Chapter 6 Inventories 273of the units from the January 10 purchase ($21 per unit). The cost of the 7 units in in-
ventory after the sale on January 22 is the cost of the 3 units remaining from the be-
ginning inventory and the cost of the 4 units remaining from the January 10 purchase.
The remainder of the lifo illustration is explained in a similar manner.
When the lifo method is used, the inventory ledger is sometimes maintained in
units only. The units are converted to dollars when the financial statements are pre-
pared at the end of the period.
The use of the lifo method was originally limited to rare situations in which the
units sold were taken from the most recently acquired goods. For tax reasons, which
we will discuss later, its use has greatly increased during the past few decades. Lifo is
now often used, even when it does not represent the physical flow of goods.Average Cost Method
When the average cost method is used in a perpetual inventory system, an average
unit cost for each type of item is computed each time a purchase is made. This unit
cost is then used to determine the cost of each sale until another purchase is made and
a new average is computed. This averaging technique is called a moving average. Since
the average cost method is rarely used in a perpetual inventory system, we do not
illustrate it in this chapter.Computerized Perpetual Inventory Systems
The records for a perpetual inventory system may be maintained manually. However,
such a system is costly and time consuming for businesses with a large number of in-
ventory items with many purchase and sales transactions. In most cases, the record
keeping for perpetual inventory systems is computerized.InventoryCost of
Purchases Merchandise Sold
Total
CostUnit
Quantity Cost
200
60
60
168
60
84
60
42
60
42
22020
20
20
21
20
21
20
21
20
21
22
Total
CostUnit
Quantity Cost140
84
42
20
21
21
10
3 3 8 3 4 3 2 3 2
10
7
4
2
Total
CostUnit
Quantity Cost168
220
21
22
8
10
Date
Jan. 1
4
1022
28
30
Item 127BJan. 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 84
Merchandise Inventory 84
28 Accounts Receivable 60
Sales 60
28 Cost of Merchandise Sold 42
Merchandise Inventory 42
30 Merchandise Inventory 220
Accounts Payable 220
Exhibit 6
Entries and Perpetual Inventory Account (Lifo)