Inventory Cost Flow Assumption: FIFO (First In First Out)

Introduction

• Presenter: James
• Channel: Accounting Stuff
• Topic: Inventory Cost Flow Assumptions - specifically focusing on FIFO (First In First Out)
• Related topics: Cost of goods sold, perpetual and periodic inventory systems

Inventory Cost Flow Assumptions

• Purpose: Estimate cost flows from inventory into cost of goods sold and closing inventory.
• Types:
  • FIFO: First In First Out
  • LIFO: Last In First Out
  • AVCO: Average Cost Method

FIFO Method

• Concept: Oldest inventory is assumed to be sold first.
• Steps to Calculate Using FIFO:
  1. Inventory Cost Flow Table: Create a table with columns for date, description, quantity, cost per unit, and total cost.
  2. Enter Known Data:
     • Opening inventory example: 220 units at $2 each (total $440)
     • Additions example: 400 units costing $1,200 (cost per unit $3)
  3. Fill in Blanks:
     • Goods available for sale calculation
     • Cost of goods sold: Use FIFO logic to determine cost (older inventory sold first)
     • Example calculation: 220 units at $2 + 280 units at $3 = $1,280 total cost of goods sold
  4. Calculate Totals:
     • Total cost of goods sold for month: $1,280
     • Closing inventory: 120 units remaining, total cost $360

Example Scenario

• Business Context: Wholesale buying and selling squeegees
• Transactions:
  • Opening inventory: 220 units, $2 each
  • Purchase: 400 units, $1,200 total
  • Sale: 500 units, $2,750 revenue

Implications of FIFO

• FIFO can depict higher profits in an inflationary economy by aligning older, cheaper costs against current revenues.
• High profits might lead to higher taxes, affecting cash flow.

Conclusion

• FIFO is straightforward and mirrors basic inventory calculations.
• Upcoming content will cover LIFO and AVCO.
• Additional resource: Cost Flow Assumptions Cheat Sheet available for purchase.

Additional Notes

• Video suggests subscribing to the channel for more videos on LIFO and AVCO methods.
• Emphasis on practical applications and implications of choosing FIFO.

This summary captures the core ideas and calculations presented in the video on FIFO, providing a structured approach to understanding and applying the FIFO inventory method.