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3 Tutorials that teach LIFO
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LIFO

LIFO

Author: Evan McLaughlin
Description:

In this lesson, the student will learn about the last in first our method.

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Tutorial

"LIFO"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

Video Transcription

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Hey everyone, and welcome to today's video on LIFO. So what is today's video all about? Well, we're going to learn about the inventory cost flow assumption known as LIFO, L-I-F-O. And we're going to define that acronym in just a minute.

So we're going to talk about what is it. We're going to talk about what is LIFO. And then we're going to finish up today by calculating our Cost Of Goods Sold, C-O-G-S, using LIFO.

But let's start by learning a little bit more about what LIFO is. L-I-F-O. So what is LIFO? Well, as I mentioned, LIFO is an inventory valuation method.

So what does the acronym LIFO stand for? It stands for Last In, First Out. So again, LIFO is an inventory valuation method. And it helps to provide information about our cost of goods sold and ending inventory.

Well, what does that mean? What does Last In, First Out mean? It means goods are assumed to be sold newest to oldest. So the goods that were purchased last or purchased most recently are the first to be sold. And so then the oldest goods, or the goods that were purchased first, are assumed to remain in our inventory.

So what's the argument for LIFO? Well, the argument for LIFO really circulates around matching, so that it matches current costs with current revenues. So the newer purchases, which are our current costs, are being recorded as cost of goods sold. So we're matching that expense with our current revenues. So that's LIFO.

So now, LIFO and costs of goods sold. Let's revisit that cost of goods sold calculation. We start with beginning inventory. We add costs of goods purchased.

That gives us goods available for sale. We subtract out our ending inventory to give us cost of goods sold. So that's our cost of goods sold formula.

So now we're talking about LIFO, talking about cost of goods sold. Let's look at an example of calculating cost of goods sold using LIFO. OK. So what we have here is our cost of goods sold calculation using LIFO.

So quick rundown again of what that calculation is. Beginning inventory, we add cost of goods purchased to give us goods available for sale. We subtract out our ending inventory to give us cost of goods sold.

So let's start with our beginning inventory. So the beginning inventory we can get from our trial balance. Or we can get it from our balance sheet. It's what we started with at the beginning of the year.

So we take that beginning inventory. And then we can detail all of the purchases that we made during the year. So if you look at this schedule here, where I have beginning inventory and purchases, we can see the inventory that we started with as well as all the purchases that we made throughout the year.

So then we can add our purchases to our cost of goods sold schedule to get our goods available for sale. So you'll see goods available for sale equals the cost of our beginning inventory and all of our purchases. OK. So now we have goods available for sale.

So now we need to know what our ending inventory is. How do we do that? Well, in this case, looking at our ending inventory, we're going to make the assumption that we have 100 units left in our ending inventory.

So because we're dealing with LIFO means that the last ones in are the first ones out. So that means these most recent purchases are the purchases that our sales came from. So that means that our oldest units are what is made up of our ending inventory.

So then we can take 50 units in our beginning inventory, our oldest units, and then we work our way forward through our purchases. So then we can take another 50 units from that purchase that we made on April 1. So once we have that information we can total up what our ending inventory is.

In this case, we have 100 units. And our ending inventory is 1,100 based on those units. So then we can take that, drop it into our cost of goods sold schedule to calculate our cost of goods sold in this case in LIFO which is 4,800.

Great. So now that we've seen that cost of goods sold calculation using our inventory valuation method LIFO, let's summarize what we talked about today. In a nutshell, well, we talked about LIFO, Last In, First Out, and that it's an inventory valuation method that helps us to provide information about cost of goods sold and ending inventory.

Under LIFO, goods are assumed to be sold newest to oldest. So the goods that were purchased last are the first to be sold. And the oldest goods are assumed to remain in our ending inventory. We looked at the calculation using LIFO of our cost of goods sold.

I hope everybody enjoyed this video. And I hope to see you next time.