Page 290 - Accounting Principles (A Business Perspective)

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Units Unit Total
Cost Cost
Ending inventory composed of purchases made on:
August 12 10 $ 9.00 $ 90
December 21 10 9.10 91
Ending inventory 20 $181
Cost of goods sold composed of:
Beginning inventory 10 8.00 $ 80
Purchases made on:
March 2 10 8.50 85
May 28 20 8.40 168
October 12 20 8.80 176
$509
Cost of goods available for sale $690
Ending inventory 181
Cost of goods sold $509
Exhibit 50: Determining ending inventory under specific identification
FIFO (first-in, first-out) under periodic inventory procedure The FIFO (first-in, first-out) method
of inventory costing assumes that the costs of the first goods purchased are those charged to cost of goods sold

when the company actually sells goods. This method assumes the first goods purchased are the first goods sold. In
some companies, the first units in (bought) must be the first units out (sold) to avoid large losses from spoilage.
Such items as fresh dairy products, fruits, and vegetables should be sold on a FIFO basis. In these cases, an
assumed first-in, first-out flow corresponds with the actual physical flow of goods.
Because a company using FIFO assumes the older units are sold first and the newer units are still on hand, the
ending inventory consists of the most recent purchases. When using periodic inventory procedure, to determine the
cost of the ending inventory at the end of the period under FIFO, you would begin by listing the cost of the most

recent purchase. If the ending inventory contains more units than acquired in the most recent purchase, it also
includes units from the next-to-the-latest purchase at the unit cost incurred, and so on. You would list these units
from the latest purchases until that number agrees with the units in the ending inventory.
In Exhibit 51, you can see how to determine the cost of ending inventory under FIFO using periodic inventory
procedure. The company assumes that the 20 units in inventory consist of 10 units purchased December 21 and 10
units purchased October 12. The total cost of ending inventory is USD 179, and the cost of goods sold is USD 511.
We show the relationship between the cost of goods sold and the cost of ending inventory under FIFO using
periodic inventory procedure in Exhibit 52. The 80 units in cost of goods available for sale consists of the beginning
inventory and all of the purchases during the period. Under FIFO, the ending inventory of 20 units consists of the

most recent purchases—10 units of the December 21 purchase and 10 units of the October 12 purchase—costing
USD 179. We assume the beginning inventory and other earlier purchases have been sold during the period,
representing the cost of goods sold of USD 511.

Accounting Principles: A Business Perspective 291 A Global Text