FIFO Method, First in First Out Method for Expensing Inventory (Financial Accounting Tutorial #36)

The video introduces the concept of inventory and the FIFO method, which stands for First-In, First-Out. This means the first inventory purchased is the first to be expensed or sold. An example of a supermarket selling milk is used to illustrate this principle, where the oldest milk (first in) is sold first.

A key point about the FIFO method is highlighted: it yields the same cost of goods sold (COGS) and ending inventory amounts regardless of whether a perpetual or periodic inventory system is used. This is contrasted with other cost flow assumptions, like the average cost method, where these numbers can differ based on the inventory system.

The tutorial presents a problem with a table of inventory transactions, including beginning inventory, purchases, and sales, along with their respective units, unit costs, and sales prices. The objective is to find the cost of goods sold and ending inventory for January 31st.

The first step in solving the problem is to determine the total value of all inventory purchased or on hand. This is done by multiplying the units by their unit cost for each inventory entry (beginning inventory and purchases) and summing them up. The initial total inventory value is calculated as $13,700 for 900 units.

The video then focuses on calculating the cost of goods sold using the FIFO method. For each sale, the oldest inventory units are expensed first at their original cost. The example walks through expensing 300 units at $10 each, then 200 units at $15 each, and finally 50 units from the $17 batch, totaling $6,850 for 550 units sold.

Finally, the ending inventory is calculated by subtracting the cost of goods sold from the total inventory value ($13,700 - $6,850 = $6,850). The ending inventory can also be verified by totaling the cost of the remaining units in stock (300 units at $20 and 50 units at $17), which also equals $6,850.

The tutorial reiterates the core principles of the FIFO method: always expense the most historical or dated inventory first, and use unit costs (not sales prices) when calculating the cost of goods sold.