Hi everyone. So in this video on Merchandise Inventory, we're going to be
looking at LIFO - last-in first-out method of inventory valuation. So again
remember, as I stated in their earlier video about FIFO, this is a theoretical
method or way of valuing your cost of goods sold and your ending inventory. It
really has nothing to do necessarily with the physical flow of your inventory.
It's just a way to value what we still have, and what we've sold. So always keep
that in mind. So let's look at this spreadsheet, it's very similar to the one
we saw within the FIFO video ( first- in first- out). Except now we're selling our
goods under the theoretical method of last- in- first out. So the stuff we sale
is the newest stuff, the stuff that came in most recently. So here we have our
ending inventory from June becomes our beginning inventory for
July. So in July the 1st, we had 1 unit on hand, according to our
spreadsheet here, and it cost us $45. On July the 5th, we purchased
6 items and as prices typically do they go up. So we paid $45
a piece for them, and now we have one item from beginning inventory on hand
that cost us $45 and the 6 items that we just purchased at
$45 each. So we have 7 total items on hand that cost us a total of
$310, which is the $40 plus the $270. Now nothing up to
this point is different from FIFO, but now in July the 15th, when we actually
make a sale. This is where it becomes a little bit different. Under FIFO, we would
go to the oldest stuff first, and we would go to all the way back to
beginning inventory for the month, and we would sell that stuff first. But now,
under LIFO, we go to the newest stuff first. The newest stuff is that July the
5th purchase of 6 items, and we were selling 4 items on July the 15th. So that
purchase on July the 5th actually is enough to cover this entire
sale of 4 items. So we're assuming theoretically that we're selling 4 of
those 6 items that cost us $45 a piece. Now keep in mind we
really have no idea from this chart how much we actually sold them for. This is
just the cost. This is a cost record. It has nothing to do with the revenues, so
keep that in mind as well. So now after selling these 4 items, we still have
that 1 on hand from our beginning inventory, theoretically, and we still
have 2 left from the July the 5th purchase at $45 a piece. So now we have
an ending inventory of 3 items that cost a total of a $130.
Now in July the 26th, we bought 7 more items. (Again prices are going
up). $50 a piece. So a total of $350 for that
purchase. So now we have the 1 item again theoretically from beginning
inventory at $40, we have 2 items left from the July the 5th
purchase, and now we have 7 items that we just purchased on July the 26th.
So what you need to start seeing here is it's very very important that you stay
organized with this information, so that we know which items are going out next
when we make a sale. So in July the 31st we make a sale of 8 items, and we go
to our newest stuff first. The newest stuff is that from that purchase
on July the 26th of 7 items. That is not enough to cover the whole sale of
8 items, but we're going to sell all 7 of those. So a cost of
$350 for those 7 items, then we're going to have to go
back to the July the 5th purchase and see if we have any of those left. And we
do we still have two of those- we only need one. So we're going to sell that
item as well at a cost of $45. So in total cost of that one sale of 8
items of $395. Now left on hand we still have one item from beginning
inventory ( way back from July the 1st). We still have that one, and we still have
one item left from that July the 5th purchase of 6 items at $45. So we have
a total ending inventory at the end of July of two items that have a total cost
of $85. Our total cost of goods sold, for the period, would
be the total column added up for cost of goods sold of 12 items that we sold of
$575 in total purchases of 13 items @ $620.
So now I'd like for you to take a shot at it, and will give you an example here.
Assume that an RK toy store bought and sold a lot of dolls during December.
The same problem we used under the FIFO method, so you can go back, and once we
have the solution here, you can go back and kind of compare the two. But I'd like
for you to compute the cost of ending inventory, and the cost of goods sold
under LIFO. And then once you get that computed we'll come back and look at it
together. So push pause on your player. We'll come back in a second and talk
about it together. Okay so what you should have found is ending inventory of
$90, cost of goods sold of $275 total, and purchases of $225. Now
what I want us to talk about here for a second is which method, if you go back
and compare this with your FIFO that you did in an earlier video, which is
going to result in the higher cost of goods sold and why? Well if you look back
at your at the FIFO method if you if you watch that video you should find that
the cost of goods sold under LIFO is higher than under FIFO. Why is that? Well
it's because prices rise. So if prices continually rise, which we anticipate
them doing, then if we sell theoretically the newest stuff first, then that would
be the most expensive stuff that we are holding in our inventory. If we sell the
most expensive stuff first, then that means our cost of goods sold will be
higher under LIFO then it will be under FIFO. That means we're also going
to show a lower net income under LIFO, therefore, a lower operating income,
therefore, reducing our taxes that we have to pay. But also keep in mind this
also shows a lower net income to our stakeholders, which may or may not
necessarily look good to them. Don't forget if you enjoyed the video give it
a thumbs up and questions and comments are always welcome.