when calculating the cost of inventory using LIFO, is the calculation based on the total purchased inventory at the end of a period? Or is it calculated during the period. Below is an example: Lets say that a company has the following inflows and sales of inventory: Inflows Sales Week 1: 10 Units @ $5 5 Units Week 2: 15 Units @ $10 each 9 Units Week 3: 20 Units @ $20 each 7 Units Using LIFO, Would the COGS be $410? Calculated as 20 Units x $20 + 1 Unit x $10 -or- Would the COGS be $255? Calculated as 5 Units x $5 + 9 Units x $10 + 7 Units x $20 I hope this question makes sense, TheChad
Calculated as 5 Units x $5 + 9 Units x $10 + 7 Units x $20
Last In First Out. So the COGS will be based on the “last in” inventory (i.e. week 3, then week2 then week 1). Since 21 units were sold during the 3 week period all 20 units from week 3 are depleted and 1 unit from week 2 (if you actually think about inventory being sold as the last one in being the first one out… this visualization may help in remembering the cost flows even though any widget from the shelve can be taken and sold) therefore COGS should be $410 on a LIFO basis
TheChad, I think COGS is calculated at the end of the reporting period (e.g. quarterly), rather than on a monthly, weekly or daily schedule. Super I points out that a reasonable reporting period should be assumed: http://www.analystforum.com/phorums/read.php?11,622331,623903#msg-623903
Char-Lee is correct.
I have a similar question, but its about Inventory valuation: Baldwin, Inc. uses the last in, first out (LIFO) inventory cost flow assumption. Inventory transactions for beginning inventory and for furniture purchased and sold during 2007 were as follows: -------------------------------------Units ---------------Unit Cost------------------- Total Cost Beginning Inventory ------------------------100-----------------$500--------------------------$50,000 Purchases March 1, 2007------200--------------- $550-------------------------$110,000 Sales March 18, 2007-----------300 Purchases August 30,2007----300--------------- $600-------------------------$180,000 Baldwin, Inc.’s balance sheet at December 31, 2007 will show furniture inventory of: A) $160,000. B) $180,000. C) $170,000. D) $150,000. What would be your answer? Under LIFO valuation we might think the last 300 units can be treated as the unit sold and book the price of the oldest 300 ($160,000) as the price of the inventory. That would be wrong according to Schweser. Even though the question says LIFO, pay attention to the dates purchases and sales are made. So the correct answer to this question is $180,000. Please correct me if I am wrong.
No, you’re right. The beginning inventory and march 1st sales are cleared after the sale, so it could only be $180,000.
The same principle applies to the valuation of COGS. So the solution to the original question is calculated as 5 Units x $5 + 9 Units x $10 + 7 Units x $20
kochunni69 Wrote: ------------------------------------------------------- > The same principle applies to the valuation of > COGS. So the solution to the original question is > calculated as 5 Units x $5 + 9 Units x $10 + 7 > Units x $20 nope, koch you’re calculating FIFO
please look at it one more time. --------Inflows-------------------Sales--------- Week 1: 10 Units @ $5------ 5 Units Week 2: 15 Units @ $10----- each 9 Units Week 3: 20 Units @ $20----- each 7 Units LIFO Week1: aquired 10 units @ 5 and sold five units. COGS(w1) = 5 unit @ 5 Week2: aquired 15 units @ 10 and sold 10 units. COGS(w2) = 9 unit @ 10 (we aquired enough quantites in week2 for the sale. So we are not taping into the left-over from week1. The week2 also created a surplus of 6 units) Week3: aquired 20 units @ 20 and sold 7 units. COGS(w3) = 7 unit @ 20 (we aquired enough quantites in week3 for the sale. So we are not taping into the surplus from week2. The week3 created a surplus of 13 units) The total COGS(LIFO) = (5 unit @ 5 ) + (9 unit @ 10) + (7 unit @ 20) Under FIFO it would be: COGS (w1) = 5 unit @ 5 COGS (w2) = (5 unit @ 5) + (4 unit @ 10) COGS (w3) = (6 unit @ 10) + (1 unit @ 20) The total COGS(FIFO) = (5 unit @ 5) + ((5 unit @ 5) + (4 unit @ 10)) + ( (6 unit @ 10) + (1 unit @ 20))
Koch, feel free to answer a similar question on the exam this way if you really wish to get it wrong. I would suggest all other candidates do not do the same.
koch is doing it correct if reporting were done weekly, but as reporting is quarterly, charlee is correct.
For what I saw in the CFA text book, the inventory is assumed to be periodic system, it means, the COGS will be calculated at the end of the period (i.e. year end), so you always calculate back from the inventory account. ($410 as the first example). There is no mention about the perpetual inventory system at all.