The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

to have come from the second lot, leaving 900  425 
 475 bulbs from that lot not

yet sold.

Lot

Number of

Bulbs Value

Number

Sold

Number

Left

1 500 $750 500 0

2 900 $1,278 425 475

3 1,200 $1,560 0 1,200

Now, to determine the inventory’s value. The current inventory contains 475 bulbs from the

second order, which had a total of 900 bulbs, so the cost we attribute to that lot is (475/900)

of the total for that lot. So the value of bulbs from that lot is:

____^475

900

($1,278)
$674.50.

The current inventory also includes the entire third lot, so we include its entire cost. The total

value of the current inventory is thus:

Inventory value 
 $674.50  $1,560 
 $2,234.50.

In summary:

Inventory Valuation by FIFO:

The value of the inventory of a given item is found as follows:

1. Make a list of previous purchases’ quantity and cost.


2. Assume that sales came fi rst from the oldest lot, and move forward until all sales
   are accounted for.


3. The inventory value is the cost of the remaining items.

LIFO

An alternative, less commonly used, valuation method is last in, first out, or LIFO. LIFO

works like FIFO, except that we assume that the newest merchandise is sold first. LIFO

can be calculated in the same way as FIFO, except that instead of working from the start

we work from the end.

We can rework our light bulb example by using LIFO as well.

Example 15.2.4 Rework Example 15.2.3 using LIFO instead of FIFO.

As before, of the original order 475 bulbs remained. Since the original orders totaled 1,400

bulbs, this means that 1,400  475 
 925 bulbs had been sold. We can adjust our table

to show where these bulbs came from, and how many of the bulbs from each lot remained.

However, since we are using LIFO, we assume that the bulbs came from the last order fi rst.

So, of the 1,200 bulbs from that order, 1,200  925 
 275 remain, along with all the bulbs

from the earlier lots.

Lot

Number of

Bulbs Value

Number

Sold

Number

Left

1 500 $750 0 500

2 900 $1,278 0 900

3 1,200 $1,560 925 275

The value of the remaining bulbs from the last order is:

1200 _____^275 ($1,560)
$357.50.

15.2 Inventory 595