Inventory Valuation

What is Inventory?

Inventories can be defined as Quantity of finished goods available for

sale in ordinary course of business

or

Raw Materials lying in process of production

or

In the form of materials or supplies to be consumed in production

process or in the rendering of services (stores, spares, raw material,
consumables).

Methods of Valuation of Inventory / Finished Goods.

A) FIFO
B) LIFO
C) HIFO
D) NIFO
E) Weighted Average Method

FIFO and LIFO are methods used in the cost of goods sold calculation.
FIFO (“First-In, First-Out”) assumes that the oldest products in a
company’s inventory have been sold first and goes by those
production costs. The LIFO (“Last-In, First-Out”) method assumes
that the most recent products in a company’s inventory have been
sold first and uses those costs instead.

The method a company uses to assess their inventory costs will

affect their profits. The amount of profits a company declares will
directly affect their income taxes. Inventory refers to purchased
goods with the intention of reselling, or produced goods (including
labour, material & manufacturing overhead costs).

1) Smith Company has 150 units costing $450 in beginning

inventory. During the year, the company purchases 1,000 units
for a total cost of $3,300. At the end of the year, a physical
count reveals that 200 units remain in ending inventory.
Compute the cost of ending inventory if the company uses the
FIFO method. Calculate the
a. Computation of cost of goods available for sale
b. Computation of a number of units sold
c. Computation of cost of goods sold under FIFO method
d. Computation of cost of ending inventory under FIFO
method

2) Ted’s Televisions is a business in New York City. Ted has been in

operation now for a year. This is what his inventory costs looks
like:
Month Amount Price Paid
January 100 Units $800.00
February 100 Units $800.00
March 100 Units $825.00
April 100 Units $825.00
May 100 Units $825.00
June 100 Units $850.00
July 100 Units $850.00
August 150 Units $875.00
September 150 Units $875.00
October 150 Units $900.00
 November 150 Units $900.00
December 150 Units $900.00

1450 units acquired.

Units = Televisions.

Assuming Ted kept his sales prices the same (which he did, in order
to stay competitive), this means there was less profit for Ted’s
Televisions by the end of the year.

For the year, the number of televisions sold was 1100.

Let’s calculate cost of goods sold using the FIFO & LIFO