FIFO (First In First Out) Method (Cambridge International A-Level Accounting)

FIFO method

Spec point — how to calculate the value of closing inventory using the first in first out (FIFO) and weighted average cost (AVCO) methods (perpetual and periodic)

What is the FIFO method?

• The FIFO method is an inventory valuation method that assumes that goods are used in production or sold in the order in which they are received from the supplier
• The valuation of the remaining inventory will therefore always be the value of the most recently purchased item

How do I find the value of inventory using the FIFO method?

• There are two methods of recording inventory:

  • Perpetual method

    • Recalculating value of inventory after every purchase and sale

  • Periodic method

    • Inventory records only calculated at the end of the accounting period

Perpetual method

• After each purchase transaction

  • Calculate the total cost of the units purchased
  • Add this to the total value of the current inventory

• After each sales transaction

  • Subtract the cost of the units sold from the total value of the current inventory

    • Use the cost of the **oldest inventory first **until all of its units are sold
    • Then move on to the** next oldest** and so on

Periodic method

• STEP 1 Calculate the number of units of closing inventory

  • $\mathrm{Opening} \mathrm{inventory} \mathrm{units}+\mathrm{Units} \mathrm{purchased}-\mathrm{Units} \mathrm{sold}=\mathrm{Closing} \mathrm{inventory} \mathrm{units}$

• STEP 2 Find the total cost of these units starting with the most recent purchase price and working backwards

  • E.g. if there are 30 units left and the most recent purchases was 20 units at $15 each

    • Then value 20 of them at $15 each to get $300

  • And if the next most recent purchase was 50 units at $25 each

    • Then value the remaining 10 at $25 each to get $250

  • Add the values together to get $550

Exam Hint Make sure to not use the selling price of products when calculating the value of inventory. Inventory is always recorded at their purchase price.

Worked Example A business owner has no inventory on 1 February. Below are a list of transactions involving the sales and purchases of inventory.

2 Feb: 8 units purchased at $10 each

7 Feb: 6 units sold

9 Feb: 9 units purchased at $11 each

16 Feb: 10 units sold

24 Feb: 7 units purchased at $12 each

27 Feb: 6 units sold

Calculate the value of the closing inventory using the FIFO method.

Answer:

Method 1

Calculate the value after each transaction

Date	Purchases	Sales	Balance $
2 Feb	8 × $10 = $80		80
7 Feb		6 × $10 = $60	80 - 60 = 20
9 Feb	9 × $11 = $99		20 + 99 = 119
16 Feb		2 × $10 = $20 8 × $11 = $88	119 - (20 + 88) = 11
24 Feb	7 × $12 = $84		11 + 84 = 95
27 Feb		1 × $11 = $11 5 × $12 = $60	95 - 11 - 60 = 24

Final answer: Closing inventory is $24

Method 2

Calculate the number of units at the end of the month

(8 + 9 + 7) - (6 + 10 + 6) = 2 units

Calculate the cost

• The most recent purchase was 7 units at $12 each

2 × $12 = $24

Final answer: Closing inventory is $24