Inventories
Chapter 8
Objectives
❖Compute the cost of inventory under the periodic
and perpetual inventory system, using the
FIFO,LIFO and Weighted average cost methods
❖Compare and contrast the use of the three
inventory costing methods
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Contents
❑Inventory cost flow assumptions
❑Periodic and perpetual inventory system
❑Inventory Costing Methods under the periodic
inventory system
❑Inventory Costing Methods under the perpetual
inventory system
❑Effect on PL and BS
❑Which costing method to choose from?
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Inventory cost flow assumptions
• Business may buy identical units of goods at different unit costs → cost flow must be
assumed.
• First in, first out (FIFO)
• Last in, first out (LIFO)
• Weighted Average
First in, first out
Last in, first out
Weighted Average
Periodic and perpetual inventory system
Remember? Periodic
COGS = Opening Balance +
inventory
Purchase – Closing Balance
system
Perpetual Closing Balance = Opening
inventory Balance + Purchase - Sale
system
Periodic and perpetual inventory system
❖ Periodic inventory system: Inventory is accounted for at the end of the period
❖ Perpetual inventory system: Each purchase and sale of goods is recorded in
an Inventory Account.
Inventory Costing Methods under the periodic
inventory system
• Using one of the following cost flow assumptions:
• FIFO;
• LIFO;
• and Weighted Average Cost method
Inventory Costing Methods under the periodic
inventory system
• FIFO
• Example 1 Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Purchase 400 $12
5th Jan Purchase 600 $14
20th Jan Purchase 200 $10
31st Jan Closing Bal 400 Unkown
Example 2
Date Units Cost per Unit
1st Jan Beginning Bal 300 $5
2nd Jan Purchase 500 $6
5th Jan Purchase 600 $4
20th Jan Purchase 600 $5
31st Jan Closing Bal 300 Unkown
Example 2.1
Date Units Cost per Unit
1st Jan Beginning Bal 500 $10
2nd Jan Purchase 600 $12
15th Jan Purchase 500 $14
20th Jan Purchase 600 $15
31st Jan Closing Bal 700 Unkown
Inventory Costing Methods under the periodic
inventory system
• LIFO
• Example 3 Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Purchase 400 $12
5th Jan Purchase 600 $14
20th Jan Purchase 200 $10
31st Jan Closing Bal 400 Unkown
Example 4
Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Purchase 400 $12
5th Jan Purchase 600 $14
20th Jan Purchase 200 $10
31st Jan Closing Bal 800 Unkown
Inventory Costing Methods under the periodic
inventory system
• Weighted Average cost method
• Example 5 Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Purchase 400 $12
5th Jan Purchase 600 $14
20th Jan Purchase 200 $10
31st Jan Closing Bal 400 Unkown
Inventory Costing Methods under the periodic
inventory system
• Weighted Average unit cost =
Inventory Costing Methods under the perpetual
inventory system
• Using one of the following cost flow assumptions:
• FIFO;
• LIFO;
• and Weighted Average Cost method
• Also, stock card or inventory subsidiary ledger account are used in
determining the inventory’s ending balance and value.
Inventory Costing Methods under the perpetual
inventory system
• FIFO
• Example 6 Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Sale 200
4th Jan Purchase 900 $12
5th Jan Sale 500
8th Jan Sale 300
30th Jan Purchase 400 $14
Example 7
Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Purchase 200 $11
4th Jan Sale 400
5th Jan Purchase 900 $12
18th Jan Sale 300
30th Jan Sale 400
IN OUT BALANCE
Date
Quantity Cost Total Quantity Cost Total Quantity Cost Total
Inventory Costing Methods under the perpetual
inventory system
• LIFO
• Example 8 Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Sale 200
4th Jan Purchase 900 $12
5th Jan Sale 500
8th Jan Sale 300
30th Jan Purchase 400 $14
Inventory Costing Methods under the perpetual
inventory system
• Weighted Average cost method
• Example 9 Date Units Cost per Unit
1st Jan Beginning Bal 300 $10
2nd Jan Sale 200
4th Jan Purchase 900 $12
5th Jan Sale 500
8th Jan Sale 300
30th Jan Purchase 400 $14
Effect on PL and BS
• Whatever the cost method apply, it will affect both PL and BS results as it affects:
• COGS
• Inventory ending balance
Which costing method to choose from?
• It depends on company’s policy
• LIFO is not permitted in a number of countries
• This is an accounting policy, therefore, it requires a consistency
Which costing method to choose from?
• During a period of inflation or rising price, applying FIFO would give a higher gross
profit and higher ending inventory balance as compared with other two methods.
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THANK YOU
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