Perpetual Inventory System Methods

Handout By: Mary J. Collins

Accounting Instructional Technician

Example of the three methods of Inventory................................................................. 2 FIFO method of inventory...........................................................................................3-6 Average Cost method of inventory.............................................................................6-10 LIFO method of inventory.........................................................................................10-13

FIFO:

Average Cost:

LIFO:

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In the real world inventory is bought and then sold during the year many times so a company will have inventory coming in and out of the store at all times of the year. The perpetual inventory system method tries to track the value of ending inventory during the year so that the management knows these three facts about inventory during the year: how many units, unit price and total ending inventory cost at any given time during the year. The system provides current and on going information for decisions of what and when to buy items for resell to customers.

Step by Step Direction on how to create these three Charts 1. FIFO method of perpetual Inventory systems will result in the same cost for

ending inventory as the periodic method.

Step 1 The first step is to enter the beginning inventory from the end of the last year in your chart.

On going balance: 100 units multiplied by $26 per unit equals $2,600 beginning balance carried over from previous year.

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Step 2 Step two is to record a purchase of 50 items at a cost of $28 and to add it to the running balance of your ending inventory. You will list the number of items, unit price and then multiply the items times the unit cost to get the total cost for that purchase. The example is in green. Then you will repeat the current items then add to it purchased units and unit price and total all of these to get the current on going balance total price. Example in red.

Purchases: 50 units multiplied by $28 per unit equals total price of $1,400. On Going Balance: 100 units multiplied by $26 per unit plus 50 unit multiplied by $28 per unit equals $4,000 current on going balance of ending inventory. Step 3 Step three is how to record the sale of 110 units to a customer and record the cost of good sold and the on going balance of items under the FIFO method of inventory costing. The cost of good sold will be in green and the on going balance will be in red.

Cost of Good Sold: 100 units multiplied by $26 per unit and 10 units multiplied by $28 per unit equal $2,880. On going balance: 40 units multiplied by $28 per unit equal $1,120. Note: The chart in light green works the same as for periodic inventory but you can only use what you have at the point of sale.

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Step 4 Step four is to record a purchase of 150 items at a cost of $30 and to add it to the running balance of your ending inventory. You will list the number of items, unit price and then multiply the items times the unit cost to get the total cost for that purchase. The example is in green. Then you will repeat the current items then add to it purchased units and unit price and total all of these to get the current on going balance total price. Example in red.

Purchases: 150 units multiplied by $30 per unit equals total price of $4,500. On Going Balance: 40 units multiplied by $28 per unit plus 150 units multiplied by $30 per units equals $5,620 current on going balance of ending inventory.

Step 5 Step five is how to record the sale of 130 units to a customer and record the cost of good sold and the on going balance of items under the FIFO method of inventory costing. The cost of good sold will be in green and the on going balance will be in red.

Cost of Good Sold: 40 units multiplied by $28 per unit and 90 units multiplied by $30 per unit equal $3,820. On going balance: 60 units multiplied by $30 per unit equal $1,800 .

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Step 6 The last step is to total the amount purchased for the year and the total amount of the cost of goods sold. The ending inventory is the last total for the on going balance. Purchases will be in green, Cost of good sold will be in blue and ending inventory will be in red.

Purchases: $1,400 plus $4,500 equal $5,900. Cost of Goods Sold: $2,880 plus $3,820 equals $6,700. Ending Inventory Cost: $1,800

2. Average Cost method of valuing inventory: The one issue to remember is that this system has a moving average because every time you make a sale you have to recalculate the average unit price due to additions to the inventory because of purchases.

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Step 1 The first step is to enter the beginning inventory from the end of the last year in your chart.

Step 2 Step two is to record a purchase of 50 items at a cost of $28 and to add it to the running balance of your ending inventory. You will list the number of items, unit price and then multiply the items times the unit cost to get the total cost for that purchase. The example is in green. Then you will repeat the current items then add to it purchased units and unit price and total all of these to get the current on going balance total price. Example in red.

Purchases: 50 units multiplied by $28 per unit equals total price of $1,400. On Going Balance: 100 units multiplied by $26 per unit plus 50 unit multiplied by $28 per unit equals $4,000 current on going balance of ending inventory.

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Step 3 Step three is how to record the sale of 110 units to a customer and record the cost of good sold and the on going balance of items under the Average Cost method of inventory costing. The cost of good sold will be in green and the on going balance will be in red.

Cost of Goods Sold: The first thing you must do is average the cost for the current inventory. Do this by dividing the total price under the on going balance by the total number of units in inventory at that point in time. $4,000 divided by 150 units equals an average cost of $26.67. Round to nearest cent. Multiply the number of units sold by the average cost to get Cost of Goods Sold Total Price. 110 units multiplied by $26.67 average cost equals $2,933.33 total price. On Going Balance: Once the cost has been averaged you used that average cost for any remaining inventory. 40 units multiplied by $26.67 average cost equals $1,066.67 average cost of on going balance of ending inventory.

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Step 4 Step four is to record a purchase of 150 items at a cost of $30 and to add it to the running balance of your ending inventory. You will list the number of items, unit price and then multiply the items times the unit cost to get the total cost for that purchase. The example is in green. Then you will repeat the current items then add to it purchased units and unit price and total all of these to get the current on going balance total price. Example in red.

Purchases: 150 units multiplied by $30 per unit equal $4,500.00. On Going Balance: Bring the previous balance of 40 units at an average cost of $26.67 forward and add the purchases of 150 units multiplied by a cost of $30 per unit to equal $5,566.67. Step 5 Step five is how to record the sale of 130 units to a customer and record the cost of good sold and the on going balance of items under the Average cost method of inventory costing. The cost of good sold will be in green and the on going balance will be in red.

Cost of Goods Sold: The first thing you must do is average the cost for the current inventory. Do this by dividing the total price under the on going balance by the total number of units in inventory at that point in time. $5,566.67 divided by 190 units equals $29.30 per unit. Multiply the number of units sold by the average cost to get Cost of Goods Sold Total Price.

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130 units multiplied by $29.30 per unit equal $3,808.77. On going balance: Once the cost has been reaveraged you used that average cost for any remaining inventory. 60 units multiplied by $29.30 equal $1,757.89. Step 6 The last step is to total the amount purchased for the year and the total amount of the cost of goods sold. The ending inventory is the last total for the on going balance. Purchases will be in green, Cost of good sold will be in blue and ending inventory will be in red.

Purchases: $1,400 plus $4,500 equal $5,900. Cost of Goods Sold: $2,933.33 plus $3,808.77 equals $6742.10. Ending Inventory Cost: $1,757.89

3. LIFO method of inventory costing: To find the cost of the inventory sold always go

from the bottom up when calculating inventory sold at the current point in time of the sale.

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Step 1 The first step is to enter the beginning inventory from the end of the last year in your chart.

On going balance: 100 units multiplied by $26 per unit equals $2,600 beginning balance carried over from previous year. Step 2 Step two is to record a purchase of 50 items at a cost of $28 and to add it to the running balance of your ending inventory. You will list the number of items, unit price and then multiply the items times the unit cost to get the total cost for that purchase. The example is in green. Then you will repeat the current items then add to it purchased units and unit price and total all of these to get the current on going balance total price. Example in red.

Purchases: 50 units multiplied by $28 per unit equals total price of $1,400. On Going Balance: 100 units multiplied by $26 per unit plus 50 unit multiplied by $28 per unit equals $4,000 current on going balance of ending inventory.

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Step 3 Step three is how to record the sale of 110 units to a customer and record the cost of good sold and the on going balance of items under the LIFO method of inventory costing. The cost of good sold will be in green and the on going balance will be in red.

Cost of Good Sold: 60 units multiplied by $26 per unit and 50 units multiplied by $28 per unit equal $2,960. On going balance: 40 units multiplied by $26 per unit equal $1,040. Step 4 Step four is to record a purchase of 150 items at a cost of $30 and to add it to the running balance of your ending inventory. You will list the number of items, unit price and then multiply the items times the unit cost to get the total cost for that purchase. The example is in green. Then you will repeat the current items then add to it purchased units and unit price and total all of these to get the current on going balance total price. Example in red.

Purchases: 150 units multiplied by $30 per unit equals total price of $4,500. On Going Balance: 40 units multiplied by $26 per unit plus 150 units multiplied by $30 per units equals $5,540 current on going balance of ending inventory.

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Step 5 Step five is how to record the sale of 130 units to a customer and record the cost of good sold and the on going balance of items under the LIFO method of inventory costing. The cost of good sold will be in green and the on going balance will be in red.

Cost of Good Sold: 130units multiplied by $30 per unit equal $3,900. On going balance: 20 units multiplied by $30 per unit and 40 units multiplied by $26 equal $1,640. Step 6 The last step is to total the amount purchased for the year and the total amount of the cost of goods sold. The ending inventory is the last total for the on going balance. Purchases will be in green, Cost of good sold will be in blue and ending inventory will be in red.

Purchases: $1,400 plus $4,500 equal $5,900. Cost of Goods Sold: $2,960 plus $3,900 equals $6,860. Ending Inventory Cost: $1,640

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