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Comparison Avg
Comparison Avg
This is based on the standard periodic inventory model: Net Sales Beginning inventory + Net Purchases & Freight = Goods Available for Sale - Ending inventory = ..................................>
THE MAJOR OBJECTIVE: Determine the cost that will be associated with ending inventory. Notice that this will directly affect COGS and thus Gross Margin. THREE COMMON VALUATION METHODS: 1. Weighted average 2. First-in, first-out (FIFO) 3. Last-in, first-out (LIFO) Information for examples: #Items Beginning inventory Purchase #1 Purchase #2 Purchase #3 Goods Available for sale Units Sold Units Remaining 200 400 300 350 1,250 870 380 Unit Cost Total Cost $12.00 13.00 13.70 14.20 $2,400 5,200 4,110 4,970 $16,680 $17,400
At $20
A. Weighted average. Determine one average cost by dividing total costs by total units. Use units remaining to determine ending inventory. 16,680/1,250 = $13.344 x 380 = $5,071 ending inventory Goods Available for 16,680 Net sales $17,400
5,071 11,609
11,609 $5,791
B. First-in, first-out (FIFO). If you assume that those purchased first were sold first, then those remaining would be the last ones. This makes sense from a physical flow standpoint, but it DOESNT MATTER. You can use any of these methods for the "costs" regardless of whether you sold the first ones first or the last ones first or a combination! However, the FIFO method values the ending inventory as if you sold the first ones first. Remaining units: 350 x 14.20 30 x 13.70 380............. 4,970 411 5,38l
ending inventory
C. Last-in, first out (LIFO). If you assume that those purchased last were sold first, then those remaining would be the first ones. Although this doesnt usually make sense from a physical flow standpoint, again IT DOESNT MATTER. The actual flow does not need to match the one chosen for the costs. Remaining units: 200 x 12.00 180 x 13.00 380............. 2,400 2,340 4,740
ending inventory
1. When prices are rising, LIFO gives the lowest profit and FIFO the highest. 2. The LIFO profit is the closest to measuring the cost of goods sold as the cost to replace the inventory. 3. When prices are rising, FIFO gives the best measure of the cost of the ending inventory at current prices