Purchases37,00037,00037,000Ending Inventory (appears on B/S)
*See calculation below
8,000 15,000 11,250
$37,000$30,000$33,750Expenses10,000 10,000 10,000
*Note: All calculations assume that there are 1,000 units left for ending inventory:(4,000 units - 3,000 units sold = 1,000 units left)What we are doing here is figuring out the ending inventory, the results of which depend on theaccounting method, in order to find out what COGS is. All we've done is rearrange the aboveequation into the following:Beginning Inventory + Net Purchases - Ending Inventory= Cost of Goods Sold
LIFO EndingInventory Cost =
1,000 units X $8 each = $8,000
Remember that the last units in are sold first; therefore, we leave the oldest units for ending inventory.
FIFO EndingInventory Cost =
1,000 units X $15 each = $15,000
Remember that the first units in (the oldest ones) are sold first; therefore, we leavethe newest units for ending inventory.
Average Cost Ending Inventory =
[(1,000 x 8) + (1,000 x 10) + (1,000 x 12) +(1,000 x 15)]/4000 units = $11.25 per unit1,000 units X $11.25 each = $11,250
Remember that we take a weighted average of all the units in inventory.
Using the information above, we can calculate various performance and leverage ratios. Let'sassume the following:Assets (not including inventory)$150,000Current assets (not including inventory)$100,000Current liabilities$40,000Total liabilities$50,000Each inventory valuation method causes the various ratios to produce significantly differentresults (excluding the effects of income taxes):