Inventory

Date Explanation Units Cost Per unit Total Cost

1 Jan Beginning Inventory 100 10 1000
(1000/100)
April Purchase 200 11 2200
August Purchase 300 12 3600
November Purchase 400 13 5200
Units available for sale 1000 12000
(-) Units Sold (550)
Ending inventory 450
Units available for sale = Beginning inventory + Purchase
Ending inventory = Units available for sale – Units Sold or (Units sold = Units
available for sale – ending inventory)
FIFO
The item we purchase first is the item to be sold first
COGS >>>> old items then the new items
Ending inventory >>>> Most recent items
Date Explanation Units Cost Per unit Total
Cost
1 Jan Beginning 100 10 (1000/100) 1000
Inventory
April Purchase 200 11 2200
August Purchase 300 12 3600
November Purchase 400 13 5200
Units available for sale 1000 12000
(-) Units Sold (550)
Ending inventory 450

Cost of ending inventory (recent Units Cost per unit Total

items) Cost
November 400 13 5200
August 50 12 600
450 5800
Cost of goods sold = Cost of units available for sale – Cost of ending
inventory
= 12000 – 5800 = 6200
LIFO
The item purchased last is the item to be sold first
COGS >>> Recent item to old item
Ending inventory >>>> OLD items
Date Explanation Units Cost Per unit Total
Cost
1 Jan Beginning 100 10 1000
Inventory (1000/100)
April Purchase 200 11 2200
August Purchase 300 12 3600
November Purchase 400 13 5200
Units available for sale 1000 12000
(-) Units Sold (550)
Ending inventory 450

Cost of ending inventory (old Units Cost per unit Total

items) Cost
Beginning 100 10 1000
April 200 11 2200
August 150 12 1800
450 5000
Cost of goods sold = Cost of units available for sale – Cost of ending
inventory
= 12000 – 5000 = 7000
Average Cost
Average cost = Cost of units available for sale / Units available for sale
This average is used to calculate the cost of ending inventory and cost of good
sold
Date Explanation Units Cost Per unit Total Cost
1 Jan Beginning Inventory 100 10 1000
(1000/100)
April Purchase 200 11 2200
August Purchase 300 12 3600
November Purchase 400 13 5200
Units available for sale 1000 12000
(-) Units Sold (550)
Ending inventory 450
Average cost Cost of units available for sale / Units available for sale
= 12000/1000 = 12
Cost of ending Units Average Cost Total Cost
inventory
450 12 5400
Cost of goods sold = Cost of units available for sale – Cost of ending
inventory
= 12000 – 5400 = 6600
Or = 550 units * 12 = 6600
Gross Profit and Gross Profit ratio
Gross Profit is the profit we have after covering the COGS (Sales – COGS)
Gross Profit ratio is the percentage (%) of gross Profit to sales (Gross profit / sales)
Sales = Units sold * selling price
FIFO Average LIFO
Sales (550 Units * 20 11,000 11,000 11,000
selling price) 1
(-) COGS 2 (6200) (6600) (7000)
Gross Profit 3 = 1-2 4800 4400 4000
Gross Profit ratio 4 = 3/1 43.63% 40% 36.36%
(4800/11000) (4400/11000) (4000/11000)

Note: in case of inflation (increasing in the price)

 COGS FIFO 6200 < Average 6600 < LIFO 7000 Why? FIFO calculate
the COGS based on the old items which has the lower cost while LIFO
calculate the COGS on the recent items which have the highest cost
 Gross Profit FIFO 4800 > Average 4400 > LIFO 4000 Why? Because FIFO
has the lowest COGS while LIFO has the highest COGS so FIFO has a higher
profit compare to LIFO
 Ending Inventory FIFO 5800 > Average 5400 > LIFO 5000 Why? FIFO
price the ending inventory for the recent items which has the highest price
while LIFO price the ending inventory for the old items which has the
lowest price