LIFO Inventory
Lesson:
LIFO stands for last in, first out. This means that newer inventory is sold first, and older inventory is kept longer.
Imagine a stack of cups. The ones closer to the top were stacked the most recently. When someone decides to take a cup, he'll take it from the top, right? That means he's going to get the cup that was placed in the stack more recently than the others. In other words, the last cup that was added in is the first cup that is taken out.
Coincidentally, many accountants reference the term LIFO when explaining that they are, in fact, the LIFO the party, which only further highlights the fact that accountants tend to have a terrible sense of humor.
You're managing an inventory system using the LIFO method.
You've been provided with the following information:
- Your inventory of chairs was purchased in different quantities and at different prices, as shown below:
Inventory Holdings Inventory Purchase Count Price per Unit Product Name Purchase #1 46 $46 Chairs Purchase #2 48 $28 Chairs Purchase #3 24 $46 Chairs - Right after updating your inventory records, customers bought 31 chairs.
Using the LIFO method, what is the value of the ending inventory?
Answer:
- The ending inventory is worth $3,264.00.
Explanation:
- The first step should be to write out the current inventory.
Inventory Holdings Inventory Purchase Count Price per Unit Product Name Purchase #1 46 $46 Chairs Purchase #2 48 $28 Chairs Purchase #3 24 $46 Chairs - Now write down the number of customer sales we need to account for (31) and the quantity of items that the firm bought in the most recent inventory purchase in our table (24).
- We need to account for more sales than can be covered by our most recent inventory purchase. Let's remove the entire most recent inventory purchase from our inventory table and reduce the number of sales we have to account for by the quantity of inventory we just removed (24).
31 - 24 = 7 - Now our inventory table looks like this.
Inventory Holdings Inventory Purchase Count Price per Unit Product Name Purchase #1 46 $46 Chairs Purchase #2 48 $28 Chairs - Now write down the number of customer sales we need to account for (7) and the quantity of items that the firm bought in the most recent inventory purchase in our table (48).
- Since the number of items we need to account for (7) is lower than the remaining items left in the most recent inventory purchase (48), we can just reduce the quantity of items in the most recent inventory purchase by (7).
- Here's the final state of our inventory table:
Inventory Holdings Inventory Purchase Count Price per Unit Product Name Purchase #1 46 $46 Chairs Purchase #2 41 $28 Chairs - Sum the dollar value of each row in our inventory table.
ROW UNIT COUNT * ROW PRICE PER UNIT = ROW INVENTORY VALUE - Now we just have to do the math to arrive at our ending inventory.
ENDING INVENTORY = 46 * $46 + 41 * $28