:28
yes they quote fuel in pounds in airplane land so
- 01:31
that fuel burned on the flight from Phoenix to Austin
- 01:34
is the same fuel burn whether we're in January or
- 01:37
April or July and whether or not fuel costs a
- 01:39
dollar five dollars or twenty dollars In Alan they might
- 01:42
bring slightly more on hot days than cold ones but
- 01:45
it surrounding air different So just moving on so the
- 01:48
flight burns three thousand gallons How do we assess the
- 01:50
profitability of that flight Are reusing jet a fuel we
- 01:53
bought in January for two bucks a gallon or are
- 01:56
we using the recently bought fuel at three fifty a
- 01:58
gallon Huge difference is here at three thousand gallons at
- 02:01
two dollars a gallon Cost Six thousand dollars in that
- 02:04
twenty thousand dollars in revenue from the Nerd Bird flight
- 02:07
with five grant in unit expenses gave us nine grand
- 02:10
in pretax operating profits Pretty good but if we use
- 02:13
is our cost the three fifty a gallon fuel Then
- 02:16
instead of six thousand dollars in fuel costs those costs
- 02:19
were ten thousand five hundred dollars taking our profits from
- 02:23
that flight all the way down to forty five hundred
- 02:25
bucks So which accounting method do we use Fi faux
- 02:28
or life Oh well what is always the answer here
- 02:31
Yes it depends Yeah it's really about consistency Some airlines
- 02:36
report a blended fuel cost and take a running average
- 02:39
of what they paid for fuel say the last six
- 02:41
months Others you strict life o others you strict by
- 02:45
foe So let's say we took quote running hundred eighty
- 02:49
day average unquote as the price that was set for
- 02:52
fuel And we're now in June and roughly half the
- 02:54
fuel from the two dollar a gallon purchases is left
- 02:57
over Any other half is the current three fifty a
- 03:00
gallon fuel that's being used So we have a fifty
- 03:02
fifty allocation here or a blend that has a cost
- 03:05
per gallon average of two Seventy five to give US
- 03:08
six thousand seven hundred fifty bucks then in contributed profits
- 03:12
on the nerd bird from a cash flow perspective in
- 03:15
the end doesn't matter No matter which earnings calculation we
- 03:18
used the cash went out the door to buy the
- 03:20
fuel when it needed TIO It's on ly the estimation
- 03:23
of earnings here That changes and the key idea here
- 03:27
is consistency That is if we are always using a
- 03:30
trailing one hundred eighty day fuel cost average then that's
- 03:33
totally fine as long as it's disclosed and noted But
- 03:36
you can imagine the chick Ai Neri that could go
- 03:38
on with Rhea Learnings if accountants flipped and then flopped
- 03:42
as toe which method of accounting for fuel costs they
- 03:44
were using in a given quarter for poor old the
- 03:47
shmoop West Airlines So consistency is the key here in
- 03:50
any fife O or life Oh smackdown Pick a smacker
- 03:53
downer and then you know stick with her through the 00:03:56.28 --> [endTime] fight Yeah
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