Inventory and Cost of Goods Sold: FIFO

the cost of inventory that is still on hand is called: This is a topic that many people are looking for. is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, would like to introduce to you Inventory and Cost of Goods Sold: FIFO. Following along are instructions in the video below:

“Accounting students and those of you wishing to learn more about accounting. This is the the first video in our merchandise inventory series. And we re going to be looking 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 3000. 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. 5000 operating expenses for the month for 2400. 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.

19100 and your total purchases would have been 16700. 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 7700. We can just look at the spreadsheet here and go go right down through there we purchased 7700. 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. 9000 crediting accounts payable for the 9000. 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 17600 credit sales revenue for 17600. 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 5000. 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.

2400 two thirds of that is 1600. So we credit cash for 1600. The remainder of that would be credited to accounts payable. Don t forget.

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