The arithmetic
Goods available for sale = beginning inventory + purchases. FIFO cost of goods sold is the cost of the earliest units to the number sold. Periodic LIFO cost of goods sold is the cost of the latest units to the number sold. Weighted average cost of goods sold = units sold × (total cost ÷ total units). Cost of goods sold plus ending inventory equals goods available under each method. ASC 330-10 permits these cost flow assumptions.
When to use it
Use it to test the inventory costing method a client reports, to size the effect of a change in method, or to check the ending balance in a roll-forward.
Limits
It models a single item in one period. It does not compute the lower of cost or market for LIFO, apply the dollar-value LIFO technique, or cost a perpetual system. The NRV write-down is on total ending units with one NRV per unit, so apply it by item for real populations.
Illustrative figures only. Check the result against your firm's methodology before relying on it.
Common questions
How does each method assign cost?
FIFO treats the oldest units as sold first, so ending inventory carries the latest costs. Periodic LIFO treats the newest purchases as sold first, so ending inventory carries the oldest costs. Weighted average divides the total cost of goods available by total units and applies that one cost per unit to sales and to ending inventory.
When prices rise, which method gives the highest profit?
FIFO gives the lowest cost of goods sold and the highest ending inventory and gross profit. LIFO gives the opposite. Weighted average falls between them. When prices fall the ranking reverses.
What does ASC 330 say about lower of cost and net realizable value?
Inventory measured by any method other than LIFO or the retail inventory method is measured at the lower of cost and net realizable value. Net realizable value is estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. LIFO and retail method inventory is measured at the lower of cost or market.
Why must units sold not exceed units available?
Cost of goods sold cannot take cost from layers that do not exist. If the units sold exceed the layers entered, check for a missing beginning balance or purchase.
How does a perpetual system differ?
Under a perpetual system each sale is costed when it occurs, so FIFO matches this tool's result but LIFO and moving average can differ from the periodic results shown here.
Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.