LIFO inventory valuation, which stands for Last-In, First-Out,
results in the most recent purchases being recorded as COGS
and the oldest purchases remaining in ending inventory.
Recall that 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 sold 300 units @ a price of $50 each.
Finally March 30th purchased 100 units @ $40 each.
If you want to pause the video at this time, to write down those numbers, go ahead, and then just start it up when you're ready.
With this data and using LIFO, 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 the units in ending inventory.
This is important to note because sometimes units sold are given and not ending units,
while other times ending units are given and not units sold.
In real life, we know the ending units of inventory because we physically counted them.
So we take the data from the 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 LIFO.
But before we do that there is an important concept we need to be aware of when using the periodic method.
We assume that all goods are available for sale.
So I know, and you know there isn't any way that March 30th purchases could have been sold on March 10th.
but we ignore that fact when using the periodic method.
Now back to solving this problem.
So, ask the question, which 700 units did we sell?
Well LIFO stands for Last-in, First-Out so we sold all 100 units of the March 30th purchase leaving zero.
We sold 500 units of the March 20th purchase leaving zero.
We sold 100 units from the March 4th purchase leaving 200 in ending inventory.
So we can account for all 700 units sold and the cost of those units is $21,000, which is $4,000 + $15,000 + $2,000.
Let's plug that amount into the COGS model.
Since the cost of goods available for sale is $27,000, we can determine the value of ending inventory by subtracting COGS of $21,000.
Therefore, ending inventory is $6,000.
We could have proved this by using the ending inventory as well.
Since 400 units remain in ending inventory,
and those units come from 200 units of beginning inventory and 200 units remaining from the March 4th purchase.
Those gives us a total $6,000 which matches what we've already calculated.
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