Inventory Cost Flow Assumptions

http://ccba.jsu.edu/accounting/INVENTORYCOSTFLOW.HTML

A. The FIFO Method

The FIFO method considers the oldest goods sold first. The ending inventory consists of the newer purchases. During times of rising prices, FIFO will result in a higher ending inventory value and a lower cost of goods sold (i.e., in comparision to LIFO).

B. The LIFO Method

The LIFO method considers the most recent purchases as being sold first. The ending inventory consists of the older purchases. During times of rising prices, LIFO will result in a lower ending inventory and a higher cost of goods sold (i.e., in comparison to FIFO)

C. Computing Cost of Goods Sold in a Periodic Inventory System

The calculations can be broken down into three basic parts:(1) determine goods available for sale, (2) determine the value of ending inventory, and (3) determining cost of goods sold.

Example:

          Beginning Inventory, Jan. 1
                    10 units @ $20 per unit

          Purchases:
             Jan 10  8 units @ $21 per unit
             Jan 30  10 units @ $22 per unit

          Sales:
             Jan 4   7 units
             Jan 22  4 units
             Jan 28  2 units


   Step 1: Determine Goods Available for Sale

                                      Units       Cost        Total
                                      -----      -----        -----
      Beginning Inventory              10     x   $20    =    $200
      Jan 10 Purchases                  8     x   $21    =    $168
      Jan 30 Purchases                 10     x   $22    =    $220
                                      -----                   -----
      Goods available for sale         28                     $588
                                      =====                   =====

   Step 2: Determine Ending Inventory (28 units available - 13 units sold = 15)

      A.  FIFO

                                      Units       Cost        Total
                                      -----      -----        -----
                                        10    x   $22    =    $220
                                         5    x   $21    =    $105
                                      -----                   -----
                                        15                    $325
                                      =====                   =====
      A.  LIFO

                                      Units       Cost        Total
                                      -----      -----        -----
                                        10    x   $20    =    $200
                                         5    x   $21    =    $105
                                      -----                   -----
                                        15                    $305
                                      =====                   =====

   Step 3: Determine Cost of Goods Sold

                                            FIFO            LIFO
                                           ------          ------
      Goods Available for Sale              $588            $588
      Less Ending Inventory                  325             305
                                           ------          ------
      Cost of Goods Sold                    $263            $283
                                           ======          ======