Ask Me Help Desk - Calculate cost of goods sold, ending inventory, & gross profit for LIFO, FIFO &

Yeah, this one's got a thick layer of dust on it and rollerboat1's probably gone on to a long and successful career in accounting since posting this one, but the question belongs to a general category that gets asked about quite a bit; so maybe a couple of tips could prove helpful for future viewers of the post.

For FIFO and LIFO, think "layers". All the inventory on hand at any given moment should be seen as composed of multiple layers, with a new layer being added with each purchase.

As of Jan 2 in this particular example, the company had 260 units on hand, which was composed of two layers: The beginning layer of 160 units at a cost of $18 each, and then a new layer added on Jan 2 of 100 units at a cost of 20 each.

Come Jan 6 the company sells 180 units. Which layer(s) did these 180 units come from? This is where FIFO and LIFO differ. Under FIFO the sales are deemed to come from the oldest layers first. This would mean that the 180 units sold on Jan 6 would consist of the entire first layer (160 units which cost 18 each), and then 20 units from the second layer. Now the first layer is completely gone, and the company's inventory at that point consists of 80 units remaining of the second layer.

Thus the Cost of Goods Sold under FIFO is easily seen as being 160 units x $18 (all of the first layer) plus 20 units x 20 (from the newer layer), for a total COGS of $3,280. Also, the ending inventory after the Jan 6 sale (still under FIFO) would be 80 second-layer units at 20 per, for a total of $1,600.

LIFO on the other hand takes the opposite viewpoint. Under LIFO sales are deemed to come from the newest layers first, and sales "eat through" the layers in reverse order.

So the Jan 6 sales under LIFO would be deemed to consist of all 100 units of the new layer added Jan 2, plus another 80 units coming from the original layer.

The ending inventory after the Jan 6 sale is just what you'd expect from this LIFO approach: the new Jan 2 layer was completely erased by the Jan 6 sale, and what's left on hand is 80 units of the original layer.

You can see then that the Jan 6 COGS would total (100 x 20) plus (80 x 18) = $3,440.

That same basic methodology is then just applied throughout the remainder of the month. Add a new layer with each purchase, and treat each sale as being drawn from the layers in the order they were acquired (under FIFO) or in the reverse order of their purchases (under LIFO).

Moving average, though, is an animal quite different from LIFO and FIFO. Forget the notion of layers. With each purchase of new inventory you just recompute a new average cost for all units. Then this newly-recalculated average cost becomes the COGS to be used on all subsequent sales (at least until there's another inventory purchase, at which time the 'average' is recomputed once again).

Going back to the initial transactions posted in this particular problem, after the Jan 2 purchase the company has 260 items on hand, which have cost a total of (160 x 18) + (100 x 20) = $4,880. This gives us an average unit cost of 4,880 / 260 = $18.77 each.

Now we forget layers. We just have 260 units on hand, all of which are assigned a cost of 18.77 per. On Jan 6 when we sell 180 units, we just calculate the COGS as being 180 x 18.77 = $3,378.60 and we figure our ending inventory following the sale is 80 units at 18.77 each.

That's the FIFO, LIFO, and moving average approaches in a nutshell. The purchase returns and the sales returns are handled pretty intuitively, in accordance with the particular method being employed, as described above.

Hope that helps a bit.