FA 33 - Inventory - LIFO Method

Summary

This 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

00:00

📚 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.

05:00

📈 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.

Keywords

💡FIFO

FIFO stands for 'First-In, First-Out,' a method of accounting for inventory where the oldest items in stock are considered sold first. In the video, it's mentioned as a completed method, contrasting with LIFO, which is the focus of the current discussion.

💡LIFO

LIFO stands for 'Last-In, First-Out,' an inventory valuation method where the most recently acquired items are sold first. The video script primarily focuses on explaining the LIFO method, detailing its application in various inventory transactions.

💡Beginning Inventory

Beginning Inventory refers to the stock of goods available at the start of an accounting period. In the script, the beginning inventory is given as 20 units at $3 each, totaling $60, setting the initial value for the LIFO calculations.

💡Purchase

A purchase in this context refers to the acquisition of additional inventory items during the accounting period. The script mentions several purchases, such as the one on May 5th where 5 units were bought at $3.25 each, affecting the inventory valuation under LIFO.

💡Cost of Goods Sold (COGS)

COGS is a key financial metric representing the direct costs attributable to the production of the goods sold by a company. In the video, the script calculates COGS using the LIFO method to determine the cost of the items sold, which is essential for understanding gross profit.

💡Revenue

Revenue is the income generated from the sale of goods or services. The script calculates revenue by multiplying the number of units sold by the selling price, which is then used to determine the gross profit.

💡Gross Profit

Gross Profit is the profit a company makes after deducting the costs associated with making and selling its products, but before deducting other expenses. The script concludes with the calculation of gross profit by subtracting COGS from revenue.

💡Journal Entries

Journal entries are the financial transactions recorded in the books of accounts. The script briefly touches on how to record journal entries for purchases and sales, which is an integral part of accounting and reflects the business's economic events.

💡Inventory Valuation

Inventory valuation is the process of determining the value of a company's stock of goods. The script explains how inventory valuation is affected by the LIFO method, especially when calculating the cost of goods sold and the remaining inventory value.

💡Sales

Sales refer to the act of selling goods or services. In the script, sales transactions are detailed, showing how the LIFO method impacts the calculation of which inventory items are considered sold and their associated costs.

💡Weighted Average

Although not the main focus of the script, the weighted average method is mentioned as the next topic to be covered. It is another method of inventory valuation that averages the cost of all items available for sale, which contrasts with the specific identification methods like LIFO and FIFO.

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