Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 6 Inventories 275

The physical count on December 31 shows that 300 units have not been sold. Using

the fifo method, the cost of the 700 units sold is determined as follows:

Earliest costs, Jan. 1: 200 units at $ 9 $1,800

Next earliest costs, Mar. 10: 300 units at 10 3,000

Next earliest costs, Sept. 21: 200 units at 11 2,200

Cost of merchandise sold: 700 $7,000

Deducting the cost of merchandise sold of $7,000 from the $10,400 of merchandise

available for sale yields $3,400 as the cost of the inventory at December 31. The $3,400

inventory is made up of the most recent costs incurred for this item. Exhibit 7 shows

the relationship of the cost of merchandise sold during the year and the inventory at

December 31.

Q.What is the cost of
merchandise sold if the
beginning inventory is
$50,000, the ending
inventory is $65,000,
the net purchases are
$400,000, and the
transportation in is
$12,000?

A.$397,000 ($50,000 

$400,000$12,000

$65,000)

Exhibit 7

First-In, First-Out Flow

of Costs

300 units

at $10

Purchases

Merchandise

Available

for Sale

Cost of

Merchandise

Sold

Sept. 21

400

units

at

$11

Nov. 18

100

units

at

$12

Mar. 10

300

units

at

$10

Jan. 1

200

units

at

$9

$10,400

4,400

3,000

$ 1,800

1,200

Merchandise

Inventory

$1,800

3,000

2,200

$7,000

$2,200

1,200

$3,400

200 units

at $9

100 unitsat $12

(^200) units
at $11
200 u
nits
at $11
Last-In, First-Out Method
When the lifo method is used, the cost of merchandise sold is made up of the most re-
cent costs. Based on the data in the fifo example, the cost of the 700 units of inventory
is determined as follows:
Most recent costs, Nov. 18: 100 units at $12 $1,200
Next most recent costs, Sept. 21: 400 units at 11 4,400
Next most recent costs, Mar. 10: 200 units at 10 2,000
Cost of merchandise sold: 700 $7,600