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.