I'm Larry Walther, this is priciplesofaccounting.com, Chapter 8.
In this module, we will be looking at the perpetual inventory method as it
relates to LIFO and the average cost method.
In a previous module, we looked at the perpetual FIFO method.
So we're shifting gears now to LIFO and
average cost methods under a perpetual approach.
First, I wanna point out that with the perpetual LIFO method,
the results will not be the same as they would be under the periodic LIFO method.
So periodic and perpetual LIFO give you different final results.
That was not true under FIFO, as we saw in a previous module.
Let me have you think about the reason for that.
On a perpetual LIFO basis, if we have this amount of beginning inventory and
then we buy and sell goods, we're constantly taking away from our stock.
The last in is the first out.
So we buy goods, we sell goods, we buy goods, we sell goods.
We may even dip in into our beginning base stocks somewhat.
Our ending inventory is what we have left over at the end.
If we were to look at the LIFO on a periodic basis,
we got a beginning inventory, we layer in all our purchases.
And then we take away what we assume to sell.
That's different.
That approach of a beginning amount plus purchases minus sales can give
us a different result than our beginning inventory plus purchases minus sales,
plus purchases minus sales.
We're dipping in and out at a different rate.
So perpetual LIFO is simply different in terms of its outcome,
as compared to the periodic LIFO method.
However, I would like to point out that the journal entries,
the accounts involved are the same as they were under the perpetual FIFO method.
That is, as we buy an inventory, we debit inventory and
credit the consideration, paid cash or accounts payable.
As we sell goods, in addition to recording the sale,
we'll relieve the inventory account.
We'll debit cost of goods sold and credit inventory.
So the inventory account in the ledger is constantly moving with each purchase and
sale transaction, the same as under the FIFO method.
If you need to review the accounts and the way they function, the previous module,
the previous video module looks at the perpetual FIFO method and
shows you the accounts involved, the same under the LIFO method here.
Okay, now let's look at an example.
All right, here I start on January 1 with 4,000 units at $12 a unit.
Total cost of goods available for sale at that moment is $48,000.
On March 5, we buy 6,000 units, and so
our pool of inventory then consists of 4,000 at 12 and 6,000 at 16.
All right, now in a LIFO basis on April 17th we have a sale of 7,000 units.
Focusing on the cost of goods sold columns here,
we've got 7,000 units that were sold.
We're going to assign $108,000 of cost to those units.
That consists of the last layer we purchased, 6,000 at 16,
plus 1,000 units from the previous layer which carry a cost of $12 a unit.
So we come up with $108,000 of cost of goods sold for that transaction that would
be entered into a journal entry, debit cost of sales and credit inventory.
Okay, it leaves us 3,000 units at $12 a unit.
That's 3,000 of the 4,000 that were from beginning inventory.
On September 7th, we buy 8,000 units, this time paying $17.
It gives us a total in stock supply of 11,000 units,
the 3,000 at 12 carried forward and then 8,000 more at $17.
On November 11th, we sell 6,000 units.
Those 6,000 are all assumed to come from the last purchase,
which contained 8,000 units.
So 6,000 of those 8,000 units are sold.
And the other 2,000 of those 8,000 stay in inventory,
along with the other 3,000 carried forward.
So at each purchase and each sale date or transaction,
we'll need to adjust our carrying stock of inventory to reflect what's on hand.
As we sell goods we peel away on a last in, first out basis.
Now if we were to tabulate the totals we would find
that $70,000 is in ending inventory.
And that's carried on the balance sheet.
We would find that 304,000 was the dollar value of the sales,
that goes on the income statement.
And importantly, our cost of goods sold account contains 210,000,
the cost assigned to the units that were sold.
Turning next to the perpetual average method, here we are going to start,
once again, with 4,000 units in beginning inventory at $12.
Now the mathematics becomes a bit more calculation intensive,
not more complex, but more calculation intensive here.
When we buy 6,000 units at $16, we're going to see that we then have
a total of $144,000 invested in a total of 10,000 units,
giving us an average cost per unit of $14.40, as shown with the calculations.
When we sell goods on April 17th,
we're going to sell 7,000 units at a cost of average $14.40 a unit.
And we're left with 3,000 units at an average cost of $14.40 a unit.
When we buy again on September 7th,
we have a 179,200 inventory available at that date.
And that's 11,000 units at that point, so the average cost has now change to $16.29.
We're re-averaging.
We're kind of throwing away the old number as we go forward and establishing a new
benchmark for the continuing perpetual average cost of what's on hand.
When we sell 6,000 units on November 11th,
we'll assign the unit cost of $16.29 to those units, or
a total of 97,745 cost of goods sold for those units.
And we're left with 5,000 units in ending inventory at $16.29.
Be sure when you work problems to kind of perfect your knowledge of this subject.
Be sure and not to round too much on your per unit cost.
A tenth of a penny doesn't sound like much until you start to multiply it times
100,000 or a million units.
So in calculating your per unit average cost, it's best to go ahead and
let your calculator carry out your decimal for quite a few places.
Don't be too aggressive in rounding there.
So finally, a new average unit cost must be completed with each purchase, and
that carries forward in your accounting records.
The perpetual average gives you a different result than the periodic
average method that was looked at in a previous module.
So in closing, periodic versus perpetual, FIFO sort of gives you the same result.
LIFO and average can give you somewhat different results
as between those methods.