Chapter 8
Inventory Valuation
228
1
Record the opening balance of inventory of 10 pens at $10 each.
2
The purchase of 50 pens on March 5 is added to the value of inventory. These are listed on a
separate line from the 10 opening units because they were purchased at a different unit cost.
3
The sale of 15 pens on March 7 can be specifically identified. Eight of the pens came from
opening inventory and seven of the pens came from the purchase on March 5. As a result, the
opening balance of 10 pens is reduced to two and the batch of 50 pens is reduced to 43. The
value of cost of goods sold for this sale is $164 ($80 + $84).
4
The purchase of 40 pens on March 15 is added to the value of inventory. Again, a new row is
used because the unit cost is different from the current inventory.
5
The purchase of 20 pens on March 19 is added to the value of inventory. Again, a new row is
used because the unit cost is different from the current inventory.
6
The sale of 50 pens on March 27 can be specifically identified. Two came from opening
inventory, 33 from the purchase on March 5 and 15 from the purchase on March 15.The value
of the cost of goods sold for this sale is $626 ($20 + $396 + $210).
7
The value of ending inventory is made up of 10 pens remaining from the March 5 purchase,
25 pens remaining from the March 15 purchase and 20 pens remaining from the March 19
purchase. Total value of ending inventory is $790 ($120 + $350 + $320).
First-In, First-Out (FIFO) Method
The FIFOmethod is used when the inventory items which are purchased first (first-in) are generally
sold first (first-out). For example, a supermarket will try to sell its oldest dairy products first so that
they do not expire.
When using the FIFO method, it is helpful to list the purchases in the order they were received.
This will clearly show which items were the first ones purchased, which will also be assumed the
first ones sold. This is done by using a table as shown in Figure 8.3. The opening balance and the
transactions from Figure 8.1 are listed in the table. This is similar to the specific identification
method. At the bottom of the figure is the value of ending inventory.
