FA 33 - Inventory - LIFO Method
Summary
TLDRThis video script explains the Last-In-First-Out (LIFO) inventory valuation method, contrasting it with FIFO. It walks through a series of inventory transactions in May, including purchases and sales, calculating the cost of goods sold (COGS) and gross profit using LIFO. The script also covers journal entries for inventory purchases and sales, providing a step-by-step guide for understanding LIFO's impact on financial reporting.
Takeaways
- 📚 The script discusses the Last In, First Out (LIFO) method of inventory valuation, contrasting it with the First In, First Out (FIFO) method.
- 🛒 On May 1st, there is a beginning inventory of 20 units at $3 each, totaling $60.
- 📦 A purchase is made on May 5th of 5 units at $3.25 each, adding $16.25 to the inventory.
- 💸 On May 13th, 22 units are sold under LIFO, which means the most recently purchased units are sold first.
- 🔢 The cost of goods sold (COGS) for the sale on May 13th is calculated by multiplying the number of units sold by their respective purchase costs.
- 🛍️ Additional purchases are made on May 20th (7 units at $3.55 each) and May 24th (5 units at $3.70 each).
- 📈 The inventory balance is adjusted after each purchase to reflect the new average cost of items on hand.
- 💼 On May 31st, 13 units are sold, and again, the LIFO method is applied to determine the COGS.
- 🧾 The script explains the process of calculating sales, COGS, and gross profit for the period.
- 📝 Journal entries for May 24th and 31st are discussed, detailing the accounting treatment for inventory purchases and sales.
- 🔑 The script emphasizes the importance of understanding the LIFO method for inventory valuation and its impact on financial statements.
Q & A
What is the acronym LIFO stand for and what does it represent in inventory management?
-LIFO stands for 'Last In, First Out.' It is a method of inventory valuation where the most recently acquired items are sold first, which means the newest inventory items are assumed to be the ones that are sold.
What was the beginning inventory balance on May 1st according to the script?
-The beginning inventory balance on May 1st was 20 units at $3 each, which amounts to a total of $60.
On May 5th, what was the cost per unit for the new purchase and how many units were purchased?
-On May 5th, the cost per unit for the new purchase was $3.25, and 5 units were purchased.
How is the cost of goods sold (COGS) calculated under the LIFO method when making a sale?
-Under the LIFO method, the cost of goods sold is calculated by taking the most recent purchases first. For example, if 22 units are sold, the 5 most recent units at $3.25 each and then 17 of the older units at $3 each are considered for the COGS calculation.
What was the total cost of the inventory purchased on May 20th?
-The total cost of the inventory purchased on May 20th was $24.85 for 7 units at $3.55 each.
What was the cost per unit for the inventory purchased on May 24th and how many units were bought?
-The cost per unit for the inventory purchased on May 24th was $3.70, and 5 units were bought.
How many units were sold on May 31st and what was the cost of these units under LIFO?
-13 units were sold on May 31st. The cost included 5 units at $3.70, 7 units at $3.55, and 1 unit at $3, totaling $36.35.
What was the total sales revenue for the sales made on May 31st?
-The total sales revenue for the sales made on May 31st was $130, as 13 units were sold at $10 each.
How is the gross profit calculated after determining the sales and COGS?
-The gross profit is calculated by subtracting the total cost of goods sold (COGS) from the total sales revenue. In this case, it is $350 in sales minus $113 in COGS, resulting in a gross profit of $237.
What are the journal entries for the inventory purchase on May 24th and the sale on May 31st?
-For the inventory purchase on May 24th, the journal entry is to debit Inventory by $18.50 and credit Accounts Payable (AP) by the same amount. For the sale on May 31st, the entries are to debit Accounts Receivable (AR) or Cash by $130, credit Sales Revenue by $130, debit COGS by $36.35, and credit Inventory by the same amount.
Outlines
📚 Introduction to LIFO Inventory Valuation
This paragraph introduces the Last-In, First-Out (LIFO) inventory valuation method, contrasting it with the First-In, First-Out (FIFO) method. It explains the process of valuing inventory sales by taking the most recently purchased items first. The example provided walks through the inventory transactions for the month of May, starting with a beginning inventory of 20 units at $3 each, followed by purchases on May 5th and May 24th at different unit prices. The paragraph concludes with a LIFO cost of goods sold calculation for a sale made on May 31st, detailing the specific units sold and their respective costs, resulting in a remaining inventory value.
📈 Journal Entries and Financial Calculations
The second paragraph delves into the process of creating journal entries for inventory transactions, focusing on the purchases made on May 24th and the sale on May 31st. It explains the necessary debits and credits for inventory purchases and sales, emphasizing the distinction between Accounts Payable (AP) and Accounts Receivable (AR) or cash. The summary includes the calculation of the cost of goods sold (COGS) for the sale on May 31st, using the LIFO method, and the determination of gross profit by subtracting COGS from total sales revenue. The paragraph ends with a teaser for the next video, which will cover the weighted average inventory valuation method.
Mindmap
Keywords
💡FIFO
💡LIFO
💡Beginning Inventory
💡Purchase
💡Cost of Goods Sold (COGS)
💡Revenue
💡Gross Profit
💡Journal Entries
💡Inventory Valuation
💡Sales
💡Weighted Average
Highlights
Introduction to LIFO (Last In, First Out) method in inventory valuation.
Comparison of LIFO to FIFO, emphasizing the difference in inventory selection during sales.
Explanation of beginning inventory balance and its calculation with 20 units at $3 each.
Details of the first purchase on May 5th, including the cost of 5 units at $3.25 each.
Process of updating inventory balance after the first purchase.
Description of a sale on May 13th and the application of LIFO to determine cost of goods sold.
Calculation of revenue and cost of goods sold for the May 13th sale.
Second purchase details on May 20th, with 7 units at $3.55 each.
Update of inventory balance after the second purchase.
Third purchase details on May 24th, with 5 units at $3.70 each.
Process of selling 13 units on May 31st using LIFO and the resulting cost of goods sold.
Final calculation of the remaining inventory value after the May 31st sale.
Computation of total sales, cost of goods sold, and gross profit for the period.
Journal entry explanation for inventory purchases and sales, focusing on May 24th and 31st.
Amounts calculation for journal entries related to inventory and sales revenue.
Completion of the LIFO section and a teaser for the next video on the weighted average method.
Transcripts
okay we have completed the FIFO method
in problem seven to eight it's time to
move on to LIFO so very very similar to
FIFO only this time when we sell our
inventory we don't take the oldest we
take the newest last in first out so
let's do it
May the first we didn't make a purchase
we didn't make a sale but we did have a
beginning inventory balance 20 units at
3 bucks apiece gives us $60 in beginning
inventory on May the fifth we make a
purchase five units three dollars and 25
cents each five times three twenty five
is $16.25 we didn't make any sales today
so I bring down my previous inventory
balance 20 times 3 is 60 and I add to it
my new purchase five at 325 is 16 and a
quarter
moving on to May the 13th I make a sale
so when I make a sale I'm worried about
the cost of goods sold not that I had
two hundred and twenty dollars in
revenue which of course we can all see
22 times ten is two hundred and twenty
dollars in revenue I'm worried about not
my revenue but my cost of goods sold so
I have to say which of these 22 units
sold and with LIFO it's the newest or
the most recently purchased stuff so
five sold all of those sold all those
ones and 17 of those gets me up to 22 so
I sold five at 325 and I sold 17 at
three bucks five times 325 and 17 times
three what does that leave me with
it leaves me to $3 units or three $3
units pardon me three left over three
times three is nine
okay
so that's really the key item now we
make a couple more purchases May 20th we
buy a seven that cost 355 equals that
times that 2485 there's no cost of goods
sold because we didn't sell any goods so
we had three at three four nine bucks
now we're adding to it seven at 355 424
85 and that brings us to May 24th we buy
five more May 24th we buy five at three
dollars and seventy cents five times
three seventy is 1850
I had three I didn't sell them so I
still got him
I had seven at 355 424 85 and I didn't
sell him I still got him and now I'm
adding to it five at 374 1850 so that's
May the 24th now on May 31st my mother's
birthday
what happens we south 13 we gotta say
which 13 did we sell we sold the most
recently purchased 13 so we sold the Wow
let's see what we just looking from
bottom to top now we must have sold all
five of those we must have sold all
seven of those that gets us up to 12 we
must have sold one of those to get us to
13 so in order I sold five four three
seventy that's $18.50
I sold seven at 355 seven times 355 2485
and I sold one at three bucks and I know
one times three is three leaving me too
at three dollars for six dollars put an
underline under here and we are done
that part of the question we have
prepared our inventory record now let's
compute sales cogs and gross profit our
sales were having you is just we look on
the sale date and we figure out how much
we sold stuff for so 22 times 10 is 220
five times three 7b oh wait that's a
purchase 13 times 10 is 130
so 220 plus 130 $350 and this is the
same across each method so our sales rep
is 350 our cogs cost of goods sold is
the sum of the cogs column here
so I add that Plus that Plus that Plus
that Plus that I know there's quicker
ways to do it in Excel just want to show
you what I'd be doing in my calculator
sales minus cogs is gross profit 350
minus 113 is 236 40 so there we've
answered be on to see journal entries
should be very straightforward here we
are doing journal entries just for May
24th and 31st we could be forced to do
them all but we're not here so May 24th
and May 31st
I know May 24th was a purchase so when
I'm buying inventory debit inventory
credit AP and I know May 31st was a sale
so I know there's two parts to it debit
AR or cash it's unclear here credit
sales Rev debit cogs credit inventory
and now let's figure out our amounts I'm
May 24th how much inventory did I buy
well I bought $18.50 worth of inventory
just right here I bought 1850 so Demick
inventory credit AP 1850 how much money
did I take in on May 31st or how much
day earn on May 31st right there I
earned a hundred and thirty dollars and
that's my sales revenue well are my cogs
on May 31st well it's the total this
section so it's 1850 plus 24 85 plus 346
35 is my debit to cogs credit to
inventory and at that point I've done it
I've completed my lifeö
section of the problem in our next video
will attack a weighted average stay
tuned
Посмотреть больше похожих видео
5.0 / 5 (0 votes)