How is the inventory to be valued?

a1. Use the format in Exhibit 8–1 to compute the ending FIFO inventory and the cost of goods sold, assuming $90,000 in sales; beginning inventory 500 units @ $50; purchases of 400 units @ $50; 100 units @ $65; 400 units @ $80.

a2. Also compute the cost of goods sold percentage of sales.

b1. Use the format in Exhibit 8–2 to compute the ending LIFO inventory and the cost of goods sold, using same assumptions.

b2. Also compute the cost of goods sold percentage of sales.

1. Comment on the difference in outcomes.

Exhibit 8–1

INVENTORY METHODS

How is the inventory to be valued? The two most commonly used inventory valuation methods are First-In, First-Out (FIFO) and Last-In, First-Out (LIFO). The method chosen will affect the organization’s financial statements, as explained in the following sections.

First-In, First-Out (FIFO) Inventory Method

The First-In, First-Out, or FIFO inventory costing method, recognizes the first costs placed into inventory as the first costs moved out into cost of goods sold when a sale occurs. How will this method affect the organization’s financial statements? Under FIFO, the ending inventory figure will be higher (because when the oldest inventory moves out first, the ending inventory will be based on the costs of the latest purchases, which we assume will have cost more). Exhibit 8–1 illustrates this effect.

Last-In, First-Out (LIFO) Inventory Method

The Last-In, First-Out, or LIFO inventory costing method, recognizes the latest, or last, costs placed into inventory as the first costs moved out into cost of goods sold when a sale occurs. How will this method affect the organization’s financial statements? Under LIFO, the ending inventory figure will be lower (because when the latest inventory moves out first, the ending inventory will be based on costs of the earliest purchases, which we assume will have cost less). Exhibit 8–2 illustrates this effect.

Other Inventory Treatments

Two other inventory treatments deserve mention, as follows.