Inventory Cost Flow Assumptions

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 ====== ======