How to Calculate FIFO and LIFO

Introduction

• FIFO (First-In, First-Out) and LIFO (Last-In, First-Out) are inventory valuation methods.
• Each method affects the calculation of Cost of Goods Sold (COGS) differently.
• Understanding these methods helps in assessing inventory value.

Key Takeaways

• FIFO: Assumes oldest inventory is sold first.
• LIFO: Assumes newest inventory is sold first.
• Different impacts on inventory valuation.

What Is FIFO?

• Definition: Assumes inventory bought first is disposed of first.
• Purpose: Used to calculate COGS and remaining inventory value.
• FIFO is an assumption for calculation, not literal order of sales.

How to Calculate FIFO

• Steps:
  1. Multiply units sold by the cost of oldest inventory.
  2. If units sold exceed oldest inventory, move to next oldest.
• Formula:
  • COGS = Number of Units Sold x Cost of Oldest Inventory
• Example:
  • Lee’s Lighting sold 80 lamps. Calculated using FIFO with oldest cost of $50 per lamp.
  • Calculation: 80 x $50 = $4000.

What Is LIFO?

• Definition: Assumes goods bought most recently are sold first.
• Purpose: Used in COGS calculations with most recent purchase prices.

How to Calculate LIFO

• Steps:
  1. Determine cost of most recent inventory.
  2. Multiply by amount sold.
• Formula:
  • COGS = Number of Units x Cost of Newest Inventory
• Example:
  • Lee’s Lighting sold 80 lamps using LIFO with most recent cost of $100 per lamp.
  • Calculation: 80 x $100 = $8,000.
• LIFO Reserve: Difference in taxable income when using LIFO.

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Conclusion

• FIFO and LIFO are crucial tools for inventory and COGS calculations.
• They provide different financial insights and tax implications.