To the extent that this is the case, the fifo method provides results that are about the
same as those obtained by identifying the specific costs of each item sold and in in-
ventory.
When the fifo method of costing inventory is used, costs are included in the cost
of merchandise sold in the order in which they were incurred. To illustrate, Exhibit 5
shows the journal entries for purchases and sales and the inventory subsidiary ledger
account for Item 127B. The number of units in inventory after each transaction, to-
gether with total costs and unit costs, are shown in the account. We assume that the
units are sold for $30 each on account.272 Chapter 6 Inventories
Jan. 4 Accounts Receivable 210
Sales 210
4 Cost of Merchandise Sold 140
Merchandise Inventory 140
10 Merchandise Inventory 168
Accounts Payable 168
22 Accounts Receivable 120
Sales 120
22 Cost of Merchandise Sold 81
Merchandise Inventory 81
28 Accounts Receivable 60
Sales 60
28 Cost of Merchandise Sold 42
Merchandise Inventory 42
30 Merchandise Inventory 220
Accounts Payable 220InventoryCost of
Purchases Merchandise Sold
Total
CostUnit
Quantity Cost
200
60
60
168147
105
105
220
20
20
20
21
21
21
21
22
Total
CostUnit
Quantity Cost140
60
21
42
20
20
21
21
10
3 3 8 7 5 5
10
7
3
1
2
Total
CostUnit
Quantity Cost168
220
21
22
8
10
Date
Jan. 1
4
1022
28
30
Item 127BExhibit 5
Entries and Perpetual Inventory Account (Fifo)You should note that after the 7 units were sold on January 4, there was an in-
ventory of 3 units at $20 each. The 8 units purchased on January 10 were acquired at
a unit cost of $21. Therefore, the inventory after the January 10 purchase is reported
on two lines: 3 units at $20 each and 8 units at $21 each. Next, note that the $81 cost
of the 4 units sold on January 22 is made up of the remaining 3 units at $20 each and
1 unit at $21. At this point, 7 units are in inventory at a cost of $21 per unit. The re-
mainder of the illustration is explained in a similar manner.Last-In, First-Out Method
When the lifo method is used in a perpetual inventory system, the cost of the units
sold is the cost of the most recent purchases. To illustrate, Exhibit 6 shows the journal
entries for purchases and sales and the subsidiary ledger account for Item 127B, pre-
pared on a lifo basis.
If you compare the ledger accounts for the fifo perpetual system and the lifo per-
petual system, you should discover that the accounts are the same through the January
10 purchase. Using lifo, however, the cost of the 4 units sold on January 22 is the cost