Greetings Accounting students and those of you wishing to learn more about
Accounting. This is the first video in our merchandise inventory series, and
we're going to be looking at FIFO. Which stands for first in first out value in a
method of inventory valuation. Now this will give us a way to value what we sold,
and a way to value what we still have left. Now what I want to stress to you
about all of these inventory valuation methods that we're looking at. These are
ways to measure what we have left and what we sold. It is not necessarily the
true indication of physical flow of goods. It's a theoretical method. Okay so
this is not necessarily the true physical flow of goods, that's very
important for you to understand. So let's go ahead and look at FIFO
First-in-first-out method of valuing our cost of goods sold as well as what we have left
and our ending inventory. So here I've set up a spreadsheet for you for one of
our products, and you see that on July the 1st, we had one item left in ending
inventory at that point. So we started July the 1st with one unit from June, and
that unit cost us $40. So that's what we have at the beginning of July. Then on
July the 5th we bought six more items of the same product, but now as prices tend
to do, they are increasing. So now we're paying $45 a piece for each of those 6
items for a total cost of $270. Then if you scroll
all the way over to our inventory on hand, which is also our ending inventory,
we still have that one unit from our beginning inventory on July the 1st at
$40 for that one item, and now we have 6 more items at $45 each. So now we
have a total ending inventory of $310, which is the $40 from the one
item in the $270 from the 6 items. But notice in that in that last in those
last three columns, I'm keeping the different value of inventory separate, so
the one item at 40 is separate from the six items at 45. That's going
to be important when we get when we start selling items like we do on July
the 15th. So in July the 15th, we actually sold four items, but because we're using
the first- in first- out method of inventory valuation we start with our
beginning inventory. Well the beginning inventory only had one item, so that's
not enough to fulfill the order. But we are going to theoretically sell that one
item which cost $40, and then we're going to need to go grab three from that
purchase on July the 5th, and they each cost us $45. So we've sold
four units here, we don't really know what what we sold them for because this
is not, this spreadsheet, does not tell us what revenues are. It's only a cost sheet.
So please make sure you understand that revenues are not depicted here at all. So
again we sold 4 items. The total cost of that sale was a $175
which is the $40 for the one item from beginning and $135
from the 3 from the July the 5th purchase. So now
we have 3 items left in our ending inventory. We have none left
theoretically from our beginning inventory, and we have 3 left from
that July the 5th purchase of 6 at $45. So 3 of those at
45 leaves us $135 in our ending
inventory. Then on July the 26th we made another purchase, again as prices tend to
do, they're going up again. So we bought 7 items this time and each one of
those cost us $50 a piece. So now in our ending inventory, we have 3 items
left from that July the 5th purchase, and we now have those 7 from the
current purchase at $50 a piece. So now in ending inventory we have 10 total
items: 3 at 45 and 7 at 50 for a total cost of our ending
inventory of $485. Then on July the 31st, the
end of the month, we sold 8 items. Again we go to our
oldest stuff first because we're using first-in first-out.
We still have, we don't have anything left from beginning, but we have 3
left from that July 5th purchase. So now you're starting to see how
important it is to stay organized with this stuff. So we're going to take the
3 we have left from the July the 5th purchase at 45, and we need 5
more, so we're going to take those 5 from the July the 26th purchase. So we're
selling 8 items for a total of $385 in cost
of that item. And we still have 2 items left now in our ending inventory from
the July the 26th purchase at $50 each. So all of our beginning is theoretically
gone. All of that purchase from July the 5th is theoretically gone, and 5 of
the items from the July the 26th purchase are gone. Now we'll start August
the 1st with beginning inventory of 2 units at $50 each. Okay so now
let's let you try one. So let's assume that in our case Toys store bought and
sold a lot of dolls during December as follows. So we have our beginning
inventory. We have 14 units at $10 each, then we sold 8 units. Then we
purchased 15 at $15 each, and then we sold 13 units. So we're going to say that
we don't have any dates here, but we'll just assume that they happen in that
order. Whatever the date may be. So Arcade toys uses the perpetual inventory system.
Compute the cost of ending inventory and cost of goods sold under FIFO ( first-in
first-out). So I'd like for you to do is give this a shot.
Press pause on your player, and once you've completed the problem, come back
and we'll take a look at it together. Okay so what you should have found for
ending inventory would be a $120 at the end of this these
transactions. And your cost of goods sold for this period of time would have been
$245. If you look at my spreadsheet here you'll
see that we started the period with 14 units that cost us $10 each. We sold
8 units. They all have to come from beginning because that's all we have. So
8 at $10 gives me that cost of goods sold of $80. Then my inventory on
hand at that point would be 6 a@ $10. So all of those coming from beginning.
Then we bought 15 more at $15 because as we as things typically do prices rise. So
now we've got 6 left from beginning inventory at $10 each, and now we have 15
more that cost us $15 each. Then we made a sell of 13, again, because we're using
FIFO, first in first out, we have to use the oldest stuff first. So we go all the
way back to beginning inventory. We still have 6 left from beginning inventory, so
we can sell all theoretically sell all of those, but we still need 7 more. So
we're going to need 7 from that first purchase there of 15 @ $15, and that will
give us the total cost of that sell. And we still have 8 left from that purchase
that we made, and so that leaves us inventory on hand that 8 that those 8
units at $15 each, which equals $120. And the total cost of goods sold we would
add up that whole column of cost of goods sold and that gives us
$245. Okay so let's try one more. This one's got a little more
stuff in it that we're going to deal with. See we have here. We have Unfit
World. They begin January with an inventory of 60 crates of vitamins that
cost a total of $3,000. During the month Unfit World purchased
and sold merchandise on account as follows. So this time we have purchases
and we have our sales amount. So we sold like the first sale we sold 180 crates
at $100 each. That's our revenue remember what I told
you about the the inventory spreadsheet. Revenues do not appear there, so we must
be going to do something else. Maybe some journal entries here in a second or
something. So we may need that information for something else, but it
does not go in our cost sheet. All right so Unfit World uses the FIFO
method, so we're still on first-in first-out. Cash payments on account
totaled $5,000. Operating expenses for the month for $2,400, with 2/3 paid in
cash and the rest accrued as accounts payable. We need to compute total
purchases, cost of goods sold, and ending inventory for Unfit World. Okay so once
again press pause on your player. Give this one a shot. Once you've computed the
2 amounts, come back and we'll take a look see how you did.
Okay so the key here again is to stay organized with your with your
spreadsheet, and if you do you should come out something with something
similar to what I have here. You should have found that your ending inventory
you would end up with 10 units at $60 each all those came from that second
purchase that you made. So a total of ending inventory of $600. Your total cost
of goods sold for this period would be $19,100, and your total purchases
would have been $16,700. So once you have your spreadsheet set up in your
cost of goods sold calculated, you actually have to get this into your
books. So we need to journalize all the transactions here using the FIFO costing
method. So now that you've got this on your own you're in your notes. We want to
journalize these transactions. So we want journalize the purchase, the sale
purchase to, and sale to. So let's just start with purchase one so. We purchased
inventory a total of $7,700. We can just
look at the spreadsheet here, and go go right down through there. We purchased
$7,700 on account, so we would debit inventory and credit
accounts payable. The next transaction was a sale. Recall that every sale has
two transactions. We have to record the revenue and record the cost. So if it's
sold on account, we would debit accounts receivable and credit sales revenue for
the amount that we charged for our product. And then we would also record
the cost by debiting cost of goods sold, and reducing our inventory since it's no
longer there we've now sold it. The next transaction was purchased- number two.
Here we're buying inventory so we're debiting
inventory for the $9,000, crediting accounts payable for the $9,000. Sale
number two will look very similar to sell number one. And we had a sale so
there's two transactions. We debit accounts receivable for $17,600, credit
sales revenue for $17,600, but then we also have to record the cost and reduce our
inventory. So we debit cost of goods sold, credit inventory for $9500. The next two
entries they tell us that we paid on account $5,000. So we debit our accounts
payable and credit our cash. We're paying toward our debt. The next
transaction was towards your operating expenses. It said that a certain portion
of them were paid in cash and the rest was on account. 2/3 of that was
paid in cash, so operating expenses were $2,400, two-thirds of that is $1,600. So
we credit cash for $1600, the remainder of that would be credited to
accounts payable. Don't forget, if you enjoyed the video give it a thumbs up
and questions and comments are always welcome.