Accounting for Inventories
2.2. Example of LIFO cost flow method
Under LIFO, the cost of goods sold is calculated by using the costs of drills purchased last. The computation is shown below:
Illustration 5: Brid's Drills cost of goods sold under LIFO
Purchase Two 
80 units x $20 
= 
$1,600 
Purchase One 
120 units x $18 
= 
$2,160 
Beginning Inventory 
70 units x $15 
= 
$1,050 
Total 
270 units 

$4,810 
The 30 units from the beginning inventory remain in the Inventory account.
The net income is determined by subtracting the cost of goods sold from sales: $5,990 ($10,800  $4,810). The income tax to be paid is $1,797 ($5,990 x 30%).
2.3. Example of weightedaverage cost flow method
Under this method, the weightedaverage cost per unit needs to be calculated first. This is done by dividing the cost of goods available for sale by the number of units available for sale.
Illustration 6: Brid's Drills data for calculating weightedaverage cost
The cost of goods available for sale: 
100 x $15 + 120 x $18 + 80 x $20 = $5,260 

The number of goods available for sale: 
100 + 120 + 80 = 300 units 
Based on the above information, the weightedaverage cost per unit is $17.53, rounded to a cent: $5,260 ÷ 300 units.
Next, to determine the cost of goods sold the number of drills sold is multiplied by the weightedaverage cost. In our illustration, the cost of goods sold is $4,733.1 ($17.53 x 270 units). The net income is $6,066.9 ($10,800  $4,733.1) and the income tax is $1,820.07 ($6,066.9 x 30%).
2.4. Summary of cost flow methods
Below you can see the accounting equation, which is partially divided. The first part shows purchase and sale recognition transactions which are the same for any cost flow method. The second presents recognition of the cost of goods sold and income tax payment under different cost flow methods (FIFO, LIFO, and weightedaverage).
The transactions are numbered:
1) First purchase of inventory
2) Second purchase of inventory
3a) Sales (revenue) recognition
3b) Expense (cost of goods sold) recognition
4) Income tax payment
Note that some numbers in the table below are rounded.
Illustration 7: Transactions under different cost flow methods for general example

Assets 

Claims (Equity) 



# 
Cash 
+ 
Inv. 
= 
Cont. Cap. 
+ 
Ret. Earn. 
Rev. 
 
Exp. 
= 
Net Inc. 
Cash Flow 

Bal 
$4,500 
+ 
$1,500 
= 
$4,500 
+ 
$1,500 
$ 0 
 
$ 0 
= 
$ 0 



1 
(2,160) 
+ 
2,160 
= 
n/a 
+ 
n/a 
n/a 
 
n/a 
= 
n/a 
(2,160) 
OA 

2 
(1,600) 
+ 
1,600 
= 
n/a 
+ 
n/a 
n/a 
 
n/a 
= 
n/a 
(1,600) 
OA 

3a 
10,800 
+ 
n/a 
= 
n/a 
+ 
10,800 
10,800 
 
n/a 
= 
10,800 
10,800 
OA 

FIFO 

3b 
n/a 
+ 
(4,660) 
= 
n/a 
+ 
(4,660) 
n/a 
 
4,660 
= 
(4,660) 
n/a 


4 
(1,842) 
+ 
n/a 
= 
n/a 
+ 
(1,842) 
n/a 
 
1,842 
= 
(1,842) 
(1,842) 
OA 

Bal 
9,698 
+ 
600 
= 
4,500 
+ 
5,798 
10,800 
 
6,502 
= 
4,298 
5,198 


LIFO 

3b 
n/a 
+ 
(4,810) 
= 
n/a 
+ 
(4,810) 
n/a 
 
4,810 
= 
(4,810) 
n/a 


4 
(1,797) 
+ 
n/a 
= 
n/a 
+ 
(1,797) 
n/a 
 
1,797 
= 
(1,797) 
(1,797) 
OA 

Bal 
9,743 
+ 
450 
= 
4,500 
+ 
5,693 
10,800 
 
6,607 
= 
4,193 
5,243 


WeightedAverage 

3b 
n/a 
+ 
(4,733) 
= 
n/a 
+ 
(4,733) 
n/a 
 
4,733 
= 
(4,733) 
n/a 


4 
(1,820) 
+ 
n/a 
= 
n/a 
+ 
(1,820) 
n/a 
 
1,820 
= 
(1,820) 
(1,820) 
OA 

Bal 
9,720 
+ 
527 
= 
4,500 
+ 
5,474 
10,800 
 
6,553 
= 
4,247 
5,220 
