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Perpetual Inventory:FIFO, LIFO, and Average Cost

Brian Krogol
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Alright now let's discuss how to use Fife. Oh life. Oh and average cost in a perpetual inventory system. So we're gonna use these FIFA Life. Oh average cost methods. This is when we're selling large amounts of identical inventory. Okay so if you think about it, if we're selling a bunch of cans of soda were reselling identical uh cans of soda, you can't tell 11 can of soda from the other can of soda, they're all gonna be identical in essence, Right? So we can't really tell the difference. So what we do is we use these cost flow assumptions and that's gonna help us track our cost of goods sold an inventory here. Okay so let's talk about what these are the first one, First in first out. This is our Fife Oh method. Right. First in first out Fife. Oh so this means that the first unit that came into our inventory is gonna be the first unit that we sell. Okay so the first unit that goes out of inventory. So the oldest unit is the one that gets sold first. Okay so for selling the oldest units first, that means that our cost of goods sold. Well the cost of goods sold, it's gonna have what we paid for our older units, right? We're gonna put our older units into cost of goods sold, compare that to last in first out. This is the opposite here Life. Oh last in first out. Well that means that the newest unit that we received is the one that we're gonna sell. Okay so this is the newest unit gets sold first. Okay. So the cost of goods sold on the income statement. Right? Our our cost of goods sold is going to include what we paid for newer units. Okay. So 11 quick thing before average cost. The whole trick to these questions when we deal with this FIFA life. Oh the whole point of it is that we're buying units at different prices. Okay. Every time we purchase we're getting a different price and that forces us to use one of these methods to cost our inventory. Okay. So the last one average cost this is that goods are sold at their average cost. Right? The average cost and this is the average of what you paid for the units. That's what's gonna go to cogs. Okay, So the perpetual system, we have kind of a special thing with the average, it's called the moving average, right? Because we're perpetually updating the inventory record. So since we're always updating the record while we're gonna constantly have to change the average, we're gonna have to move the average based on the record. So the average is gonna be updated after each purchase and sale. Okay, So we are going to be updating that average quite quite often. Alright. And this is how we find our average is a pretty simple formula. This is going to give us a cost per unit. Okay, a cost per unit. Which is just if we take the total cost of everything we have divided by the amount of units that we have. Well, that will give us the cost per unit. Okay. Total cost divided by quantity. And a very important note that I want to make here. Is that the cost flow assumption? Whether we're using FIFA Life? Oh, average cost. It does not have to be consistent with the physical flow of goods. Okay. Physical flow is which, you know, if we're selling cans of soda, which can of soda we are actually selling? Well, that would be the physical physical flow. But that doesn't matter with the accounting records. We can we don't have to match that actual can with the cost of that actual can itself. Right? We're gonna use these methods to help simplify the process and it doesn't have to align with which actual can we we sold and what we paid for that can No, that doesn't matter. Okay, FIFA Life. Oh, uh an average cost. We just look at it kind of in the big picture. All right, So let's go ahead and pause here. And then we will start an example on how to use these methods in a perpetual system. Cool.