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October 16, 2019

First in First out (FIFO) Method with Example

October 16, 2019


The first in first out (FIFO) method is widely used to estimate the value of inventory in hand and cost of goods sold. The FIFO method assumes that inventory purchased first is first sold and the newer inventory remains unsold. In other words, the most recent cost of inventory remains in the balance sheet while the oldest cost assign to the cost of goods sold. It is the logical approach as oldest inventory is first sold and thereby reducing the risk of getting obsolete. The FIFO method is allowed by both Generally Accepted Accounting Principles and International Financial Reporting Standards.

The first in first out method can be applied to periodic inventory system or perpetual inventory system.  It provides same result for both periodic and perpetual inventory system.
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Example 1: (Periodic Inventory System)


Find cost of ending inventory, cost of goods sold and gross profit using FIFO method under periodic system. Take data from the given below table:

Date Description Units Per Unit Cost Amount
1-Jan Inventory 100 20 2000
10-Mar Purchased 200 25 5000
15-May Purchased 100 25 2500
20-Aug Sold 200 30 6000
10-Sep Purchased 100 25 2500
15-Oct Sold 200 30 6000
20-Nov Purchased 100 25 2500
5-Dec Purchased 200 25 5000

Computation for ending units/Units in hand:

Opening units 100
Total purchased units 700
Total units available for sale 800
Total sold units 400
Ending units/Units in hand 400

Computation for cost of ending inventory:

Abc Corporation
Cost of Ending Inventory
By using First In First Out Method

Date Description Units Per Unit Cost Amount
5-Dec Purchased 200 25 5000
20-Nov Purchased 100 25 2500
10-Sep Purchased 100 25 2500
Cost of ending inventory 10000  

Computation for Cost of Goods Sold:

Opening Inventory 2000
Purchases 17500
Cost of goods available for sale 19500
Ending inventory 10000
Cost of goods sold 9500 

Computation for Gross Profit:

Sale 12000
Cost of goods sold 9500
Gross profit 2500


Example 2: (Perpetual Inventory System)


Find cost of ending inventory, cost of goods sold and gross profit using FIFO method under perpetual system. Take data from the above table:

Computation for ending inventory and cost of goods sold:


Inventor Card: FIFO Method

Computation for Gross Profit:

Sale 12000
Cost of goods sold 9500
Gross profit 2500

So we applied both periodic and perpetual inventory system in order to calculate cost of inventory, cost of goods sold and gross profit and we got the same result. 
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