Accounting Study Guide

U.S. GAAP Codification

IFRS International Standards

Accounting Topics

Inventory Valuation Methods

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Principles of Accounting, Intermediate Accounting, Advanced Accounting
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Inventory Valuation Methods

Inventory valuation example 1 in pdf file
FIFO example 1 in pdf file
LIFO example 1 in pdf file
Dollar Value LIFO

First-in First-out (FIFO)

Under FIFO, it is assumed that items purchased first are sold first.
Last-in First-out (LIFO)
Under LIFO, it is assumed that items purchased last are sold first.
Perpetual Inventory System
Perpetual inventory system updates inventory accounts after each purchase or sale.
Inventory subsidiary ledger is updated after each transaction.
Inventory quantities are updated continuously.
Periodic Inventory System
Periodic inventory system records inventory purchase or sale in "Purchases" account.
"Purchases" account is updated continuously, however, "Inventory" account is updated
on a periodic basis, at the end of each accounting period (e.g., monthly, quarterly)
Inventory subsidiary ledger is not updated after each purchase or sale of inventory.

Inventory quantities are not updated continuously.

Inventory quantities are updated on a periodic basis.

Example 1 (Company A)
Inventory transactions in May 2010.
Units Purchased
Date
Transactions
(Sold)
May 1
Beginning Inventory
700
May 3
Purchase
100
May 8
Sale
(500)
May 15
Purchase
600
May 19
Purchase
200
May 25
Sale
(400)
May 27
Sale
(100)
May 31
Ending Inventory

Unit Cost

Inventory Units

$10
$12
??
$14
$15
??
??
??

700
800
300
900
1,100
700
600

Ending Inventory = Beginning Inventory + Units Purchased - Units Sold

= 700 + 900 - 1,000 = 600 units

Example 1-1 (Perpetual Recording, FIFO Valuation)

FIFO valuation under perpetual inventory system
Date
May 1
May 3
May 8
May 15
May 19
May 25
May 27
May 31

Transactions
Beginning Inventory
Purchase
Sale (*1)
Purchase
Purchase
Sale (*2)
Sale (*3)
Ending Inventory

Units Sold
700
100
(500)
600
200
(400)
(100)

Unit Cost
$10
$12
??
$14
$15
??
??
??

(*1) 500 units sold

= 700 units from beginning inventory of at $10 unit cost.
Cost of goods sold = 500x$10 = $5,000
(*2) 400 units sold
= 200 units from beginning inventory at $10 unit cost
+ 100 units from May 3 purchases at $12 unit cost
+ 100 units from May 15 purchases at $14 unit cost
Cost of goods sold = 200x$10 + 100x$12 + 100x$14
= $2,000 + $1,200 + $1,400 = $4,600

Inventory Units
700
800
300
900
1,100
700
600

(*3) 100 units sold

= 100 units from May 15 purchases at $14 unit cost
Cost of goods sold = 100x$14 = $1,400
Total cost of goods sold
= 500x$10 + 200x$10 + 100x$12 + 100x$14 + 100x$14
= $5,000 + $2,000 + $1,200 + $1,400 + $1,400
= $5,000 + $4,600 + $1,400 = $11,000
Cost of ending inventory
= Beginning inventory + Cost of purchases - Cost of goods sold
= $7,000 + (100x$12 + 600x$14 + 200x$15) - $11,000
= $7,000 + $12,600 - $11,000 = $8,600
[Checking]
Quantity of ending inventory
= Beginning inventory + Units purchased - Units sold
= 700 + 900 - 1,000 = 600 units
Cost of ending inventory
= 400 x $14 (May 15 purchase) + 200 x $15 (May 19 purchase)
= $5,600 + $3,000 = $8,600
Click here for FIFO solutions to example 1 in pdf file.

Example 1-2 (Perpetual Recording, LIFO Valuation)

LIFO valuation under perpetual inventory system
Date
May 1
May 3
May 8
May 15
May 19
May 25
May 27
May 31

Transactions
Beginning Inventory
Purchase
Sale (*1)
Purchase
Purchase
Sale (*2)
Sale (*3)
Ending Inventory

Units Sold
700
100
(500)
600
200
(400)
(100)

Unit Cost
$10
$12
??
$14
$15
??
??
??

(*1) 500 units sold

= 100 units from May 3 purchases at $12 unit cost
= 400 units from beginning inventory at $10 unit cost
Cost of goods sold = 100x$12 + 400x$10
= $1,200 + $4,000 = $5,200
(*2) 400 units sold

Inventory Units
700
800
300
900
1,100
700
600

= 200 units from May 19 purchases at $15 unit cost

+ 200 units from May 15 purchases at $14 unit cost
Cost of goods sold = 200x$15 + 200x$14
= $3,000 + $2,800 = $5,800
(*3) 100 units sold
= 100 units from May 15 purchases at $14 unit cost
Cost of goods sold = 100x$14 = $1,400
Total cost of goods sold
= 100x$12 + 400x$10 + 200x$15 + 200x$14 + 100x$14
= $1,200 + $4,000 + $3,000 + $2,800 + $1,400
= $5,200 + $5,800 + $1,400 = $12,400
Cost of ending inventory
= Beginning inventory + Cost of purchases - Cost of goods sold
= $7,000 + (100x$12 + 600x$14 + 200x$15) - $12,400
= $7,000 + $12,600 - $12,400 = $7,200
[Checking]
Quantity of ending inventory
= Beginning inventory + Units purchased - Units sold
= 700 + 900 - 1,000 = 600 units
Cost of ending inventory
= 300x$10 (beginning inventory) + 300x$14 (May 15 purchase)
= $3,000 + $4,200 = $7,200
Note: 400 units from beginning inventory were sold on May 8.
200 units from May 15 purchase were sold on May 25.
100 units from May 15 purchase were sold on May 27.
100 units from May 3 purchase were sold on May 8.
200 units from May 25 purchase were sold on May 25.
Click here for LIFO solutions to example 1 in pdf file.

Example 1-3 (Periodic Recording, FIFO Valuation)

FIFO valuation under periodic inventory system
Date
May 1
May 3
May 8
May 15
May 19
May 25

Transactions
Beginning Inventory
Purchase
Sale (*1)
Purchase
Purchase
Sale (*2)

Units Sold
700
100
(500)
600
200
(400)

Unit Cost
$10
$12
??
$14
$15
??

Inventory Units
700
800
300
900
1,100
700

May 27
May 31

Sale (*3)
Ending Inventory

(100)

??
??

600

Under periodic inventory system, cost of inventories is calculated at the end of each
accounting period (on May 31 in this example).
[May 31, 2010]
Quantity of ending inventory
= Beginning inventory + Units purchased - Units sold
= 700 + 900 - 1,000 = 600 units
Using FIFO, units purchased first are assumed to be sold first.
1,000
=
+
+

units sold
700 units from beginning inventory of at $10 unit cost
100 units from May 3 purchases at $12 unit cost
200 units from May 15 purchases at $14 unit cost

Cost of goods sold = 700x$10 + 100x$12 + 200x$14

= $7,000 + $1,200 + $2,800 = $11,000
600 units of inventory left
= 400 units from May 15 purchases at $14 unit cost
+ 200 units from May 19 purchases at $15 unit cost
Cost of ending inventory
= 400x$14 + 200x$15 = $5,600 + $3,000 = $8,600
Click here for FIFO solutions to example 1 in pdf file.
Example 1-4 (Periodic Recording, LIFO Valuation)
LIFO valuation under periodic inventory system
Date
May 1
May 3
May 8
May 15
May 19
May 25
May 27
May 31

Transactions
Beginning Inventory
Purchase
Sale (*1)
Purchase
Purchase
Sale (*2)
Sale (*3)
Ending Inventory

Units Sold
700
100
(500)
600
200
(400)
(100)

Unit Cost
$10
$12
??
$14
$15
??
??
??

Inventory Units
700
800
300
900
1,100
700
600

Under periodic inventory system, cost of inventories is calculated at the end of each accounting
period (on May 31 in this example).
[May 31, 2010]
Quantity of ending inventory
= Beginning inventory + Units purchased - Units sold
= 700 + 900 - 1,000 = 600 units

Using LIFO, units purchased last are assumed to be sold first.

1,000
=
+
+
+

units sold
200 units from
600 units from
100 units from
100 units from

May 19 purchases at $15 unit cost

May 15 purchases at $14 unit cost
May 3 purchases at $12 unit cost
beginning inventory at $10 unit cost

Cost of goods sold = 200x$15 + 600x$14 + 100x$12 + 100x$10

= $3,000 + $8,400 + $1,200 + $1,000 = $13,600
600 units of inventory left
= 600 units from beginning inventory at $10 unit cost
Cost of ending inventory
= 600x$10 = $6,000
Click here for LIFO solutions to example 1 in pdf file.

Example 1-5 (Perpetual Recording, Moving Average Valuation)

Moving Average valuation under perpetual inventory system

Date

Transactions

Units Sold

Unit Cost

Inventory Units

Moving
Average
Unit Cost

May 1

Beginning
Inventory

700

$10

700

$10

May 3

Purchase

100

$12

800

May 8

Sale

(500)

??

300

May 15

Purchase

600

$14

900

May 19

Purchase

200

$15

1,100

May 25
May 27
May 31

Sale
Sale
Ending Inventory

(400)
(100)

??
??
??

700
600

(*1) Average cost of 800 units

= (700x$10 + 100x$12) / (700 + 100)
= ($7,000 + $1,200) / 800 = $8,200 / 800 = $10.25
Cost of goods sold on May 8 = 500x$10.25 = $5,125
(*2) Average cost of 900 units
= (300x$10.25 + 600x$14) / (300 + 600)
= ($3,075 + $8,400) / 900 = $11,475 / 900 = $12.75

$10.25
(*1)
$10.50
$12.75
(*2)
$13.16
(*3)
700
600

(*3) Average cost of 1,100 units

= (900x$12.75 + 200x$15) / (900 + 200)
= ($11,475 + $3,000) / 1,100 = $14,475 / 1,100 = $13.16
Cost of goods sold on May 25 = 400x$13.16 = $5,264
Cost of goods sold on May 27 = 100x$13.16 = $1,316
Total cost of goods sold
= 500x$10.25 + 400x$13.16 + 100x$13.16
= $5,125 + $5,264 + $1,316 = $11,705
Cost of ending inventory
= Beginning inventory + Cost of purchases - Cost of goods sold
= $7,000 + (100x$12 + 600x$14 + 200x$15) - $11,705
= $7,000 + $12,600 - $11,705 = $7,895
[Checking]
Quantity of ending inventory
= Beginning inventory + Units purchased - Units sold
= 700 + 900 - 1,000 = 600 units
Cost of ending inventory
= 600 x $13.16 (Moving Average cost per unit as of May 31)
= $7,896
$7,896 - $7,895 = $1 (rounding error)
Example 1-6 (Periodic Recording, Weighted Average Valuation)
Weighted Average valuation under periodic inventory system
Date
May 1
May 3
May 8
May 15
May 19
May 25
May 27
May 31

Transactions
Beginning Inventory
Purchase
Sale (*1)
Purchase
Purchase
Sale (*2)
Sale (*3)
Ending Inventory

Units Sold
700
100
(500)
600
200
(400)
(100)

Unit Cost
$10
$12
??
$14
$15
??
??
??

Inventory Units
700
800
300
900
1,100
700
600

Under periodic inventory system, cost of inventories is calculated at the end of each accounting
period (on May 31 in this example).
[May 31, 2010]
Quantity of ending inventory
= Beginning inventory + Units purchased - Units sold
= 700 + 900 - 1,000 = 600 units

Weighted average cost per unit

= (700x$10 + 100x$12 + 600x$14 + 200x$15) / (700+100+600+200)
= ($7,000 + $1,200 + $8,400 + $3,000) / 1,600
= $19,600 / 1,600 = $12.25
Cost of goods sold
= (500 + 400 + 100) x $12.25
= 1,000 x $12.25 = $12,250
Cost of ending inventory
= 600 x $12.25 = $7,350
[Checking]
Cost of ending inventory
= Beginning inventory + Purchases - Cost of Goods Sold
= $7,000 + (100x$12 + 600x$14 + 200x$15) - $12,250
= $7,000 + $12,600 - $12,250 = $7,350

Comparison of FIFO and LIFO valuation methods

Dollar Value LIFO valuation method