| Inventory
Valuation Methods |
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Inventory valuation example 1 in pdf file
FIFO example 1 in pdf file
LIFO example 1 in pdf file
Dollar Value LIFO
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| First-in
First-out (FIFO) |
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Under FIFO, it is assumed that items
purchased first are sold first.
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| Last-in
First-out (LIFO) |
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Under LIFO, it is assumed that items
purchased last are sold first.
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| Perpetual
Inventory System |
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Perpetual
inventory system updates inventory accounts after each purchase or sale.
Inventory subsidiary ledger is updated after
each transaction.
Inventory quantities are updated
continuously.
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| Periodic
Inventory System |
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Periodic inventory system records
inventory purchase or sale in "Purchases"
account.
"Purchases" account
is updated continuously, however, "Inventory" account is updated
on a periodic basis, at the end of each accounting period (e.g., monthly,
quarterly)
Inventory subsidiary ledger is not updated
after each purchase or sale of inventory.
Inventory quantities are not updated
continuously.
Inventory quantities are updated on a
periodic basis.
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| Example
1 (Company A) |
Inventory transactions in May 2006.
| Date |
Transactions |
Units
Purchased (Sold) |
Unit Cost |
Inventory
Units |
| May 1 |
Beginning
Inventory |
700 |
$10 |
700 |
| May 3 |
Purchase |
100 |
$12 |
800 |
| May 8 |
Sale |
(500) |
?? |
300 |
| May 15 |
Purchase |
600 |
$14 |
900 |
| May 19 |
Purchase |
200 |
$15 |
1,100 |
| May 25 |
Sale |
(400) |
?? |
700 |
| May 27 |
Sale |
(100) |
?? |
600 |
| May 31 |
Ending
Inventory |
|
?? |
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Ending Inventory = Beginning
Inventory + Units Purchased - Units Sold
= 700 + 900 - 1,000 = 600 units |
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| Example
1-1 (Perpetual Recording, FIFO Valuation) |
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FIFO valuation under
perpetual inventory system
| Date |
Transactions |
Units Sold |
Unit Cost |
Inventory
Units |
| May 1 |
Beginning
Inventory |
700 |
$10 |
700 |
| May 3 |
Purchase |
100 |
$12 |
800 |
| May 8 |
Sale
(*1) |
(500) |
?? |
300 |
| May 15 |
Purchase |
600 |
$14 |
900 |
| May 19 |
Purchase |
200 |
$15 |
1,100 |
| May 25 |
Sale
(*2) |
(400) |
?? |
700 |
| May 27 |
Sale
(*3) |
(100) |
?? |
600 |
| May 31 |
Ending
Inventory |
|
?? |
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(*1) 500 units sold
= 700 units
from beginning inventory of at $10 unit cost.
Cost of goods
sold = 500x$10 = $5,000
(*2) 400 units sold
= 200 units
from beginning inventory at $10 unit cost
+ 100 units
from May 3 purchases at $12 unit cost
+ 100 units
from May 15 purchases at $14 unit cost
Cost of goods sold = 200x$10 +
100x$12 + 100x$14
= $2,000 +
$1,200 + $1,400 = $4,600
(*3) 100 units sold
= 100 units
from May 15 purchases at $14 unit cost
Cost of goods sold =
100x$14 = $1,400
Total cost of goods sold
= 500x$10 +
200x$10 + 100x$12 + 100x$14 + 100x$14
= $5,000 +
$2,000 + $1,200 + $1,400 + $1,400
= $5,000 +
$4,600 + $1,400 = $11,000
Cost of ending inventory
= Beginning
inventory + Cost of purchases - Cost of goods sold
= $7,000 +
(100x$12 + 600x$14 + 200x$15) - $11,000
= $7,000 +
$12,600 - $11,000 = $8,600
[Checking]
Quantity of ending inventory
= Beginning inventory
+ Units purchased - Units sold
= 700 + 900 - 1,000 =
600 units
Cost of ending inventory
= 400 x $14
(May 15 purchase) + 200 x $15 (May 19 purchase)
= $5,600 +
$3,000 = $8,600
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Click
here for FIFO solutions to example 1 in pdf file. |
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| Example
1-2 (Perpetual Recording, LIFO Valuation) |
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LIFO valuation under
perpetual inventory system
| Date |
Transactions |
Units Sold |
Unit Cost |
Inventory
Units |
| May 1 |
Beginning
Inventory |
700 |
$10 |
700 |
| May 3 |
Purchase |
100 |
$12 |
800 |
| May 8 |
Sale
(*1) |
(500) |
?? |
300 |
| May 15 |
Purchase |
600 |
$14 |
900 |
| May 19 |
Purchase |
200 |
$15 |
1,100 |
| May 25 |
Sale
(*2) |
(400) |
?? |
700 |
| May 27 |
Sale
(*3) |
(100) |
?? |
600 |
| May 31 |
Ending
Inventory |
|
?? |
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(*1) 500 units sold
= 100 units
from May 3 purchases at $12 unit cost
= 400 units
from beginning inventory at $10 unit cost
Cost of goods
sold = 100x$12 + 400x$10
= $1,200 +
$4,000 = $5,200
(*2) 400 units sold
= 200 units
from May 19 purchases at $15 unit cost
+ 200 units
from May 15 purchases at $14 unit cost
Cost of goods sold = 200x$15 +
200x$14
= $3,000 +
$2,800 = $5,800
(*3) 100 units sold
= 100 units
from May 15 purchases at $14 unit cost
Cost of goods sold =
100x$14 = $1,400
Total cost of goods sold
= 100x$12 +
400x$10 + 200x$15 + 200x$14 + 100x$14
= $1,200 +
$4,000 + $3,000 + $2,800 + $1,400
= $5,200 +
$5,800 + $1,400 = $12,400
Cost of ending inventory
= Beginning
inventory + Cost of purchases - Cost of goods sold
= $7,000 +
(100x$12 + 600x$14 + 200x$15) - $12,400
= $7,000 +
$12,600 - $12,400 = $7,200
[Checking]
Quantity of ending inventory
= Beginning inventory
+ Units purchased - Units sold
= 700 + 900 - 1,000 =
600 units
Cost of ending inventory
= 300x$10
(beginning inventory) + 300x$14 (May 15 purchase)
= $3,000 +
$4,200 = $7,200
Note: 400 units from beginning inventory were sold on May 8.
200
units from May 15 purchase were sold on May 25.
100
units from May 15 purchase were sold on May 27.
100
units from May 3 purchase were sold on May 8.
200
units from May 25 purchase were sold on May 25.
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Click
here for LIFO solutions to example 1 in pdf file. |
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| Example
1-3 (Periodic Recording, FIFO Valuation) |
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FIFO valuation under periodic
inventory system
| Date |
Transactions |
Units Sold |
Unit Cost |
Inventory
Units |
| May 1 |
Beginning
Inventory |
700 |
$10 |
700 |
| May 3 |
Purchase |
100 |
$12 |
800 |
| May 8 |
Sale
(*1) |
(500) |
?? |
300 |
| May 15 |
Purchase |
600 |
$14 |
900 |
| May 19 |
Purchase |
200 |
$15 |
1,100 |
| May 25 |
Sale
(*2) |
(400) |
?? |
700 |
| May 27 |
Sale
(*3) |
(100) |
?? |
600 |
| May 31 |
Ending
Inventory |
|
?? |
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Under periodic inventory system, cost of
inventories is calculated at the end of each accounting period (on May 31 in
this example).
[May 31, 2006]
Quantity of ending inventory
= Beginning inventory
+ Units purchased - Units sold
= 700 + 900 - 1,000 =
600 units
Using FIFO, units purchased first are assumed to be
sold first.
1,000 units sold
= 700 units
from beginning inventory of at $10 unit cost
+ 100 units
from May 3 purchases at $12 unit cost
+ 200 units
from May 15 purchases at $14 unit cost
Cost of goods sold =
700x$10 +
100x$12 + 200x$14
= $7,000 +
$1,200 + $2,800 = $11,000
600 units of inventory left
= 400 units
from May 15 purchases at $14 unit cost
+ 200 units
from May 19 purchases at $15 unit cost
Cost of ending inventory
= 400x$14 +
200x$15 = $5,600 + $3,000 = $8,600
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|
Click
here for FIFO solutions to example 1 in pdf file. |
| |
| Example
1-4 (Periodic Recording, LIFO Valuation) |
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LIFO valuation under periodic
inventory system
| Date |
Transactions |
Units Sold |
Unit Cost |
Inventory
Units |
| May 1 |
Beginning
Inventory |
700 |
$10 |
700 |
| May 3 |
Purchase |
100 |
$12 |
800 |
| May 8 |
Sale
(*1) |
(500) |
?? |
300 |
| May 15 |
Purchase |
600 |
$14 |
900 |
| May 19 |
Purchase |
200 |
$15 |
1,100 |
| May 25 |
Sale
(*2) |
(400) |
?? |
700 |
| May 27 |
Sale
(*3) |
(100) |
?? |
600 |
| May 31 |
Ending
Inventory |
|
?? |
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Under periodic inventory system, cost of
inventories is calculated at the end of each accounting period (on May 31 in
this example).
[May 31, 2006]
Quantity of ending inventory
= Beginning inventory
+ Units purchased - Units sold
= 700 + 900 - 1,000 =
600 units
Using LIFO, units purchased last are assumed to be
sold first.
1,000 units sold
= 200 units
from May 19 purchases at $15 unit cost
+ 600 units
from May 15 purchases at $14 unit cost
+ 100 units
from May 3 purchases at $12 unit cost
+ 100 units
from beginning inventory at $10 unit cost
Cost of goods sold =
200x$15 + 600x$14 + 100x$12 + 100x$10
= $3,000 +
$8,400 + $1,200 + $1,000 = $13,600
600 units of inventory left
= 600 units
from beginning inventory at $10 unit cost
Cost of ending inventory
= 600x$10 = $6,000
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|
Click
here for LIFO solutions to example 1 in pdf file. |
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| Example
1-5 (Perpetual Recording, Moving Average Valuation) |
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Moving Average valuation under
perpetual inventory system
| Date |
Transactions |
Units Sold |
Unit Cost |
Inventory
Units |
Moving
Average Unit Cost |
| May 1 |
Beginning
Inventory |
700 |
$10 |
700 |
$10 |
| May 3 |
Purchase |
100 |
$12 |
800 |
$10.25 (*1) |
| May 8 |
Sale |
(500) |
?? |
300 |
$10.50 |
| May 15 |
Purchase |
600 |
$14 |
900 |
$12.75 (*2) |
| May 19 |
Purchase |
200 |
$15 |
1,100 |
$13.16 (*3) |
| May 25 |
Sale |
(400) |
?? |
700 |
700 |
| May 27 |
Sale |
(100) |
?? |
600 |
600 |
| May 31 |
Ending
Inventory |
|
?? |
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(*1) Average cost of 800 units
= (700x$10 +
100x$12) / (700 + 100)
= ($7,000 +
$1,200) / 800 = $8,200 / 800 = $10.25
Cost of goods
sold on May 8 = 500x$10.25 = $5,125
(*2) Average cost of 900 units
= (300x$10.25 +
600x$14) / (300 + 600)
= ($3,075 +
$8,400) / 900 = $11,475 / 900 = $12.75
(*3) Average cost of 1,100 units
= (900x$12.75 +
200x$15) / (900 + 200)
= ($11,475 +
$3,000) / 1,100 = $14,475 / 1,100 = $13.16
Cost of goods
sold on May 25 = 400x$13.16 = $5,264
Cost of goods
sold on May 27 = 100x$13.16 = $1,316
Total cost of goods sold
= 500x$10.25 +
400x$13.16 + 100x$13.16
= $5,125 +
$5,264 + $1,316 = $11,705
Cost of ending inventory
= Beginning
inventory + Cost of purchases - Cost of goods sold
= $7,000 +
(100x$12 + 600x$14 + 200x$15) - $11,705
= $7,000 +
$12,600 - $11,705 = $7,895
[Checking]
Quantity of ending inventory
= Beginning inventory
+ Units purchased - Units sold
= 700 + 900 - 1,000 =
600 units
Cost of ending inventory
= 600 x $13.16
(Moving Average cost per unit as of May 31)
= $7,896
$7,896 - $7,895 = $1 (rounding error)
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| Example
1-6 (Periodic Recording, Weighted Average Valuation) |
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Weighted Average valuation under
periodic inventory system
| Date |
Transactions |
Units Sold |
Unit Cost |
Inventory
Units |
| May 1 |
Beginning
Inventory |
700 |
$10 |
700 |
| May 3 |
Purchase |
100 |
$12 |
800 |
| May 8 |
Sale
(*1) |
(500) |
?? |
300 |
| May 15 |
Purchase |
600 |
$14 |
900 |
| May 19 |
Purchase |
200 |
$15 |
1,100 |
| May 25 |
Sale
(*2) |
(400) |
?? |
700 |
| May 27 |
Sale
(*3) |
(100) |
?? |
600 |
| May 31 |
Ending
Inventory |
|
?? |
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Under periodic inventory system, cost of
inventories is calculated at the end of each accounting period (on May 31 in
this example).
[May 31, 2006]
Quantity of ending inventory
= Beginning inventory
+ Units purchased - Units sold
= 700 + 900 - 1,000 =
600 units
Weighted average cost per unit
= (700x$10 + 100x$12
+ 600x$14 + 200x$15) / (700+100+600+200)
= ($7,000 + $1,200 +
$8,400 + $3,000) / 1,600
= $19,600 / 1,600 =
$12.25
Cost of goods sold
= (500 + 400 + 100) x
$12.25
= 1,000 x $12.25 = $12,250
Cost of ending inventory
= 600 x $12.25 =
$7,350
[Checking]
Cost of ending inventory
= Beginning
inventory + Purchases - Cost of Goods Sold
= $7,000 +
(100x$12 + 600x$14 + 200x$15) - $12,250
= $7,000 +
$12,600 - $12,250 = $7,350
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Comparison
of FIFO and LIFO valuation methods |
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Dollar Value LIFO valuation method |
