Inventory and Cost of Goods Sold: FIFO - YouTube

Greetings Accounting students and those of you wishing to learn more about

Accounting. This is the first video in our merchandise inventory series, and

we're going to be looking at FIFO. Which stands for first in first out value in a

method of inventory valuation. Now this will give us a way to value what we sold,

and a way to value what we still have left. Now what I want to stress to you

about all of these inventory valuation methods that we're looking at. These are

ways to measure what we have left and what we sold. It is not necessarily the

true indication of physical flow of goods. It's a theoretical method. Okay so

this is not necessarily the true physical flow of goods, that's very

important for you to understand. So let's go ahead and look at FIFO

First-in-first-out method of valuing our cost of goods sold as well as what we have left

and our ending inventory. So here I've set up a spreadsheet for you for one of

our products, and you see that on July the 1st, we had one item left in ending

inventory at that point. So we started July the 1st with one unit from June, and

that unit cost us $40. So that's what we have at the beginning of July. Then on

July the 5th we bought six more items of the same product, but now as prices tend

to do, they are increasing. So now we're paying $45 a piece for each of those 6

items for a total cost of $270. Then if you scroll

all the way over to our inventory on hand, which is also our ending inventory,

we still have that one unit from our beginning inventory on July the 1st at

$40 for that one item, and now we have 6 more items at $45 each. So now we

have a total ending inventory of $310, which is the $40 from the one

item in the $270 from the 6 items. But notice in that in that last in those

last three columns, I'm keeping the different value of inventory separate, so

the one item at 40 is separate from the six items at 45. That's going

to be important when we get when we start selling items like we do on July

the 15th. So in July the 15th, we actually sold four items, but because we're using

the first- in first- out method of inventory valuation we start with our

beginning inventory. Well the beginning inventory only had one item, so that's

not enough to fulfill the order. But we are going to theoretically sell that one

item which cost $40, and then we're going to need to go grab three from that

purchase on July the 5th, and they each cost us $45. So we've sold

four units here, we don't really know what what we sold them for because this

is not, this spreadsheet, does not tell us what revenues are. It's only a cost sheet.

So please make sure you understand that revenues are not depicted here at all. So

again we sold 4 items. The total cost of that sale was a $175

which is the $40 for the one item from beginning and $135

from the 3 from the July the 5th purchase. So now

we have 3 items left in our ending inventory. We have none left

theoretically from our beginning inventory, and we have 3 left from

that July the 5th purchase of 6 at $45. So 3 of those at

45 leaves us $135 in our ending

inventory. Then on July the 26th we made another purchase, again as prices tend to

do, they're going up again. So we bought 7 items this time and each one of

those cost us $50 a piece. So now in our ending inventory, we have 3 items

left from that July the 5th purchase, and we now have those 7 from the

current purchase at $50 a piece. So now in ending inventory we have 10 total

items: 3 at 45 and 7 at 50 for a total cost of our ending

inventory of $485. Then on July the 31st, the

end of the month, we sold 8 items. Again we go to our

oldest stuff first because we're using first-in first-out.

We still have, we don't have anything left from beginning, but we have 3

left from that July 5th purchase. So now you're starting to see how

important it is to stay organized with this stuff. So we're going to take the

3 we have left from the July the 5th purchase at 45, and we need 5

more, so we're going to take those 5 from the July the 26th purchase. So we're

selling 8 items for a total of $385 in cost

of that item. And we still have 2 items left now in our ending inventory from

the July the 26th purchase at $50 each. So all of our beginning is theoretically

gone. All of that purchase from July the 5th is theoretically gone, and 5 of

the items from the July the 26th purchase are gone. Now we'll start August

the 1st with beginning inventory of 2 units at $50 each. Okay so now

let's let you try one. So let's assume that in our case Toys store bought and

sold a lot of dolls during December as follows. So we have our beginning

inventory. We have 14 units at $10 each, then we sold 8 units. Then we

purchased 15 at $15 each, and then we sold 13 units. So we're going to say that

we don't have any dates here, but we'll just assume that they happen in that

order. Whatever the date may be. So Arcade toys uses the perpetual inventory system.

Compute the cost of ending inventory and cost of goods sold under FIFO ( first-in

first-out). So I'd like for you to do is give this a shot.

Press pause on your player, and once you've completed the problem, come back

and we'll take a look at it together. Okay so what you should have found for

ending inventory would be a $120 at the end of this these

transactions. And your cost of goods sold for this period of time would have been

$245. If you look at my spreadsheet here you'll

see that we started the period with 14 units that cost us $10 each. We sold

8 units. They all have to come from beginning because that's all we have. So

8 at $10 gives me that cost of goods sold of $80. Then my inventory on

hand at that point would be 6 a@ $10. So all of those coming from beginning.

Then we bought 15 more at $15 because as we as things typically do prices rise. So

now we've got 6 left from beginning inventory at $10 each, and now we have 15

more that cost us $15 each. Then we made a sell of 13, again, because we're using

FIFO, first in first out, we have to use the oldest stuff first. So we go all the

way back to beginning inventory. We still have 6 left from beginning inventory, so

we can sell all theoretically sell all of those, but we still need 7 more. So

we're going to need 7 from that first purchase there of 15 @ $15, and that will

give us the total cost of that sell. And we still have 8 left from that purchase

that we made, and so that leaves us inventory on hand that 8 that those 8

units at $15 each, which equals $120. And the total cost of goods sold we would

add up that whole column of cost of goods sold and that gives us

$245. Okay so let's try one more. This one's got a little more

stuff in it that we're going to deal with. See we have here. We have Unfit

World. They begin January with an inventory of 60 crates of vitamins that

cost a total of $3,000. During the month Unfit World purchased

and sold merchandise on account as follows. So this time we have purchases

and we have our sales amount. So we sold like the first sale we sold 180 crates

at $100 each. That's our revenue remember what I told

you about the the inventory spreadsheet. Revenues do not appear there, so we must

be going to do something else. Maybe some journal entries here in a second or

something. So we may need that information for something else, but it

does not go in our cost sheet. All right so Unfit World uses the FIFO

method, so we're still on first-in first-out. Cash payments on account

totaled $5,000. Operating expenses for the month for $2,400, with 2/3 paid in

cash and the rest accrued as accounts payable. We need to compute total

purchases, cost of goods sold, and ending inventory for Unfit World. Okay so once

again press pause on your player. Give this one a shot. Once you've computed the

2 amounts, come back and we'll take a look see how you did.

Okay so the key here again is to stay organized with your with your

spreadsheet, and if you do you should come out something with something

similar to what I have here. You should have found that your ending inventory

you would end up with 10 units at $60 each all those came from that second

purchase that you made. So a total of ending inventory of $600. Your total cost

of goods sold for this period would be $19,100, and your total purchases

would have been $16,700. So once you have your spreadsheet set up in your

cost of goods sold calculated, you actually have to get this into your

books. So we need to journalize all the transactions here using the FIFO costing

method. So now that you've got this on your own you're in your notes. We want to

journalize these transactions. So we want journalize the purchase, the sale

purchase to, and sale to. So let's just start with purchase one so. We purchased

inventory a total of $7,700. We can just

look at the spreadsheet here, and go go right down through there. We purchased

$7,700 on account, so we would debit inventory and credit

accounts payable. The next transaction was a sale. Recall that every sale has

two transactions. We have to record the revenue and record the cost. So if it's

sold on account, we would debit accounts receivable and credit sales revenue for

the amount that we charged for our product. And then we would also record

the cost by debiting cost of goods sold, and reducing our inventory since it's no

longer there we've now sold it. The next transaction was purchased- number two.

Here we're buying inventory so we're debiting

inventory for the $9,000, crediting accounts payable for the $9,000. Sale

number two will look very similar to sell number one. And we had a sale so

there's two transactions. We debit accounts receivable for $17,600, credit

sales revenue for $17,600, but then we also have to record the cost and reduce our

inventory. So we debit cost of goods sold, credit inventory for $9500. The next two

entries they tell us that we paid on account $5,000. So we debit our accounts

payable and credit our cash. We're paying toward our debt. The next

transaction was towards your operating expenses. It said that a certain portion

of them were paid in cash and the rest was on account. 2/3 of that was

paid in cash, so operating expenses were $2,400, two-thirds of that is $1,600. So

we credit cash for $1600, the remainder of that would be credited to

accounts payable. Don't forget, if you enjoyed the video give it a thumbs up

and questions and comments are always welcome.