1. © 2014 Cengage Learning. All Rights Reserved.
Learning Objectives
LO2 Calculate the cost of merchandise inventory using the first-in, first-out (FIFO) inventory costing method.
LO3 Calculate the cost of merchandise inventory using the last-in, first-out (LIFO) inventory costing method.
LO4 Calculate the cost of merchandise inventory using the weighted-average inventory costing method.
© 2014 Cengage Learning. All Rights Reserved.

2. First-In, First-Out Inventory Costing Method
Lesson 20-2
First-In, First-Out Inventory Costing Method
LO2
Using the price of merchandise purchased first to calculate the cost of merchandise sold first is called the first-in, first-out inventory costing method.
The first-in, first-out method is frequently abbreviated as FIFO.

3. First-In, First-Out Inventory Costing Method
Lesson 20-2
First-In, First-Out Inventory Costing Method
LO2 3
Units Needed to Equal the Total Units on Hand 4
Unit Price Times FIFO Units
Purchase Dates
Units Purchased
Unit Price
Total Cost
FIFO Units on Hand
FIFO Cost
January 1, beginning inventory 10
$20.80 $
February 16, purchases 6
21.60
129.60
April 17, purchases 14
22.40
313.60
September 5, purchases 12
23.40
280.80
$234.00
November 22, purchases 8
23.50
188.00 50
$ 1,120.00 18
$422.00 2
Units from the Most Recent Purchase 1
Total Units on Hand 5
Total FIFO Cost

4. Last-In, First-Out Inventory Costing Method
Lesson 20-2
Last-In, First-Out Inventory Costing Method
LO3
Using the price of merchandise purchased last to calculate the cost of merchandise sold first is called the last-in, first-out inventory costing method.
The last-in, first-out method is frequently abbreviated as LIFO.

5. Last-In, First-Out Inventory Costing Method
Lesson 20-2
Last-In, First-Out Inventory Costing Method
LO3 2
Beginning Inventory Units 5
Unit Price Times LIFO Units
Purchase Dates
Units Purchased
Unit Price
Total Cost
LIFO Units on Hand
LIFO Cost
January 1, beginning inventory 10
$20.80 $
$208.00
February 16, purchases 6
21.60
129.60
April 17, purchases 14
22.40
313.60 2
44.80
September 5, purchases 12
23.40
280.80
November 22, purchases 8
23.50
188.00 50
$ 1,120.00 18
$382.40 3
Units from the Earliest Purchase
Units Needed to Equal the Total Units on Hand 4 1
Total Units on Hand
Total LIFO Cost 6

6. Weighted-Average Inventory Costing Method
Lesson 20-2
Weighted-Average Inventory Costing Method
LO4
Using the average cost of beginning inventory plus merchandise purchased during a fiscal period to calculate the cost of merchandise sold is called the weighted-average inventory costing method.
The average unit price of the total inventory available is calculated.
This average unit price is used to calculate both ending inventory and cost of merchandise sold.
The average cost of merchandise is then charged against current revenue.

7. Weighted-Average Inventory Costing Method
Lesson 20-2
Weighted-Average Inventory Costing Method
LO4
Purchases
Total Cost
Purchase Dates
Units
Unit Price
January 1, beginning inventory 10
$20.80 $
February 16, purchases 6
21.60
129.60
April 17, purchases 14
22.40
313.60
September 5, purchases 12
23.40
280.80
November 22, purchases 8
23.50
188.00 50
$ 1,120.00
Total Cost of Inventory Available 1 2
Weighted-Average Price per Unit
Total of Beginning
Inventory and Purchases ÷
Total Units =
Weighted-Average
Price per Unit
$1,120.00 50
$22.40
Units in
Ending Inventory ×
Cost of 18
$403.20 3
Cost of Ending Inventory

8. Calculating the Cost of Merchandise Sold
Lesson 20-2
Calculating the Cost of Merchandise Sold
LO4
Cost of Merchandise Available for Sale −
FIFO Cost of Ending Inventory =
Cost of Merchandise Sold
$1,120.00 −
$422.00 =
$698.00

9. Comparison of Inventory Methods
Lesson 20-2
Comparison of Inventory Methods
LO4
FIFO
LIFO
Weighted-
Average
Cost of merchandise sold:
Merchandise inventory, Jan. 1…………
$208.00
Net purchases
912
Merchandise available for sale
$1,120.00
Less ending inventory, Dec
422
382.4
403.2
Cost of merchandise sold
$698.00
$737.60
$716.80
In a period of rising prices:
Relative cost of ending inventory
highest
lowest
intermediate
Relative cost of merchandise sold

10. Lower of Cost or Market Inventory Costing Method
Lesson 20-2
Lower of Cost or Market Inventory Costing Method
LO4
The price that must be paid to replace an asset is called the market value.
Using the lower of cost or market price to calculate the cost of ending merchandise inventory is called the lower of cost or market inventory costing method (LCM).
In this context, cost refers to the actual amount paid for the unit of inventory on hand.
Market refers to the amount that must be paid to replace the unit of inventory.

11. Lower of Cost or Market Inventory Costing Method
Lesson 20-2
Lower of Cost or Market Inventory Costing Method
LO4
Lower of Cost or Market Inventory Costing Method
Costing Method
Cost
Market Value
(18 units × $22.40 current market price)
Lower of Cost or Market
FIFO
$422.00
$403.20
LIFO
382.40
403.20
Weighted-average
Calculate the cost
Calculate the
market price
Determine the smaller number to use as the
lower of cost or market

12. Lesson 20-2 Audit Your Understanding
1. On what idea is the FIFO method based?
ANSWER
The price of merchandise purchased first should be charged against current revenue.

13. Lesson 20-2 Audit Your Understanding
2. When the LIFO method is used, at what price is each item in ending merchandise inventory recorded?
ANSWER
The prices of merchandise purchased last are used in recording prices for each item on the inventory record.

14. Lesson 20-2 Audit Your Understanding
3. In a period of rising prices, which inventory costing method gives the lowest cost of merchandise sold? .
ANSWER
FIFO

15. Lesson 20-2 Audit Your Understanding
4. Why should a business select one inventory costing method and use that same method continuously for each fiscal period?
ANSWER
Using the same inventory costing method for all fiscal periods provides financial statements that can be compared with other fiscal period statements. If a business changes inventory cost methods, part of the difference in gross profit and net income may be caused by the change in methods.