FIFO inventory valuation, which stands for First-In, First-Out,
results in the oldest purchases being recorded as COGS
and the most recent purchases remaining in ending inventory.
Recall under the periodic inventory tracking system, we don't track the purchase and sale of inventory through the inventory account.
so the revenue entry is all that is recorded when a sale occurs.
Therefore, COGS and ending inventory valuation are determined only at the end of the month.
Let's look at an example.
Let's assume the following inventory data:
March 1st Beginning Inventory is 200 units @ $10 each.
March 4th we purchased an additional 300 units @ $20 each.
March 10th we sold 400 units @ $50 each. Now that's the retail price, not the cost.
March 20th we purchased an additional 500 units @ $30 each.
March 25th we sold 300 units @ a price of $50 each.
Finally March 30th we purchased 100 units @ $40 each.
With this data and using FIFO,
let's determine the value of ending inventory and the amount of COGS that should be recorded.
Since inventory isn't accounted for after each transaction,
we need to use the COGS Model to determine the value of COGS and ending inventory.
The COGS model is beginning inventory plus purchases equals goods available for sale.
From that we can subtract ending inventory to arrive at COGS.
We could also subtract the units sold to arrive at ending inventory.
This is important to note because sometimes units sold are given and not ending units,
while other times it's the ending units that are given and not the units sold.
However, in real life, we know the ending units of inventory because we physically counted them.
We sold 200 units from the March 20 purchase leaving 300 units.
So we take the data from our problem and put it into the COGS model.
I chose to solve for ending inventory. Because we were given the units sold.
So we have 1,100 units available for sale, with a total cost of $27,000.
We know we sold 700 units, so our ending inventory must be 400 units.
So let's figure out which 700 units we sold, using FIFO.
But before we do that, there's a very important concept that we need to be aware of, using the periodic methods.
We assume that all goods are available for sale.
So I know, and you know, there isn't any way that the March 30th purchase could have been sold on March 10th,
but we ignore that fact when using the periodic method. Now, back to solving this example.
Which 700 units did we sell? Well, FIFO stands for First-In, First-Out.
So we sold all 200 units of the beginning inventory, leaving zero.
We sold all 300 units from the March 4th purchase leaving zero.
And we sold 200 units from the March 20th purchase leaving 300 units in inventory.
So we can account for all 700 units sold and the cost of those units is $14,000, .
which is $2,000 + $6,000 + $6,000
Let's plug that amount into the COGS model.
Since the goods available for sale is $27,000,
we can determine the value of ending inventory by subtracting COGS of $14,000.
Therefore, ending inventory is $13,000.
We could have proved this by using the ending inventory units as well.
Since 400 units remain in ending inventory,
and those units come from 300 units remaining from the March 20th purchase
and 100 units from the March 30the purchase.
You can see that those total $13,000, and that matches what we've already calculated.
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