Valuation & Accounting of Inventory
Valuation & Accounting of Inventory
• Under first-in, first-out method, the ending balance of inventory represents the most
recent costs incurred to purchase merchandise or materials.
• The use of FIFO method is very common to compute cost of goods sold and the ending
balance of inventory under both perpetual and periodic inventory systems. The
example given below explains the use of FIFO method in a perpetual inventory system.
Example 1
• The Fine Electronics company uses perpetual inventory system to account for acquisition and sale of
inventory and first-in, first-out (FIFO) method to compute cost of goods sold and for the valuation of ending
inventory. The company has made the following purchases and sales during the month of January 2016.
• Jan. 01: Inventory at the beginning of the month; 24 units @ $1,000 per unit.
• Jan. 04: Sales: 16 units.
• Jan. 07: Purchases; 12 units @ $1,020 per unit.
• Jan. 10: Purchases; 10 units @ $1,050 per unit.
• Jan. 14: Sales; 16 units.
• Jan. 23: Sales; 12 units.
• Jan. 24: Purchases; 12 units @ $1,060 per unit.
• Jan. 27: Purchases; 4 units @ $1,080 per unit.
• Jan. 29: Sales; 6 units.
• During the month, all sales have been made @ $1600 per unit.
You are Required to -
• Prepare journal entries to record the above transactions under perpetual inventory system.
• Prepare a FIFO perpetual inventory card.
• Compute the cost of goods sold and the cost of inventory in hand at the end of the month of January 2012.
Inventory Valuation
Cost of goods sold (COGS) and ending
inventory
1. Cost of goods sold: $16,000 + $8,000 + $8,160 + $4,080 + $8,400 +
$2,100 + $4,240 = $50,980
2. Ending inventory: $8,480 + $4,320 = $12,800
Last-in, first-out (LIFO) method in a
perpetual inventory system
• In contrast to first-in, first-out (FIFO) method, the last-in, first-out (LIFO)
method of inventory valuation assumes that the last costs incurred to
purchase merchandise or direct materials are first costs charged against
revenues. In other words, it assumes that the cost of merchandise sold
(in a merchandising company) or the cost of materials issued to
production department (in a manufacturing company) is the cost of
most recent purchases.
• Like first-in, first-out (FIFO), last-in, first-out (LIFO) method can be used
in perpetual inventory system. The following example explains the use
of LIFO method for computing cost of goods sold and the cost of ending
inventory in a perpetual inventory system.
Example 2
LIFO perpetual inventory system in a merchandising company
• BZU uses perpetual inventory system to record purchases and sales and LIFO method
to valuate its inventories. The company has provided the following information about
commodity DX-13C and wants your assistance in computing the cost of commodity
DX-13C sold and the cost of ending inventory of commodity DX-13C.
1. Aug. 01: Beginning inventory; 20 units @ $40 per unit.
2. Aug. 07: Sales; 14 units.
3. Aug. 12: Purchases; 16 units @ $42 per unit.
4. Aug. 17: Sales; 8 units.
5. Aug. 23: Sales; 4 units.
6. Aug. 27: Purchases; 8 units @ $44 per unit.
7. Aug. 30: Sales; 10 units.
You are required to:
• Prepare a LIFO perpetual inventory card.
• Compute cost of goods sold and the cost of ending inventory using LIFO method.
1. LIFO perpetual inventory card
2. Cost of goods sold (COGS) and ending inventory
• LIFO perpetual inventory card (prepared above) can help compute
cost of goods sold and ending inventory.
1. Cost of goods sold (COGS): $560 + $336 + $168 + $436 = $1,500
2. Ending inventory: [$240 + $84] = $324