CHAPTER 6: Inventory (FIFO, LIFO, Average)

FIFO: First IN – First OUT

LIFO: Last in – First out
Ahmad, owns 3 cars, during the current month Ahmad sold one
car @ 100,000. While the purchased cars have the following
information:
Purchase date Car Cost
1/1/2020 A 70,000
20/1/2020 B 80,000
25/1/2020 C 45,000

1- How much is the profit of Ahmad from car selling?

Metho FIFO LIFO Average (total cost
d / total quantity)
Profit 100,000 – 70,000 100 – 45 = 55,000 (70 + 80 + 45) =
= 30,000 195,000 / 3 cars =
65,000
Profit = 100 -65 =
35,000

2- How much is the cost of cars still on hand of Ahmad at the

end of the month?
Method FIFO LIFO Average (total cost
– cost of car sold)
Ending 80+45 = 70+80= 150,000 2*65 = 130,000
inventory 125,000
 Example 1:

Instruction: use the three inventory methods (FIFO, LIFO, Average)

1- Compute the cost of goods sold (COGS). (100 – 45 = 55 Units)
2- Compute the ending inventory value (45 units).

1- FIFO: First In – First Out

Cost of goods sold (COGS) Ending inventory
(Need # of units sold) = 55 units (Need # of units on hand) = 45 units
Date #Units Cost per unit Total cost Date #Units Cost per unit Total cost

1 – Jan 10 100 1,000 27 – Nov 40 130 5,200

15 – April 20 110 2,200 24 – Aug 5 120 600
24 Aug 25 120 3,000
Total COGS 6,200 Total EI 5,800

2- LIFO: Last In – First Out

Cost of goods sold (COGS) Ending inventory
(Need # of units sold) = 55 units (Need # of units on hand) = 45 units
Date #Units Cost per unit Total cost Date #Units Cost per unit Total cost

27 Nov 40 130 5,200 1 Jan 10 100 1000

24 Aug 15 120 1,800 15 Apr 20 110 2,200
24 Aug 15 120 1,800
COGS 7,000
Ending inventory 5,000
3 - Average
Cost of goods sold (COGS) Ending inventory
(Need # of units sold) = 55 units (Need # of units on hand) = 45 units

= (total cost / total quantity) * Units sold = (total cost / total quantity) * Units on hand

= (12,000 / 100) * 55 = 6600 = (12,000 / 100) * 45 = 5,400

 Example 2:
Following is a summary for ADU purchases during 2020:

Month Amount Price Paid Total Cost

Nov 7 100 books $18.00 per 1800
Nov 21 100 books $18.00 per 1800
Nov 28 125 books $18.25 per 2,281.25
Dec 4 150 books $18.50 per 2,775
Dec 7 150 books $19.25 per 2,887.5
Dec 15 150 books $20.00 per 3,000
Total 775 Books 14,543.75

On Dec 31, ADU looks through the store sales and realizes that ADU’s Books has sold
450 books to-date. Compute the cost of goods sold and ending inventory, using
(FIFO, LIFO and Average methods).

1- Average
Cost of goods sold (COGS) Ending inventory
(Need # of units sold) = 450 units (Need # of units on hand) = 325 units
= (total cost / total quantity) * Units sold = (total cost / total quantity) * Units on hand

14,543.75 / 775 books = 18.77 * 450 =8444.75 14,543.75 / 775 books = 18.77 * 325 books = 6098.99

2 - LIFO
Cost of goods sold (COGS) Ending inventory
(Need # of units sold) = 450 units (Need # of units on hand) = 775 –
450 = 325 Books
Date Units Price per unit Total cost Date Units Price per unit Total cost
Dec 4 150 books $18.50 per 2,775 Nov 7 100 books $18.00 per 1,800
Dec 7 150 books $19.25 per 2,887.5 Nov 21 100 books $18.00 per 1,800
Dec 15 150 books $20.00 per 3,000 Nov 28 125 books $18.25 per 2,281.25

Total 450 Books $8,662.5 Total 325 Books $5,881.25

 3 - FIFO
Cost of goods sold (COGS) Ending inventory
(Need # of units sold) = 450 units (Need # of units on hand) = 775 –
450 = 325 Books
Date Units Price per unit Total cost Date Units Price per unit Total cost
Nov 7 100 books $18.00 per 1,800 Dec 4 25 books $18.50 per 462.5
Nov 21 100 books $18.00 per 1,800 Dec 7 150 books $19.25 per 2,887.5
Nov 28 125 books $18.25 per 2,281.25 Dec 15 150 books $20.00 per 3,000
Dec 4 125 books $18.50 per 2,312.5

Total 450 Books $8,193.75 Total 325 Books 6,350

 The data we have been working with from the videos in the previous section is:

Units Cost Amount

Jan 1 Beg Inventory 300 10 $3,000
Jan 2 Purchase 200 15 $3,000
Jan 11 Purchase 120 17 $2,040
Jan 18 Purchase 300 20 $6,000
Total 920 $14,040

The inventory on hand at the end of period is 450 units. Find the COGS and ending
inventory vale by using (FIFO, LIFO and Average methods):

Weighted average methods:

Step 1:
(Total value of purchased units) / (Total of units) = 14,040 / 920 = $15.26 per unit
Step2:
COGS= (920 – 450) = 470 Units = 470 * 15.26 = $ 7,172.6
Ending inventory: (450 units) = 450 * 15.26 = 6867.4

LIFO:
COGS= (920 – 450) = 470 Units
Units Cost Amount
300 20 6000
120 17 2040
50 15 750
Total 8790

Ending inventory: (450 units)

Units Cost Amount
300 10 3000
150 15 2250
Total 5250

FIFO:
COGS= (920 – 450) = 470 Units
Units Cost Amount
300 10 3000
170 15 2550
Total 5550

Ending inventory: (450 units)

Units Cost Amount
300 20 6000
120 17 2040
30 15 450
Total 8490