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Comparison of Inventory Valuation Methods

Inventory Valuation Methods

   First-in First-out (FIFO)
   Last-in First-out (LIFO)
   Moving Average Method
   Weighted Average Method
   Dollar Value LIFO

FIFO, LIFO, Perpetual, Periodic

Under FIFO, it is assumed that items purchased first are sold first.

Under LIFO, it is assumed that items purchased last are sold first.

Perpetual inventory system updates inventory accounts after each purchase or sale.

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)

Example 1 (Company A)

Inventory transactions in May 2010.

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		??

   Ending Inventory = Beginning Inventory + Units Purchased - Units Sold
   = 700 + 900 - 1,000 = 600 units

   Click here for calculations of cost of goods sold and cost of ending inventory under various inventory valuation methods.

Comparison of FIFO and LIFO

FIFO vs. LIFO

	Cost of goods sold	Cost of ending inventory	Beginning inventory + Purchases
FIFO, Perpetual	$11,000	$8,600	$19,600
LIFO, Perpetual	$12,400	$7,200	$19,600
FIFO, Periodic	$11,000	$8,600	$19,600
LIFO, Periodic	$13,600	$6,000	$19,600
Moving average, Perpetual	$11,705	$7,895	$19,600
Weighted average, Periodic	$12,250	$7,350	$19,600

   Example 1 shows that per unit purchase cost increases continuously throughout the period ($10 --> $12 --> $14 --> $15).

   FIFO assumes that items purchased FIRST are sold FIRST.
      --> Cost of old purchase is recorded as cost of goods sold.
      --> Cost of recent purchases is recorded as cost of ending inventory.

      --> When price goes up, old price is lower than recent price.
      --> Cost of goods sold is lower for FIFO. ($11,000 < $12,400)
      --> Cost of ending inventory is higher for FIFO. ($8,600 > $7,200)

   LIFO assumes that items purchased LAST are sold FIRST.
      --> Cost of recent purchase is recorded as cost of goods sold.
      --> Cost of old purchases is recorded as cost of ending inventory.

      --> When price goes up, recent price is higher than old price.
      --> Cost of goods sold is higher for LIFO. ($12,400 > $11,000)
      --> Cost of ending inventory is lower for LIFO. ($7,200 < $8,600)

    FIFO, Perpetual Cost of Goods Sold = FIFO, Periodic Cost of Goods Sold
            ($11,000 = $11,000)

    FIFO, Perpetual Inventory Cost = FIFO, Periodic Inventory Cost
            ($8,600 = $8,600)

    LIFO, Perpetual Cost of Goods Sold < LIFO, Periodic Cost of Goods Sold
            ($12,400 < $13,600)

    LIFO, Perpetual Inventory Cost > LIFO, Periodic Inventory Cost
            ($7,200 > $6,000)

    Moving average, Perpetual Cost of Goods Sold
         < Weighted average, Periodic Cost of Goods Sold
            ($11,750 < $12,250)

    Moving average, Perpetual Inventory Cost
          > Weighted average, Periodic Inventory Cost
            ($7,895 > $7,350)

Click here for calculations of cost of goods sold and cost of ending inventory under various inventory valuation methods.

Example 1-1 (Perpetual Recording, FIFO Valuation)

   FIFO valuation under perpetual inventory system

    Cost of goods sold = $11,000
    Cost of ending inventory = $8,600

Example 1-2 (Perpetual Recording, LIFO Valuation)

   LIFO valuation under perpetual inventory system

    Cost of goods sold = $12,400
    Cost of ending inventory = $7,200

Example 1-3 (Periodic Recording, FIFO Valuation)

   FIFO valuation under periodic inventory system

     Cost of goods sold = $11,000
     Cost of ending inventory = $8,600

Example 1-4 (Periodic Recording, LIFO Valuation)

   LIFO valuation under periodic inventory system

     Cost of goods sold = $13,600
     Cost of ending inventory = $6,000

Example 1-5 (Perpetual Recording, Moving Average Valuation)

Moving Average valuation under perpetual inventory system

Cost of goods sold = $11,705
Cost of ending inventory = $7,895

Example 1-6 (Periodic Recording, Weighted Average Valuation)

   Weighted Average valuation under periodic inventory system

     Cost of goods sold = $12,250
     Cost of ending inventory = $7,350

Dollar Value LIFO

Dollar Value LIFO valuation method