Accounting for Inventories
3.2. Example of LIFO cost flow method under perpetual system
This method requires that the cost of goods sold be determined by using the cost of units from the latest (newest) inventory layers. Therefore, when figuring out the cost of the 120 units sold on March 3, we need to take into calculation the cost of the 100 items from the second, latest layer (purchased on February 25, $12 per unit) and add the cost of 20 units from the first layer (beginning inventory, $10 per unit). The second layer is used first because it is newer than the first layer (beginning inventory).
As for the sale on May 17, the cost of goods sold is the cost of the 60 items from the third layer (purchased on April 6, $14 per unit) plus the cost of 10 units from the first layer (beginning inventory, $10 per unit). Pay attention that for goods sold on May 17, we could not use the units from the second layer (purchased on February 25) because they had already been used for the sale on March 3. The table below gives you a brief summary of LIFO application:
Illustration 10: Example of LIFO cost flow method under perpetual system
| Date |
Purchase |
Cost of Goods Sold |
Inventory |
||||||||||||
| Units |
x |
Cost |
= |
Total |
Units |
x |
Cost |
= |
Total |
Units |
x |
Cost |
= |
Total |
|
| Jan 1 |
|
|
|
|
|
|
|
|
|
|
50 |
x |
$10 |
= |
$500 |
| Feb 25 |
100 |
x |
$12 |
= |
$120 |
|
|
|
|
|
50 |
x |
$10 |
= |
$500 |
|
|
|
|
|
|
|
|
|
|
|
|
100 |
x |
$12 |
= |
$1,200 |
| Mar 3 |
|
|
|
|
|
100 |
x |
$12 |
= |
$1,200 |
|
|
|
|
|
|
|
|
|
|
|
|
20 |
x |
$10 |
= |
$200 |
30 |
x |
$10 |
= |
$300 |
| Apr 6 |
60 |
x |
$14 |
= |
$840 |
|
|
|
|
|
30 |
x |
$10 |
= |
$300 |
|
|
|
|
|
|
|
|
|
|
|
|
60 |
x |
$14 |
= |
$840 |
| May 17 |
|
|
|
|
|
60 |
x |
$14 |
= |
$840 |
|
|
|
|
|
|
|
|
|
|
|
|
10 |
x |
$10 |
= |
$100 |
20 |
x |
$10 |
= |
$200 |
|
|
|
|
|
|
|
Total COGS |
= |
$2,340 |
End. Inventory |
= |
$200 |
||||
The two preceding examples above show the computations of the cost of goods sold and the ending inventory assuming the perpetual inventory system. Let us move on to the periodic inventory system now.
3.3. Example of FIFO cost flow method under periodic system
Under the periodic system, inventory accounts are not affected when purchases and sales take place. Instead, the Inventory Purchases account is used. The amount of ending inventory is determined by a physical count of inventory on hand at period end. The cost of goods sold is computed by subtracting the amount of ending inventory from the goods available for sale.
Let us assume that the physical count at the end of the first half of 20X7 showed 20 units remaining on hand. The total amount of units sold is therefore 190 (210 - 20).
FIFO means first-in, first-out. So, we need to use the cost of inventories acquired first. Also note that the FIFO method does not require calculation of intermediate amounts of cost of goods sold and ending inventory balances. The cost of goods sold calculation for the 190 units is presented below:
Illustration 11: Example of FIFO cost flow method under periodic system
| From Beginning Inventory on Jan 1 |
50 units x $10 = $500 |
| From Purchase on Feb 25 |
100 units x $12 = $1,200 |
| From Purchase on Apr 6 |
40 units x $14 = $560 |
| Total COGS |
$2,260 |
3.4. Example of LIFO cost flow method under periodic system
When calculating the cost of goods sold under LIFO cost flow method, we need to use the cost of inventories acquired last. The computation is shown below:
Illustration 12: Example of LIFO cost flow method under periodic system
| From Purchase on Apr 6 |
60 units x $14 = $840 |
| From Purchase Feb 25 |
100 units x $12 = $1,200 |
| From Beginning Inventory on Jan 1 |
30 units x $10 = $300 |
| Total COGS |
$2,340 |
The resulting numbers appeared to be the same for FIFO and LIFO under the inventory perpetual and periodic systems. However, that is not always the case. Sometimes costs of goods sold for LIFO perpetual and LIFO periodic are different.
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