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8 - Perpetual LIFO and Perpetual Average Cost - YouTube
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I'm Larry Walter this is Prince
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of accounting dot-com chapter 8 and this
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module
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at the perpetual inventory method as it
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relates to LIFO and the average cost
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method in a previous module we looked at
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the perpetual FIFO method so we're
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shifting gears now to LIFO and average
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cost methods under a perpetual approach
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first I want to point out that with the
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perpetual LIFO method the results will
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not be the same as they would be under
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the periodic LIFO method so periodic and
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perpetual life I'll give you different
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final results that was not true and
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under FIFO as we saw in a previous
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module let me have you think about the
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reason for that on a perpetual LIFO
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basis if we have this amount of
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beginning inventory and then we buy and
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sell goods we're constantly taking away
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from our stock the last n is the first
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out so we buy goods we sell goods we buy
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goods we sell goods we may even dip into
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our beginning based stock somewhat our
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ending inventory is what we have left
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over at the end if we were to look at
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the life on a periodic basis we've got a
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beginning inventory we layer in all of
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our purchases and then we take away what
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we assumed to sell that's different that
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approach of a beginning amount plus
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purchases minus sales can give us a
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different result than our beginning
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inventory plus purchases minus sales
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plus purchases minus sales we're dipping
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in and out at a different rate so a
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perpetual LIFO is simply different in
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terms of its outcome as compared to the
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periodic LIFO method however I would
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like to point out that the journal
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entries the accounts involved are the
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same as they were under the perpetual
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FIFO method that is as we buy inventory
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we debit inventory and credit the
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consideration paid cash or accounts
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payable as we sell goods in addition to
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recording the sale will relieve the
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inventory account will debit cost of
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goods sold and credit inventory so the
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inventory accounting the ledger is
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constantly moving with each purchase and
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sale transaction the same is under the
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FIFO method if you need to review the
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accounts and the way they the way they
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function the previous module the
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previous video module looks at the
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perpetual FIFO method and shows you the
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accounts involved the same as under the
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LIFO method here okay now let's look at
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an example alright here I start
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with 4,000 units at $12 a unit total
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cost of goods available for sale at that
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moment is $48,000 on March 5 we buy
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6,000 units and saw our pool of
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inventory then consists of four thousand
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at twelve and six thousand at 16 all
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right now in the LIFO basis on April
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17th we have a sale of 7,000 units
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focusing on the cost of goods sold
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columns here we've got 7,000 units that
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were sold we're going to assign a
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hundred and eight thousand dollars of
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cost to those units that consists of the
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last layer we purchased six thousand 16
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plus 1,000 units from the previous layer
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which carry a cost of $12 a unit so we
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come up with a hundred and eight
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thousand dollars of cost of goods sold
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for that transaction that would be
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entered into a journal entry debit cost
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of sales and credit inventory okay it
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leaves us three thousand units at $12 a
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unit that's three thousand of the four
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thousand that were from beginning
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inventory on September 7th we buy 8,000
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units this time paying seventeen dollars
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gives us a total in stock supply of
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eleven thousand units the three thousand
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and twelve carried forward and then
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eight thousand more at seventeen dollars
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on November 11th we sell six thousand
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units those six thousand are all assumed
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to come from the last purchase which
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contained eight thousand units so 6,000
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of those 8,000 units are sold and the
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other 2,000 of those eight thousand stay
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in inventory along with the other three
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thousand carried forward so at each
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purchase and each sale date or
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transaction we'll need to adjust our
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carrying stock of inventory to reflect
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what's on hand as we sell goods we peel
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out peel away on a last in first out
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basis now if we were to tabulate the
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totals we would find that seventy
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thousand dollars is an ending inventory
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and that's carried on the balance sheet
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we would find that three hundred and
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four thousand was the dollar value of
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the sales that goes on the income
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statement and importantly our cost of
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goods sold account contains two hundred
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and ten thousand the cost assigned to
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the units that were sold turning next to
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the perpetual average method here we're
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going to start once again with four
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thousand units and beginning inventory
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at twelve dollars now the mathematics
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become a bit
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or calculation intensive not more
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complex but more calculation intensive
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here when we buy 6,000 units at $16
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we're going to see that we then have a
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total of a hundred and forty-four
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thousand dollars invested in a total of
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10,000 units giving us an average cost
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per unit of $14.40 as shown with the
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calculations when we sell goods on April
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17th we're going to sell 7,000 units at
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a cost of average $14.40 the unit and
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we're left with 3000 units at an average
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cost of 14 dollars and 40 cents a unit
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when we buy again on September 7th we
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have a hundred and seventy nine thousand
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two hundred inventory available at that
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date and that's 11,000 units at that
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point so the average cost is now changed
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to sixteen dollars and twenty-nine cents
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we're reading we're kind of throwing
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away the old number as we go forward and
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establishing a new benchmark for the
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continuing perpetual average cost of
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what's on him when we sell six thousand
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units on November 11th we'll assign the
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unit cost of 16 dollars and 29 cents to
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those units our total of ninety seven
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thousand 745 cost of goods sold for
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those units and we're left with 5,000
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units and ending inventory at 16 dollars
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and 29 cents be sure when you work
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problems to kind of perfect your
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knowledge of the subject be sure not to
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round too much on your per unit cost you
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know a tenth of a penny doesn't sound
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like much until you start to multiply it
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times a hundred thousand our million
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units so in calculating your per unit
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average cost it's best to go ahead and
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you know let your calculator carry out
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your decimal for quite a few places
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don't be too aggressive and rounding
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there so finally a new average unit cost
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must be computed with each purchase and
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that carries forward in your accounting
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records the perpetual average gives you
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a different result than the periodic
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average method that was looked at in the
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previous module so enclosing periodic
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versus perpetual FIFO started gives you
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the same result
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LIFO and average can give you an
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somewhat different results as between
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those methods
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