Cost Flow Assumptions
First-in, First-out (FIFO) method
Last-in, First-out (LIFO) method
Weighted average method
Last-in, First-out (LIFO) method
Weighted average method
First-in, First-out (FIFO) method
Old purchases are assumed to be sold first.
Recent purchases are included in the ending inventory.
Recent purchases are included in the ending inventory.
Last-in, First-out (LIFO) method
Recent purchases are assumed to be sold first.
Old purchases are included in the ending inventory.
Old purchases are included in the ending inventory.
International Financial Reporting Standards, IFRS
Under IFRS, Last-in, First-out (LIFO) method is not permitted.
Under IFRS, Last-in, First-out (LIFO) method is not permitted.
Weighted average method
Average cost is applied to the cost of goods sold and ending inventory calculations.
Exercise 1: Periodic Inventory System
Entity A had the following transactions during January 20×1:
(1) January 1, beginning inventory had 1,000 units at 50 per unit cost.
(2) January 11, purchased 1,200 units of merchandise at52 per unit cost.
(3) January 16, sold 1,700 units of merchandise.
(4) January 27, purchased 1,400 units of merchandise at $56 per unit cost.
Entity A uses a periodic inventory system and updates merchandise inventory balance at the end of January 20×1.
(1) January 1, beginning inventory had 1,000 units at 50 per unit cost.
(2) January 11, purchased 1,200 units of merchandise at52 per unit cost.
(3) January 16, sold 1,700 units of merchandise.
(4) January 27, purchased 1,400 units of merchandise at $56 per unit cost.
Entity A uses a periodic inventory system and updates merchandise inventory balance at the end of January 20×1.
Exercise 2: Perpetual Inventory System
Entity B had the following transactions during January 20×1:
(1) January 1, beginning inventory had 1,000 units at 50 per unit cost.
(2) January 11, purchased 1,200 units of merchandise at52 per unit cost.
(3) January 16, sold 1,700 units of merchandise.
(4) January 27, purchased 1,400 units of merchandise at $56 per unit cost.
Entity B uses a perpetual inventory system and updates merchandise inventory balance at the end of January 20×1.
(1) January 1, beginning inventory had 1,000 units at 50 per unit cost.
(2) January 11, purchased 1,200 units of merchandise at52 per unit cost.
(3) January 16, sold 1,700 units of merchandise.
(4) January 27, purchased 1,400 units of merchandise at $56 per unit cost.
Entity B uses a perpetual inventory system and updates merchandise inventory balance at the end of January 20×1.