Inventories basics and methods

Inventory Valuation Methods

First-in First-out (FIFO)    Last-in First-out (LIFO)    Moving Average Method    Weighted Average Method    Dollar Value LIFO

FIFO, LIFO, Perpetual, Periodic

Under FIFO, it is assumed that items purchased first are sold first.

Under LIFO, it is assumed that items purchased last are sold first.

Perpetual inventory system updates inventory accounts after each purchase or sale.

Periodic inventory system records inventory purchase or sale in "Purchases" account.       "Purchases" account is updated continuously, however, "Inventory" account is updated on a periodic basis, at the end of each accounting period (e.g., monthly, quarterly)

Example 1 (Company A)

Inventory transactions in May 2010. Date Transactions Units Purchased (Sold) Unit Cost Inventory Units May 1 Beginning Inventory 700 $10 700 May 3 Purchase 100 $12 800 May 8 Sale (500) ?? 300 May 15 Purchase 600 $14 900 May 19 Purchase 200 $15 1,100 May 25 Sale (400) ?? 700 May 27 Sale (100) ?? 600 May 31 Ending Inventory   ??      Ending Inventory = Beginning Inventory + Units Purchased - Units Sold    = 700 + 900 - 1,000 = 600 comparison of FIFO and LIFO    FIFO vs. LIFO   Cost of goods sold Cost of ending inventory Beginning inventory + Purchases FIFO, Perpetual $11,000 $8,600 $19,600 LIFO, Perpetual $12,400 $7,200 $19,600 FIFO, Periodic $11,000 $8,600 $19,600 LIFO, Periodic $13,600 $6,000 $19,600 Moving average, Perpetual $11,705 $7,895 $19,600 Weighted average, Periodic $12,250 $7,350 $19,600    Example 1 shows that per unit purchase cost increases continuously throughout the period ($10 --> $12 --> $14 --> $15).    FIFO assumes that items purchased FIRST are sold FIRST.       --> Cost of old purchase is recorded as cost of goods sold.       --> Cost of recent purchases is recorded as cost of ending inventory.       --> When price goes up, old price is lower than recent price.       --> Cost of goods sold is lower for FIFO. ($11,000 < $12,400)       --> Cost of ending inventory is higher for FIFO. ($8,600 > $7,200)    LIFO assumes that items purchased LAST are sold FIRST.       --> Cost of recent purchase is recorded as cost of goods sold.       --> Cost of old purchases is recorded as cost of ending inventory.       --> When price goes up, recent price is higher than old price.       --> Cost of goods sold is higher for LIFO. ($12,400 > $11,000)       --> Cost of ending inventory is lower for LIFO. ($7,200 < $8,600)     FIFO, Perpetual Cost of Goods Sold = FIFO, Periodic Cost of Goods Sold             ($11,000 = $11,000)     FIFO, Perpetual Inventory Cost = FIFO, Periodic Inventory Cost             ($8,600 = $8,600)     LIFO, Perpetual Cost of Goods Sold < LIFO, Periodic Cost of Goods Sold             ($12,400 < $13,600)     LIFO, Perpetual Inventory Cost > LIFO, Periodic Inventory Cost             ($7,200 > $6,000)     Moving average, Perpetual Cost of Goods Sold          < Weighted average, Periodic Cost of Goods Sold             ($11,750 < $12,250)     Moving average, Perpetual Inventory Cost           > Weighted average, Periodic Inventory Cost             ($7,895 > $7,350)