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8 - Perpetual FIFO - YouTube
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this is principles of accounting dot-com
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chapter 8 on inventory and this module
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who will begin to look at the perpetual
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inventory system in particular a
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perpetual FIFO system subsequent modules
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will look at perpetual LIFO and
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perpetual weighted average methods in
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the previous module we looked at an
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example where we had we applied the FIFO
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LIFO and weighted average method on a
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periodic basis that is ending inventory
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was counted at the end of the period to
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determine what was on hand and cost were
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assigned to that at the end of the
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period with a perpetual system we're
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going to maintain a running record of
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how much inventory we have and
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continually update our cost of goods
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sold and inventory accounts this
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requires considerable more attention to
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detail requires a detailed tracking
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system data must be captured and
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maintained for each inventory
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transaction as inventory transactions
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occur whether they are purchases or
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sales with perpetual file system layers
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are peeled away based on the chronicle
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chronological order of their creation
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that is we buy goods we sell goods we
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buy goods we sell goods but as we sell
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we're constantly first-in first-out
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we're selling those earliest inventory
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layers that exist at the time we make
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the sale each purchase and sale
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transaction impacts the residual
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composition of layers associated with
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the inventory and furthermore our
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general ledger system is updated
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inventory is debited constantly as
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purchases occur and inventory is
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credited simultaneous with recording a
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sale we're not going to use the
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purchases account that we've used
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previously them instead of using
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purchases to capture the dollar amount
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of purchases and making in Dupre italic
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ation we instead have a real-time
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running record directly to our inventory
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accounts so here's an example this is a
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carryover of the example for the
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Gonzalez chemical company from the
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previous illustrations we're just now
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looking at on a perpetual FIFO basis it
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looks like a lot but we'll break it down
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into its smallest pieces On January 1 we
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started with 4,000 units at a unit cost
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of $12 each now on March 5 we bought
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6,000 units at $16 for a total cost of
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96 thousand so what we have an inventory
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at that moment in time is 10,000 units
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four thousand carrying a unit cost of
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twelve dollars and 6,000 carrying a unit
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cost of sixteen dollars then we had a
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sale of 7,000 unit on April 17 so those
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7,000 units on our list
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first-in-first-out are going to consist
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of or peel away the four thousand at $12
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and then from the six thousand unit
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layer three thousand are assumed to be
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sold and three thousand remain in ending
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inventory so if we tally at that date we
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have ninety six thousand dollars
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remember that number ninety six thousand
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ninety six thousand is the cost of the
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goods sold on the day when we had sales
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of a hundred and fifty four thousand now
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on September 7th we bought eight
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thousand units at seventeen and that
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gave us total inventory the three
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thousand is sixteen and now we've added
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a layer eight thousand seventeen total
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cost of goods available for sale at that
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moment it's 84 thousand we solved six
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thousand units and that consisted of
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peeling away could chronologically that
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took away three thousand of the first
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layer and assigned it to cost of gets
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sold and of the next layer of eight
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thousand three thousand went to cost of
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goods sold and five thousand stayed with
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us as inventory so that layer we've got
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ninety nine thousand cost of goods sold
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for that particular sales transaction
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that's what we ended the year with five
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thousand units at seventeen dollars per
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unit or eighty five thousand dollars and
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so when we bought inventory on March the
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fifth we debited inventory and I credit
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accounts payable ninety six thousand but
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look what we need to do on April 17th
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when we have a sale will record the sale
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the 154,000 debit accounts receivable
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credit sales simultaneously will debit
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cost of goods sold and credit inventory
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for the ninety six thousand dollars
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recall I said remember the ninety six
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thousand dollars that was the amount we
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calculated next let's look at the
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financial statement effects here on the
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left hand side of the screen of the
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general ledger accounts for inventory
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sales and cost of goods sold the
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inventory account for example started
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with forty eight thousand remember we
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had to purchase ninety six thousand we
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had to assign ninety six thousand the
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cost to get sold on April 17th
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we bought a hundred and thirty six
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thousand on September 7th and so on we
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wound up with eighty five thousand
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dollars in our inventory account in the
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ledger which also appears on the balance
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sheet as inventory sales we had two
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sales transactions
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came to a total of three hundred and
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four thousand dollars which is the
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amount that appears on the income
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statement for sales and then we have the
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amount of cost of goods sold consisting
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of the two layers that we calculated
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ninety six and ninety nine thousand
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total one hundred ninety five thousand
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which carries into the income statement
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so we're simply picking up from the
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ledger of the balances to present them
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in the balance sheet and income
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statement for our relevant costs these
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amounts may look familiar to you the
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financial statement results that we're
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seeing here under the perpetual FIFO
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method are the same ones we saw in the
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previous module with the periodic FIFO
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method gives rise to an important point
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to note the financial statement results
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are the same under the periodic FIFO and
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perpetual FIFO methods very simply
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beginning inventory and earlier
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purchases are peeled away and charge to
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charge to cost to get sold in the same
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order whether the Associated
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calculations are done as you go or at
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the end of the period so in other words
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if this is our beginning inventory this
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level okay
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and and we add to it by purchases and
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take away from sales and add to buy
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purchases and take away from sales we
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get a certain level of ending inventory
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from our very last purchases that's the
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same whether we're doing this gradually
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as we go or we are if we start here and
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then we factor in all of our purchases
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and then subtract all of our sales at
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the end of the period on a periodic
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basis we get the same ending result so
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perpetual FIFO gives you the same result
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under periodic and perpetual that's not
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going to be true in the next module when
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we look at perpetual LIFO we're going to
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see that we'll get a different result
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than we did under the periodic LIFO
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method so the next module will then turn
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to perpetual LIFO is its subject matter
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