Periodic Inventory - FIFO, LIFO, and Average Cost - Video Tutorials & Practice Problems

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When we sell identical goods, we can choose from several inventory costing methods when calculating Cost of Goods Sold and Ending Inventory.

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Periodic Inventory:FIFO, LIFO, and Average Cost

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Alright, now let's talk about how to use Fife. Oh Life. Oh and average costing in a periodic inventory system. So when we sell large amounts of of identical units, we can use different cost flow, what we call cost flow assumptions to track costs of goods sold and inventory. Okay, so remember we're in a periodic system so we're not gonna be making cost of goods sold entries all the time. Right? We don't make it after every sale, like in a perpetual system. Okay. We're only gonna deal with cost of goods sold at the end of the period. But which items did we sell? Right, That's the whole trick here with the Fife. Oh, the life of the average cost. Remember we're talking about selling identical units here. Right, so this is different, you know, cans of soda, Right? If you have all these different cans of soda, you can't tell one unit for the other. So we use cost flow assumptions to see which units we sold out of our inventory. Okay, so the first one is our first in first out. This is what we call Fife. Oh right, first in first out is Fife. Oh and this means that the oldest unit is sold first. Okay, the oldest unit is sold first. Right? The first one that came into our inventory is the first one that goes out of our inventory. Right, So the oldest unit is sold first and that means that the cost of goods sold is going to be what you paid for older units, right? The oldest units that you have are the ones that are gonna be put into cost of good soul compare that to excuse me, last in first out. That's life. Oh right. Last in first out. So this means that the newest unit is sold first. Right? So what's gonna happen is our cost of goods sold is gonna represent what we paid for the newer units. Right. So the whole thing that that makes this tricky is that every time we're purchasing new inventory we're purchasing it at a different price in these problems. Right. In these problems, it's not like, oh, you buy all your inventory at $2 a unit forever. Right? Well then we wouldn't need all these costing methods if it was just always the same price here, it's a way for us to deal with these changing prices. Okay. And then the last one here average cost, well, we're just gonna take an average, okay, we're gonna take an average cost that we've taken for all our units over time. And and then that's what's gonna go to cost of goods sold would be that average of what we paid. So here's how we would find our average cost. We would take the total cost of everything we paid and divided by how many units we bought. Right? This will give us a cost per unit. Okay. And that's what we want is a cost per unit. So you do your total cost divided by quantity. And I want to make a really important note. Okay. Is that the cost flow assumption whether we're using Fife O Life o average cost. It does not it does not have to be consistent with the physical flow of goods. Okay. Just because we're in life. Oh that doesn't mean we have to actually take the newest one of these cans and sell this can to our our customer. Right? It doesn't matter which can remember they're all identical. So this is just to to deal with the cost of the inventory, not the actual physical flow of the goods. Okay. So we can still, even in a life oh system you might still want to sell off the oldest inventory because it has the nearest expiration date. Okay. But there would be a reason, you know, different reasons why you might want to use Fife Oh Life, Oh average cost. We'll talk about that a little more. But that that's the big, big picture here. Is that the physical flow, right? Which can we're actually taking out of inventory to sell to the customer. It doesn't have to match up with this costing method we choose. Okay, so remember that in a periodic system and inventory count were physically gonna count what's left. We're gonna go into our warehouse and we're gonna say, okay we have this many cans of this stuff, we have this much of this stuff and we're gonna count what's left and it's gonna reveal the quantity in ending ending inventory. Okay. It's gonna tell us how many in this case, you know, for reselling Kansas soda or something, it'll tell us how many cans of soda we have left in our inventory. And when we're dealing with a periodic system, this has to be given to you in the problem. Okay, they're gonna have to give you this ending inventory number. Okay, So let's go ahead and check this out. We're gonna use these formulas like we've been used to we've had this base formula, right? We've talked about how inventory increases and how it decreases. Well, it's the same idea here, right first, I want to look at this bottom box, look at this one, we've seen something like this before, right? We're gonna have our beginning inventory and then we're gonna purchase stuff throughout the period. And then what decreases our inventory is when we make sales. Right? And that goes to cost of goods sold and leaves us with ending inventory. Okay. We're adding one new little idea here in this top box and it's the idea of goods available for sale, and this is just the beginning inventory plus the purchases. Okay, So if we think of what we had on hand at the beginning of the period and then everything that we bought during the period. Well that's everything that we have available to sell to customers, right? And those goods available for sale, right? The what we started with plus the purchases were either gonna sell it to a customer, so it'll go to cost of goods sold, or we're not gonna sell it to a customer, and it's still gonna be an inventory in the ending inventory. Okay. So that's a that's a good note there. Is that those goods available for sale, right? That's either gonna end up in cost of goods sold or not in cost of goods sold and stay in inventory. Cool. So let's go ahead and see this example right here. Actually, let's pause here, and then we'll do the example in the in the next video. Alright, Let's take let's take a quick break.

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example

Periodic Inventory FIFO Method

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Alright let's try this example. So a company had the following inventory data for the month of july and its periodic inventory system. So there we go. We have the inventory and then the purchases. Right notice that in a periodic system we're not gonna be updating the inventory every time we make a sale right we deal with those how much cost of goods sold we had at the end of the period. So the month end physical count noted that there were 800 units on hand. Right So this is gonna be the goal of pretty much all of the times when you're dealing with FIFA Life. Oh average cost. It's gonna be either to calculate cogs or to calculate the ending inventory based on the information given to you. Okay so we have to find out what cogs and ending inventory is gonna be. And let's do this one at a time. Let's start with Fife. Oh then we'll do life. Oh and then we'll do average cost. So let's start here with Fife. Oh the first thing we want to know is how much did we sell? Right cost of goods sold. How many units did we sell? So the first thing we wanna know is how many total units were there available for sale? Right. We started with an inventory balance of 1000 units and then we purchased 500 units and 600 units. So we could say that the total units that were available for sale were 2100 units. Right 1000 plus 500 plus 600 gives us 2100 total units. And they tell us that 800 of those units were left at the end of the period? Right. So that means if there were 2100 total that were available for sale, we either sold them or we didn't sell them. Right? And the ones we didn't sell are the 800 that are left over. Right? So if we take 2100 the total available for sale minus the 800 that are left over at the end of the period, we know that 1300 units were sold right? We sold 1300 units. So that's the first step is to find out how many units did we actually sell. And that is by taking what's left over? And the total amount we had available for sale. Okay? So now that we know how many units we sold, we have to think about which units we sold right. In this case we're in a Fife oh system. Right. So the Fife Oh system means that the first unit we bought it, the first unit we're gonna sell. So in this case our beginning balance is what the first thing we're gonna sell. So we're gonna sell all 1000 of that beginning balance right? We're gonna sell 1300 units but we're gonna we're gonna eliminate that beginning balance first. So the 1000 units in the beginning balance times the $20 per unit. Well that's gonna be $20,000 right? $20,000 for those 1st 1000 units. But we sold 1300 units. Right? Not just 1000. So where are those next 300 units gonna come from? Well from the first in first out. Right. We want we want to look at the oldest units. So in this case we already sold the beginning balance, right? Don't cross these out. I'm gonna uncross them because we're gonna do this a bunch of times. So we sold those already. So we need to sell 300 more and that's gonna come out of this purchase. Right? Because that was the first ones in. We want to sell the oldest units first. So we're gonna sell 300 of those. Right? We don't sell the full 500. We only sold 1300 units. The 1st 1000 was the beginning balance and then 300 came out of this purchase. So, that's a little bit of the trick there. Right, we didn't sell that entire purchase. We only sold 300 from that purchase. So 300 times the price of that purchase, which was $22.40. Well, I can't do that one in my head. Let's go ahead and type this in 20 to 40 times 300. That comes out to 6000, 720. Okay, so that means this is our cost of goods sold. Right? We figured out that we sold 1300 units. And now we found the cost of those units. Okay, we picked out which units we sold, and this is gonna be the cost to 26,720. All right, that's our cost of goods sold in Fife Oh, method. Okay, So now let's go ahead and see what's left in ending inventory, right? Ending inventory is gonna be everything that we didn't sell. So we sold that inventory balance at the beginning, right? We sold the beginning balance and we sold 300 units from the purchase on July 11. So we have 800 units here that we're dealing with here, right? They told us that in the problem there were 800 units on hand at the end of the month. So which ones are on hand? It's gonna be the last units we bought, right, because we sold all of the first units. So all that's left is the last units. So, we definitely know that the 600 is still on hand. The 600 from July 30. And those 600 were at a price of $23.30. So let's go ahead and figure out what those are worth. Uh 600 times 23.3, 13,980 for those 600 units. But there's 800 total units. Right, So those last 200. Well, that's the 200 that we didn't sell from this shipment on july 11th. Right, So it's gonna be 200 units from the july 11th shipment times 20 to 40. So let's see how much that comes out to 200 times 22.4 4, 80. Okay, so there we go. Now. We know the value of our ending inventory is gonna include those 600 units and those 200 units. So 4 4080 plus 13 9 80 gives us 18,000 for 60. Okay, so there we go. That's our ending inventory is going to have that balance and our cost of goods sold would be the other number we calculated there. Cool. So now let's see how it's different from a life Oh perspective and from an average cost perspective. Alright, let's pause here and then we'll continue with the life O example.

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Periodic Inventory LIFO Method

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Alright let's continue here with the life o example. So I'm gonna erase all this stuff and we'll continue. But a lot of our information is gonna stay the same. So we're still gonna deal with those 20 121 100 total units available for sale. Right? We had the 1000 we started with and then we made two purchases for more units. Right? So we're thinking in a physical amount of units there to think about how many physical units we sold and how many physical units are left over. Right so they did tell us that 800 are left over, they're generally gonna have to do that in any periodic inventory problem. Okay so again it's gonna be the same situation where we have 2100 units available for sale minus the 800 that are left over. Again We sold 1300 units. Right That doesn't change from FIFA to Life. Oh we still sold 1300 units. But what does change is which units, which unit cost we're gonna pick for what we sold and which ones we're uh we're gonna pick for what's left over. So in Life? Oh the last units in are the first ones to sell. Right so we're gonna sell first the purchases on july 30th. Okay so the first units that we are going to take out of inventory are the 600 from july 30th. Right notice the difference from Fife oh in Fife oh we did the entirely opposite thing. Right so the 600 units times 23 30. I'm gonna go ahead and leverage this math that we did down in this ending inventory before and that's gonna tell us that this value was 9 13,080 right? That is 600 times 23 30. But we sold 1300 units right? We need to make our way up to 1300 units. So we gotta sell the next most recent purchase, right? This is Life. Oh so we sold all those 600 most recent. The next is the 500. Right? We've got 500 at a price of 20 to 40. Okay. But notice this still doesn't get us all the way to 1300 right? This is still only 1100 units, so 500 Times 20 : 40. That's 11,000. Oops. Didn't mean to do that. 11,200. Okay, but remember we're trying to get up to 1300 units, so we gotta sell 200 more and that's gonna come from the July 1st balance right? Because it's the only other units we have, so 200 units times the $20 price. That's gonna be $4000 4000. So there we go, notice we had to pull from three shipments in this case right? Where before we only had two shipments to get to our total. But the key is to get to that 1300 units. So let's add these up 13 9 80 plus 11, 200 plus 4000. There we go. We're gonna get 29,180. Alright, so that would be our cost of goods sold in a life. Oh method. Notice that it's different from cost of goods sold from a FIFA method and that's because we chose different units that were a different price for sale. Okay. But there's not one that's more correct than the other. Right? In the end there's not one that's more correct. You just have to be consistent so that it's consistent from period to period what you're showing to your to your users. So ending inventory, this one's gonna be kind of easy. We only have 800 units In ending inventory just like it told us in the problem 800 units on hand. Well, those are gonna be the oldest units, right? Because we sold everything else. Right? So the in this case, what's gonna be left over is the 800 units that are the oldest here, which is from the inventory balance on July one, right? We sold everything else. So that's gonna be 800 units times The $20 price. And that's gonna leave us with 800 times 20 is $16,000 16,000. So that is our answer right there. That's the answer for the ending inventory. I'm gonna go ahead and underline all the answers here. Just so we're a little clear with where the answers are. Cool. So there's life. Oh let's go ahead and do the average cost method in the next video

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Periodic Inventory Average Cost Method

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Alright, so let's go ahead and do the average cost method for the same problem. So remember that average cost method, we have to find an average cost per unit. Okay, so to do that, what we want to do is find the total cost of all the goods available for sale, and that's where we're gonna find the average right so far. We know the quantity. We know the total quantity available for sale and I'm gonna scroll up for a second. Just so you remember what formula I'm trying to use here. It's this average cost formula average cost equals total cost over quantity. Okay? So we know the quantity the quantity here is the 2100 units. What we need to know is the total cost. Okay, so that's what we're gonna do right here. Let's first find the total cost. And we're gonna do that in this purple box that I've added on the right hand side. Alright, so we just go one by one here. The first thing was 1000 units times $20 per unit. Right In our beginning balance we had 1000 units times $20 per unit. So we're just multiplying across here, right? We're gonna multiply to find the total value of each shipment and this one was 20,000 for the for the beginning balance, then we have 500 times $22.40 per. And that's 11,000 whoops, that's a little sloppy. 11,200. And then the last shipment was 600 times 23.3 and that's 9 13,080. Okay, so there we go. We've got the total cost of each shipment. Let's go ahead and add them all together to get a total cost for everything. So 13 9 80 plus 11, 200 plus 20,000. We get a total value for all of these goods of 45,180. Okay. So now we know throughout the month and our beginning balance in total, the total value of all of that was 45,180 for 2100 units. Okay, so some of that's going to go to our cost of goods sold for the units we sold and some of that's gonna end up in our ending inventory. Okay, so remember average cost. Now we're ready to find our average cost per unit. We have our total costs and our total units. So let's let's figure it out, our average cost, which is what we're gonna use throughout this problem is 45,180 Divided by 20 100. Right, there's 45,180 in total cost and we're gonna divide that to get a per unit cost. So divided by 2100 total units. That's gonna give us a price of I'm gonna round it here. $21, I'll round it to $21.51 per unit. Okay, so each unit is $21.51. Now this gets really easy. That was the tricky part of this problem. Now, the last steps are really easy. Right, So we know how many units we sold, just like before we had 2100 total units minus the 800 left over that are in ending inventory. Well, 2100 minus 800 that's 1300 units. Right, just like in all the other cases we sold 1300 units. But look how easy it is now, 1300 units times our average cost. Right, we're gonna take our average cost over here. 21 51 times 20 whoops. 21 51. Look how easy that is, right, we've got our average cost 1300 Uh Times 21.51. So that comes out to 2709 63. Okay, so now that we know the total amount that's in cost of goods sold, well, everything else is just ending inventory, right? We had a total amount of cost minus this amount will get us to the ending inventory. Of course I'll do it both ways. Just so you can see we could just take the number in ending ending inventory that 800 units times the average cost. So there's two ways we can do this, we can take the total cost of 45,180. Right? That's the total cost that we calculated above minus the cost of goods sold 27-963. And that's gonna give us our ending inventory. 451 80 minus 27963, right? Because if we didn't sell it, well then it's gonna be an ending inventory 17,217. Okay, So that would be our ending inventory. Now, of course, we could just do 800 times 21-51. Our average cost, right? We could do the same thing 800 times our average cost. Sorry, let me get out of the way and we would get probably very close to the same answer. I feel like there's gonna be a rounding error here and there is we get 17 to 8 if we do it this way. Right? So if we do it this way, there's gonna be those those $9. The difference there, that isn't accounted for. That's why this is a safer way to do it because you're gonna make sure that you included all of the numbers in there, Right. Because we took the total cost And then uh subtracted the cost of goods sold. We already calculated all right. Now, this can only be a problem because we rounded right, we rounded this number right here, and that's why we got this bit of a discrepancy between the two. But at the end of the day, you probably think that you know in a big company maybe the $9 isn't going to be such a big deal, but you want to account for every dollar, and this is the best way to do. It would be to just subtract the cost of goods sold that you uh calculated. Alright. So that's the average cost method. You can see, it's pretty simple once you, once you find that average cost, Well, it's just the number of units times that average cost. Cool. Alright. Let's go ahead and move on to the next video.