5. Inventory

Perpetual Inventory - FIFO, LIFO, and Average Cost

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

1

concept

## Perpetual Inventory:FIFO, LIFO, and Average Cost

3m

Play a video:

Was this helpful?

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.

2

example

## Perpetual Inventory FIFO

9m

Play a video:

Was this helpful?

Alright let's go ahead and start this example with the Fife Oh Method. So a company had the following inventory data for the month of july and then we've got some data notice here that this inventory data includes sales, it's not just purchases in a perpetual system. Right? We're always updating the system and that includes when we sell units as well. Okay so we've got some sales and purchases throughout the month and then it asks us these questions are always gonna ask us this is always the end game to calculate cost of goods sold and ending inventory. Okay notice if you were one of the people who had to study periodic inventory and perpetual inventory for these methods, notice that in the perpetual method they don't give you a physical quantity for the ending inventory. Right? Because the perpetual method it doesn't need the count but a periodic method, you do need to count the ending inventory. Okay if you just have to do perpetual well don't worry about that little quip. Okay so let's go ahead and start here with the Fife Oh method. Okay so we're gonna think about what did we sell, what was the cost of goods sold in the Fife Oh method. Okay and this is gonna be every time we have a sale we're gonna account for, how much was the cost of goods sold for that sale. So first in first out let's look at our sale on july 5th. Okay july 5th we sold 700 units at $30 apiece. Okay notice that since we're dealing with the cost side, we're talking about the cost of goods sold, we're talking about inventory. This $30, the selling at $30. That's the revenue that we brought in. That doesn't have to do anything with this discussion. Our discussion now is on the cost side, not the money we bring in. What did it cost us for these sales? The cost of goods sold. Okay, so that $30 is related to revenue not cost. So we sell these at $30. And how many units did we sell? 700 units. Right So we have to figure out which units we sold 700 units and find out their price. Well, on July five, the only units we had on hand were the inventory balance from the beginning of the month. Right, so the first in first out, well, the only units we have available are the inventory from July one, so that's what we're gonna sell, 7700 times $20. That's $14,000, right? That's the cost of goods sold from that sale. So at that point, since this is a perpetual system on July five, we would have made a journal entry to including cost of goods sold $14,000. Okay, so the next thing we have to see is on July 23, the next sale where we sold 360 units. Right? So those 360 units, we have to think about uh which which purchases, which balances we're gonna use for those 360 units, right, so since it's 360 units total right on that sale, we have to look at the first ones we have. So remember from this july 1st balance, we already sold 700 of those, Right? We already sold 700 on july 5th, so there's not 1000 left there, there's only 300 left, Right, so this july 1st balance is gonna be down to 300 units and that's what we're gonna sell, the first units that we're gonna sell on this date. Right? We already sold the 1st 700 we're talking about Fife, oh so we want to sell the oldest units, So we're gonna sell the 300 units from July one at $20, right? 300 times 20, that's $6,000. Now, what about the other 60 units? Right, we sold now, we've already sold everything from this balance, right? We sold 700 of those on July five, and we sold 300 of those on July 23. Well the other 60 They're gonna have to come from our oldest units, and in this case the oldest units are gonna be the purchase on July 11, right on July 11, we uh purchased 500 more units. And in this case those are the oldest units that are available for sale. Okay, so let's go ahead and sell those units right here. So we have 360 units. Right, so there's gonna be 60 that gets sold from the purchase on July 11 because we already accounted for 300 of those. Right? We're trying to get to a total of 360. So there's only 60 from that purchase that gets sold 60 times $22.40. Right, so that purchase on July 11 is now our oldest units. So 60 times 20 to 40, that gives us 1,344. Okay, So I'm gonna put the total here on the side because we need to find the total of this purchase. 13 44 plus 6000. So, our total for this purchase is gonna be here. Let me double underline these this And then 7344. Right? That's the total of these two numbers right here, so that's the total from July 23. Now let's figure out the total from July 29. So on July 29 we sold 240 units. Right, 240 units. So where are those units gonna come from? They're gonna come the ones we sold are gonna come from our oldest batch of inventory. So we had 500 units that were available for sale on July 11. Right, but we already sold 60 of those units. However, we still have enough to cover this whole sale. Right, because we're only selling 240 we had we had purchased I'll do it right here. We had purchased 500 And then we sold 60 of them on July 23. Well that leaves us with 440 units. Right? But our sale was only 240 so that's enough to cover it. So all of those units, all 240 of those units are gonna come out of the July 11 purchase. Right? Those are our first in first out to 40 units times a price of $22.40. Well that's gonna equal let's see, 240 times 22.4. Well that's 5376. Okay, so that's gonna be our total from that purchase right there. Excuse me from that sale, that's gonna be the total cost of Good Soul. So now just to find the total cost of goods sold for the month. Well that's just gonna be the 14,000 from the first sale, plus 3 7044 from the second sale plus 5 +376 from the third sale. So what's that gonna give us 26 7 20. So there you go. That is going to be that's going to be our cost of goods sold using the Fife. Oh method there. Alright so let's go ahead and do our ending inventory now in Fife. Oh so remember ending inventory is going to be the units that are left over. So what's left over? We sold all of the inventory balance from, from july 1st. How much of the inventory did we sell from july 11th? Well, we sold the 500 minus the 60 from july 23rd sale, but we also sold to 40 right on july 29th, So -240, That leaves us with 200 units are left in ending inventory from July 11. Right? So the July 11, inventory is gonna be 200 units that we didn't sell times the price of 20-40. You see where that 200 came from? There were 500 total units that we purchased that day And we sold 60 of those units on July 23 and 240 of those units on July 29. So we're left with 200 units from the July 11 purchase. So 200 times 20 to 40. Let's go ahead and find out what that is. That's 4480. Okay, but that's not all the units left. Right, there was more units left. How about the purchase on July 30? We didn't sell any of those units. So we're gonna be left with 600 units from July 30, that were $23.30. So let's see how much of those cost us right there. 600 times 23.3 13,980. So there we go. We're ready to find our ending inventory 4480 That comes out to 18,460. Cool. Alright, so that is our answer right there. Our cost of goods sold total for the month was 7 26,020 our total ending inventory was the 4 18,060. Cool. Let's go ahead and pause and we'll continue with the Life Oh Method.

3

example

## Perpetual Inventory Average Cost

10m

Play a video:

Was this helpful?

All right. So when we do the average cost method in perpetual inventory system, we're gonna have to keep updating that average. It's gonna because we're perpetually updating inventory. That average is gonna keep changing. So that's why I have these two purple boxes above. That's what we're gonna use that as a tool to help us solve these average cost. Alright, So the first thing we wanna do is we want to keep solving for what that cost per unit is we want to use that average cost formula from above, right? Total cost divided by quantity to keep up our average and find what our averages. So let's start on july 1st and see what our average cost per unit was on that day. Well, that's pretty simple. Right? We only had one price, one set of units. So if we took our total cost, which would be the 1000 times the $20 per unit. 1000 times 20 where total cost is gonna be $20,000. Right, And how many units did we have on hand on that day? Well, we had 1000. Right, so our average cost per unit um which I'll do over here, I'm gonna try and put them right here on the end, we'll calculate our average cost per unit, which is just dividing, right? We're gonna take our total cost divided by our unit balance. So 20,000 divided by 1000. Well that gets us back to $20 per unit, Right? divided by 1000. Not a big revelation there. But now let's keep going here. Let's think about the sale on On July five. So the sale on July five. Well we had an average cost of $20 per unit at that point. Right. Nothing crazy has happened yet. So we would have sold units of 700 units at a price of $20 per unit. Okay. And notice this is the same for all the cases, right? Because there was no purchases made before the first sale, so that's what was available. We sold 700 units at 20 per unit. So what's gonna happen after that sale? Our unit balance Is gonna decrease down to 300 right now, we only have 300 units on hand. But those units all have a cost of $20, still write all those units have a cost of $20. So it would just be 300 times 20 And that's just $6,000. Right? And that makes sense because there was 20,000 total value and we sold 14,000 went to cost a good sold. So the remaining 6000 is still sitting there in inventory And we still got a $20 per unit Uh average cost over there. Okay. So now we're gonna make a purchase notice, we're making a purchase here on July 11. So we had 300 units previously right left unsold plus now 500 units. So we have a total of 800 units. And this is how you're gonna see the moving average because we're gonna keep updating. Right? So now we have 800 total units in inventory. We had those 300 that had a value of 6000. Right? But now we added a value of 500 times 20 to 40. Right? So the 1st 300 units had that value of 6000. The next 500 have this value. So let's go ahead and find out the total cost in inventory. 500 times 20 to 40. 500 times 22.4. There it is. Uh so 500 times 22.4. That's 11,200. That's what we paid for this new shipment on July 11. But we have to add what was left over from the beginning balance which is that $6,000 value from the previous line. Right so we get a total value of 17,200 in this case. So now that we have a total cost we have a total amount of units 800. Let's go ahead and divide to get our average cost. 21.5. Yeah 21. So 21 50 per unit. So notice this is the moving average the average has now gone up to $21.50 per unit. Okay, so now we're ready we have our average ready for our next sale. So the sale happening on July 23. We sell 360 units And we're just gonna take the 360 units times that average price. 21 50. Right? So what's that gonna come out to 3360 times 21.5. That's 7740. Right? So notice how easy these final calculations are. Right? We're just taking that average costs and multiplying, we don't have to pick and choose which inventory it came from. The trick happens up above right in this running total that we're doing Okay. So we sold 360 units. Right? So we had 800 units -360. That's gonna get us to how many units left? 800 -3 60. There's 440 units left on hand. And while we had 17,200. Right, that was our previous total cost. But then we sold some of it right? We sold this value 7007 40. Right? So that's what we took out of our total cost and inventory. So let's see what's left 17,200 - what we sold in the previous line. It leaves us with a value of 4 9060. And guess what if we divide that by our units of 4 40? Our average does not change yet. Right. Because all we did was sell units at the average price. So it's not gonna affect the average. The average is still gonna be 21 50 per unit 4 9060 divided by 4 40. We still have that 21 50 average. Okay, so that makes our next sale on july 29th. Pretty easy, right? Because we have the same average, we're just gonna go 240 units times the average price of 21 50. What's that? Gonna give us 5160. Right, so there we go. Now, we've got in an average cost for all of our sales. Let's go ahead and finish this up here. So we had 440 units -240. So we were left with 200 units at that point and we had a cost of nine for 60 previously, but now we're taking out 5160 in that sale? Right that sale 51 60 that's what we're taking out right there. So what's left in inventory? Nine for 60 minus 51 60 4300. And guess what? 4300 divided by the 200 units left. We're still gonna have that average of 21 21 50 per unit here. Okay. And now we've got our final purchase, right, so now we're gonna purchase units on uh July 30. So 200 plus the 600 units we purchase gets us to 800 total units. And how much did we spend on that purchase? So well, previously we had a value of 4300 right from the previous line plus this purchase of 600 600 times 23 30. Alright, 600 times 23.3. That's 13 9 80. But we have to add 4300. It gets us to a total of 18,280. Right? So the 600 times the 23.3 and then we add 4300 to get the total value. And now we divide that by the 800 units. And this gives us a ending uh average cost of 22.85 units. Okay, so our ending cost is the 22.85 units. But at the same time we just found our ending inventory, didn't we? Because we took everything that was left the 4300 plus this new purchase that we haven't sold yet and we found the value of it. Right so that total cost of 18 to 80, that's gonna be the value of our ending inventory. Okay, So our ending inventory, it's just gonna be what's left on hand or you could do the same thing where we calculated the average cost of 20-85 and multiply it by how many units there are on hand? Right, so let's just do that. We have 800 units on hand times 22.85 average cost. So what do we get? And it should be the same number that we have up there because that's how math works. So there it is 18,280 right? Oh, we didn't do the total for the cost of goods sold. So all we have to do is add the 14,000 to 77 40 the 51 60 from each sale, 14,000 plus seven seven 40 plus five one 60 gets us to our total cost of goods sold of 26 90. So let me write all that in 14,000 plus seven seven 40 plus five one 60 equals +26, 900. And that would be our answer right here. Okay, so those are two answers for cogs and ending inventory in the average cost system. Cool. So you saw here with the perpetual that average moves after each purchase. Right? We're going to see that the average changes after each purchase in this case. Alright, let's go ahead and move on to the next video.

4

example

## Perpetual Inventory LIFO

7m

Play a video:

Was this helpful?

Alright let's continue with the same example using the Life Oh method. All right, so what we gotta think about what we're doing cost of goods sold is each time we make a sale we're gonna make an entry for cost of goods sold. So we want to look at each sale on july 5th we made a sale of at $30. Let me erase this stuff right here. Okay so on july 5th we made a sale at $30. Remember that the sale price doesn't matter, we're only looking at cost here. So we sold 700 units. What were the last units that were available to sell at that date? Okay, so this is where it's a little tricky you have to think of as of that date? On july 5th, what were the last units available for sale? So on july 5th the only units that were available for sale were the ones from july 1st. Right, so even though those were the first ones from Fife oh they're still the last ones in Life because they're the only ones. Okay, so we're gonna sell 700 units here Times the $20 cost from July one. Right and that's gonna give us 14,000 in cost of goods sold on July five. Right? So notice that was the same as in the Fife oh system right, but now let's check out the next one on july 23rd we made a sale at $30 for 360 units. Right? So now we're looking at july 23rd there were 360 units and we made but now when we think about the last units we purchased right think about life o as of july 23rd now we would pull the units from the july 11th purchase right? They're not gonna come out of beginning inventory, they're gonna come out of the latest purchase as of that date. And as of july 23rd the latest purchase was the one on july 11th. And notice on July 11 there's enough units to cover all of this sale. So we can just do the 360 units Times The July 11 Price of 20 - 40. Right so notice how that's a little different already because we had a purchase we're looking at the last in first out now. So 360 times 22.4 That comes out to 8,064. Right so notice yeah in this case the last purchase was the life oh for that number. Okay so now let's do July 29. So the July 29 purchase. So this is where things you have to keep track of how many units are left from each purchase. Right so if you think about our inventory balance on July on July 1st right I would kind of keep a running total here where I'd be like okay there's 300 of these left here I sold. 3 60 so 500 minus 3 60 let's see how many of those are left. 500 minus 3 60 There's 100 40 of these left right here. Okay, so that kind of keeps track of how many we have left to sell. So now when we look at the july 29th sale, well the sale at july 29th we sold 240 units which units were available. What was the last units available? That's gonna be this 140 units we're gonna wanna sell. Right, those are the last ones available. And then we're gonna have to go to the previous which comes out of the july 1st balance. So the first ones we sell is those 140 units times the price of 20 to 40. Right? And let's see what that comes out to. I keep putting my my phone away. Alright, 140 times 22.4 3136. But we didn't just sell 140 units, right? We sold 240 units. So the other 100 the other 100 have to come out of our beginning inventory balance, right? Because that's the last end before that. So 100 comes out of there And that price was $20. So that comes out to 2000. Right? And we're gonna have a total from that day of 5136. Right? So that would be the total from that purchase. Excuse me from that sale, the total cost of goods sold. So now let's find the total for the entire month. And that's just summing up these three numbers. So the 14,000 plus the +8064 plus the +5136. That's gonna give us our total cost of goods sold for the period. And let's see 14,000 plus 8 +064 plus +5136 27,200 27,200. So there you go. That is our cost of goods sold using the life O method notice that's a little tricky here in the perpetual system, right? You have to keep track of which units are left. Okay, So that being said now when we get to ending inventory, we really got to know what units are left. Right? So if we think about this inventory balance from july 1st, we said there were 300 before that july 29th, but then we sold another 100 right? So we know there's only 200 left from july 1st inventory balance right? Because we sold 700 on july 5th and we sold 100 of them on july two 29th. So there's 200 left. And then what else is left? Is this purchase on July 30? So let's go ahead and put that into our ending inventory first, we have the 200 units from the beginning balance that are still left 200 times $20 And that comes out to 4000. But then we also have the 600 units from July 30, 600 times 23.3 23 30. So let's see what that comes out to. It comes out to 13 9 80. So our total ending inventory is going to be 17 9 80 right? That is our total ending inventory, We've got a cost of goods sold, so we're there, we've got it there with the life. Oh method. Alright. One thing I want to note that's kind of tricky here with life. Oh is look we made a purchase on July 30, that's the last things that ever came in, but we never made a sale after that to actually be able to sell them. Okay, so that's a little trick here with the perpetual method and and uh the life. Oh is that even though we had that purchase on july 30th? I don't want you to think of that as the last in first out. You wanna go date by date right? You want to think okay, as of july 5th. What was the last in first out as of that date? Right. Just like we did in the problem. Cool. Let's go ahead and move on to the weighted average. Excuse me, average cost method