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

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 weighted-average cost flow method

Under this method, the weighted-average 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 weighted-average cost

Based on the above information, the weighted-average 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 weighted-average 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 weighted-average).

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

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