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LIFO

Author: Sophia

what's covered

This lesson will cover the inventory cost flow assumption known as LIFO, which is an acronym for Last In First Out. Specifically, this lesson will cover:

1. LIFO
2. LIFO and Cost of Goods Sold
3. LIFO: Example

1. LIFO

LIFO is an inventory valuation method, which stands for Last In First Out:

As an inventory valuation method, LIFO helps to provide information about cost of goods sold and ending inventory. Under LIFO, goods are assumed to be sold newest to oldest, meaning goods that were purchased last or most recently are the first to be sold. The oldest goods, or goods that were purchased first, are assumed to remain in inventory.

The argument for using LIFO centers on matching current costs with current revenues. Newer purchases, which represent current costs, are recorded as cost of goods sold, and that expense is matched with current revenues.

2. LIFO and Cost of Goods Sold

Next, let's discuss LIFO and costs of goods sold. We will start by revisiting the cost of goods sold calculation, which starts with beginning inventory, then we add costs of goods purchased to give us goods available for sale. Then, we subtract out ending inventory to equal cost of goods sold.

formula to know

Cost of Goods Sold

table attributes columnalign right end attributes row cell Beginning space Inventory end cell row cell stack plus space Cost space of space Goods space Purchased with bar below end cell row cell Goods space Available space for space Sale end cell row cell stack negative space Ending space Inventory with bar below end cell row cell Cost space of space Goods space Sold end cell end table

2a. Beginning Inventory

Let's look at an example of calculating cost of goods sold using the inventory valuation method of LIFO. Below you will see a spreadsheet outlining the cost of goods sold calculation. We will begin with the first line, beginning inventory. Beginning inventory is pulled from our balance sheet or from our trial balance. You can also see there is a schedule, detailing beginning inventory and purchases.

Table titled Cost of Goods Sold Calculation. Beginning inventory $500 plus cost of goods purchased is equal to goods available for sale minus ending inventory is equal to cost of goods sold. The heading Beginning Inventory and Purchases shows the following entries: Date 1/1, Explanation Beginning inventory, Units 50, Cost/Unit $10, Total cost $500. — View this spreadsheet in Google Sheets

2b. Cost of Goods Purchased and Goods Available for Sale

Once we have plugged in beginning inventory, we need to determine cost of goods purchased. If you look at the detail of all the purchases made, you can see that we made three purchases throughout the year.

Table titled Cost of Goods Sold Calculation. Beginning inventory $500 plus cost of goods purchased $5400 is equal to goods available for sale $5900 minus ending inventory is equal to cost of goods sold. The heading Beginning Inventory and Purchases shows the following entries under five columns named date, explanation, units, cost/unit, and total cost, respectively: 1/1, Beginning inventory, 50, $10, $500; 4/1, Purchase, 150, $12, $1800; 7/1, Purchase, 200, $14 $2800; 10/1, Purchase, 50, $16, $800; Total, 450, $5900. The purchase total here matches the purchase total $5400 shown in the first part of the table. — View this spreadsheet in Google Sheets

We can take the total of those purchases, which is $5,400, and drop that into the schedule, which means we now have total goods available for sale of $5,900. Note that this is the total of beginning inventory plus all of the purchases.

2c. Ending Inventory

Now we need to know what our ending inventory is. If you look at the ending inventory schedule below, we're going to make the assumption that we have 100 units left in our ending inventory.

Using LIFO means that the last units in are the first ones out--that the most recent purchases are the purchases that our sales came from. In turn, this means that the oldest units are what comprise our ending inventory.

Therefore, we can take 50 units in our beginning inventory on January 1, our oldest units, and work our way forward through our purchases. We can take another 50 units from the purchase made on April 1. Once we have that information, we can total our ending inventory, which is $1,100, based on those 100 units.

2d. Cost of Goods Sold

Then, we take that number and drop it into our cost of goods sold schedule to calculate our cost of goods sold, which in this case is $4,800.

We can confirm this by calculating the units sold. If we have all 50 units from the beginning inventory and 50 units from 4/1 in our ending inventory, that means we sold the remaining 100 units from 4/1, all 200 units from 7/1, and all 50 units from 10/1. Calculating our cost of goods sold is equal to $4,800, which is the same result as using our formula.

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3. LIFO: Example

Consider the following table:

Beginning Inventory and Purchases
Purchased	Units	Unit Cost	Total Cost
Beginning Inventory	100	$5	$500
September	120	$6	$720
October	140	$7	$980
November	130	$8	$1,040
Units Available For Sale	490		$3,240
Ending Inventory
Units on Hand	290	Cost of Units on Hand	$
Units Sold	200	Cost of Goods Sold	$

Using the LIFO method and the information in this table, what is the cost of units on hand and cost of goods sold during this period?

First, find the ending inventory. With LIFO, the ending inventory is going to be our oldest units. We have 290 items on hand, which means we will take all 100 units from the beginning inventory, all 120 units from September, and 70 units from October:

table attributes columnalign left end attributes row cell Beginning space Inventory colon space 100 times $ 5 equals $ 500 end cell row cell September colon thin space 120 times $ 6 equals $ 720 end cell row cell October colon space 70 times $ 7 equals $ 490 end cell row cell Ending space Inventory colon space $ 500 plus $ 720 plus $ 490 equals $ 1 comma 710 end cell end table

The ending inventory, or cost of units on hand, for these 290 items is $1,710. Now we can subtract this value from the goods available for sale to find the cost of goods sold.

table attributes columnalign right end attributes row cell Goods space Available space for space Sale end cell row cell stack negative space Ending space Inventory with bar below end cell row cell Cost space of space Goods space Sold end cell end table

table attributes columnalign right end attributes row cell $ 3 comma 240 end cell row cell stack negative $ 1 comma 710 with bar below end cell row cell $ 1 comma 530 end cell end table

The cost of goods sold using LIFO method is $1,530.

Beginning Inventory and Purchases
Purchased	Units	Unit Cost	Total Cost
Beginning Inventory	100	$5	$500
September	120	$6	$720
October	140	$7	$980
November	130	$8	$1,040
Units Available For Sale	490		$3,240
Ending Inventory
Units on Hand	290	Cost of Units on Hand	$1,710
Beginning Inventory	100	$5	$500
September	120	$6	$720
October	70	$7	$490
Units Sold	200	Cost of Goods Sold	$1,530
October	70	$7	$490
November	130	$8	$1,040

summary

Today we learned about LIFO, Last In First Out, which is an inventory valuation method that helps 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 ending inventory. We also performed a calculation of cost of goods sold using LIFO.

Source: THIS TUTORIAL WAS AUTHORED BY EVAN MCLAUGHLIN FOR SOPHIA LEARNING. PLEASE SEE OUR TERMS OF USE.

Formulas to Know

Cost of Goods Sold: $Beginning space Inventory bottom enclose plus space Cost space of space Goods space Purchased end enclose Goods space Available space for space Sale bottom enclose negative space Ending space Inventory end enclose Cost space of space Goods space Sold$