Financial Accounting:
Perpetual FIFO Inventory Valuation
FIFO inventory valuation, which stands for First-In, First-Out,
results in the oldest purchases
being recorded as Cost of Goods Sold (COGS).
Let's look at an example.
Let's assume the following inventory data:
March 1- Beginning Inventory is 200 units @ $10 each.
March 4 - we purchased an additional 300 units @ $20 each.
March 10th we sold 400 units @ $50 each.
Now the $50 is the retail price, not the cost.
We will need to figure out the cost of the goods sold
by applying FIFO valuation to our data.
March 20th we purchased an additional 500 units @ $30 each.
March 25th - sold 300 units @ the price of $50.
Again, we'll figure out the cost in a minute.
Finally March 30th we purchased 100 units @ $40 each.
If you want to pause the video at this point
and write down those numbers,
I would encourage you to do that.
And then just start it right up.
With this data and using FIFO,
let's record the March 10th and 25th sales,
as well as determine the value of ending inventory,
assuming this is a perpetual inventory tracker.
Since this company uses the perpetual method
of tracking inventory,
the dates of the transactions matter.
So we need to list them in chronological order.
Additionally, the purchases and sales are recorded when they happen,
so I like to present the same data in a big Inventory T Account.
In fact, everything I have listed here
isn't dependent on the valuation method.
The items that are dependent are the ones highlighted
on the credit side of the account.
Let's figure out what those are.
So we know on March 10th we sold 400 units @ $50 each,
which give us sales revenue of $20,000.
But how much is the COGS?
Let's apply FIFO to figure that out.
We sold 400 units. FIFO means First-in, First-Out,
so the first units in are the 200 of beginning inventory.
So we sold all 200 units of beginning inventory, leaving zero.
However, that doesn't account for all 400 units.
The next oldest items are from March 4th.
We sold 200 units from here leaving 100 in inventory.
So we assume that the 400 units sold on March 10th
came from 200 units of beginning inventory,
and 200 units from the March 4th purchase.
We total those and the COGS is $6,000.
The next decision we need to make
happens with the sale on March 25th.
We sold 300 units.
So, which 300 units did we sell, using FIFO?
The oldest purchases remaining are from March 4th.
We sold all 100 units, leaving zero.
The next oldest purchases came from March 20th.
We sold 200 of these, leaving 300 in inventory.
So we assume the 300 units sold on March 25th
came from 100 units from March 4th,
and 200 units from the March 20th purchase.
We total those and the COGS is $8,000.
Of course, the revenue comes from the fact
that we sold the 300 units at $50 each.
So what's the total amount of COGS
and what's the value of ending inventory?
COGS is the total of the credit side of the inventory account,
which in this case is $14,000.
Ending inventory is the remaining amount
on the debit side of the inventory account.
There are 300 units from the March 20th purchase
with a total cost of $9,000.
And 100 units from the March 30th purchase with a cost of $4,000.
This totals 400 units and a value of $13,000.
Finally, if we were completing a Perpetual Inventory Record,
you can see the purchases were entered in the purchase columns.
The units sold are recorded
and notice that they total the COGS already compute.
March 10th: $6,000, and March 25th: $8,000.
Finally ending inventory is a running total
that results in 400 units of inventory with a cost of $13,000.
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