FIFO Method - First In, First Out, commonly known as FIFO, is an asset-management and valuation

method in which assets produced or acquired first are sold, used, or disposed of first. For tax purposes,
FIFO assumes that assets with the oldest costs are included in the income statement's cost of goods sold
(COGS). The remaining inventory assets are matched to the assets that are most recently purchased or
produced.

Explanation: FIFO method is a method that acquires assets first and it is used for cost flow consumption
purposes.

LIFO Method - Last in, first out (LIFO) is a method used to account for inventory that records the most
recently produced items as sold first. Under LIFO, the cost of the most recent products purchased (or
produced) are the first to be expensed as cost of goods sold (COGS), which means the lower cost of
older products will be reported as inventory.

Explanation: LIFO Method is used for accounting inventory. It is also tax advantageous when prices are
rising.

Periodic - The periodic inventory system is a method of inventory valuation for financial reporting
purposes in which a physical count of the inventory is performed at specific intervals. This accounting
method takes inventory at the beginning of a period, adds new inventory purchases during the period
and deducts ending inventory to derive the cost of goods sold (COGS).

Explanation: Periodic method is a method that can be acceptable for a business with a low number in a
slow-moving market.

Perpetual - Perpetual inventory is a method of accounting for inventory that records the sale or
purchase of inventory immediately through the use of computerized point-of-sale systems and
enterprise asset management software. Perpetual inventory provides a highly detailed view of changes
in inventory with immediate reporting of the amount of inventory in stock, and accurately reflects the
level of goods on hand. Within this system, a company makes no effort at keeping detailed inventory
records of products on hand; rather, purchases of goods are recorded as a debit to the inventory
database. Effectively, the cost of goods sold includes such elements as direct labor and materials costs
and direct factory overhead costs.

Explanation – Perpetual method is a method that maintains records of its inventory by regularly
scheduled physical counts.

Average - The average cost method assigns a cost to inventory items based on the total cost of goods
purchased or produced in a period divided by the total number of items purchased or produced. The
average cost method is also known as the weighted-average method.

Explanation: Average cost uses the weighted-average of all inventory purchased in a period to assign
value to cost of goods sold.

Specific Identification - The specific identification inventory valuation method is a system for tracking
every single item in an inventory individually from the time it enters the inventory until the time it
leaves it. This distinguishes the method from LIFO or FIFO, which groups pieces of inventory together
based on when they were purchased and how much they cost.
Explanation: Specific Identification Method is usually used for more expensive items such as furniture or
vehicles.

Examples:

FIFO Method:

DATE TRANSACTION UNITS UNIT COST SALES PRICE

Oct. 1 Beginning Inv. 300 PHP10

Oct. 2 Purchase 200 PHP15

Oct. 8 Sale 300 PHP30

Oct.11 Purchase 100 PHP17

Oct. 15 Sale 250 PHP40

Oct. 18 Purchase 300 PHP20

Solution for FIFO Method:

Oct. 1 300 × PHP10 = 3000 300 units × PHP10 = 3000

Oct. 2 200 × PHP15 = 3000 200 units × PHP15 = 3000

Oct. 11 100 × PHP17 = 1700 50 × 17 = 850

Oct. 18 300 × PHP20 = 6000 PHP 6,850

900 units PHP 13,700 COGS = Oct. 1 300 units

Oct. 2 200 units

Oct. 11 50 units

Oct.18 300 × PHP20 = 6000 550 units

50 × PHP17 = 850

End. Inventory = PHP6,850

Journal Entries:

Date Account

Oct. 2 Merchandise Inventory 3,000

Accounts Payable 3,000

Oct. 8 Accounts Receivable 9,000

Sales 9,000

Oct. 11 Merchandise Inventory 1,700

Accounts Payable 1,700

Oct. 15 Accounts Receivable 10,000

Sales 10,000

Oct. 18 Merchandise Inventory 6,000

Accounts Payable 6,000

Oct. 31 Cost of goods sold 6,850

Merchandise Inventory 6,850

LIFO Method:

DATE UNITS PRICE PER UNIT TOTAL COST

Oct. 1 200 PHP10 PHP2000

Oct. 16 150 PHP12 PHP1800

Oct. 25 225 PHP16 PHP3600

Solution for LIFO Method:

225 × PHP16 = 3600 200 × PHP10 = PHP2000

25 × PHP12 = 300 125 × PHP12 = PHP1500

Cost of Good Sold = PHP3900 End. Inventory = PHP3500

 Journal Entries: Cost of Goods Sold 3900

Merchandise Inventory 3900

Periodic Method:

Units Cost Amount

Oct. 1 Beg Inventory 300 10 3000

Oct. 2 Purchase 200 15 3000

Oct. 11 Purchase 50 17 850

Total cost of goods sold 550 6,850

Oct. 11 Purchase 50 17 850

Oct. 18 Purchase 300 20 6000

Ending Inventory 350 6850

Journal Entries: Cost of Goods Sold 6850

Merchandise Inventory 6850

Weighted Average Cost under Perpetual Method:

Date Transaction Units Unit Cost Sales Price

Oct. 1 Beg. Inventory 300 PHP10

Oct. 2 Purchase 200 PHP15

Oct. 8 Sale 300 PHP30

Oct. 11 Purchase 100 PHP17

Oct. 15 Sale 250 PHP40

Oct. 18 Purchase 300 PHP20

Solution:

Oct. 1: 300 units × PHP10 = 3,000 Oct: 8: 300 × PHP12 units = PHP3,600

Oct. 2: 200 units × PHP15 = 3,000

500 units 6,000 200 units × PHP12 = PHP2,400

6,000/500 units = PHP12 units Oct. 11: 100 units × PHP17 = PHP1,700

300 units PHP4,100

300 units – 250 units = 50 units $4,100/300 units = PHP13.67

Oct. 15: 250 units × PHP13.67 = PHP3,417

50 units × PHP13.67 = PHP684 PHP684

Oct. 18: 300 units × PHP20 = PHP6,000 + PHP6,000

Total Inventory Worth: PHP6,684

Specific Identification Method:

A Pharmacy Makagaling made the following purchases and sales during the Month of October 2020.
Date Units purchased Units Sold Balance
Oct. 1 1000 units @ PHP2.00 1000 units
Oct. 12 3000 units @ PHP2.20 4000 units
Oct. 17 2000 units 2000 units
Oct. 30 1000 units @ PHP2.40 3000 units

The 3,000 units in the inventory on October 30 is composed of 500 units from purchases made on
October 1, 1,500 units from purchases made on October 12 and 1,000 units from purchases made on
October 30.

Date Units Cost per unit Total Cost

Oct. 1 500 PHP2.20 PHP1,000

Oct. 12 1,500 PHP2.20 PHP 3,300

Oct. 30 1,000 PHP2. 40 PHP 2,400

3,000 units PHP 6,700

Costs of good sold available for sale:

1000 units × PHP2.00 = PHP 2,000

3000 units × PHP2.20 = PHP 6,600

1000 units × PHP2.40 = PHP 2,400

PHP 11,000

Less Ending Inventory (6,700)

Costs of Good Sold: PHP 4,300

Journal Entries: Cost of Goods Sold 4300

Merchandise Inventory 4300