Last-In, First-Out Method See Appendix B for more information. When the LIFO method is used, the cost of merchandise on hand at the end of the period is made up of the earliest costs. Based on the same data as in the FIFO example, the cost of the 800 units in ending inventory on January 31 is $16,000, which consists of 800 units from the beginning inventory at a cost of $20.00 per unit. Deducting the cost of the January 31 inventory of $16,000 from the cost of merchandise available for sale of $45,180 yields the cost of merchandise sold of $29,180, computed as follows:

Details A table shows how the cost of merchandise sold at the end of January for Item 127B using the LIFO method is computed. The first line shows Beginning inventory, January 1, $20,000. The next line shows Purchases, 25,180. The computation ($11,200 plus $13,980) is shown after the word Purchases. A single rule appears below 25,180. The next line shows Cost of merchandise available for sale in January, $45,180, which is the sum of Beginning inventory, January 1 and Purchases. Less ending inventory, January 31, 16,000, is shown on the next line. A single rule appears below the number 16,000. The next line shows Cost of merchandise sold, $29,180. A double rule appears below $29,180. The $16,000 cost of the ending merchandise inventory on January 31 is made up of the earliest costs. The $29,180 cost of merchandise sold is made up of the most recent costs. Exhibit 7 shows the relationship of the cost of merchandise sold for January and the ending inventory on January 31.

Details A flowchart illustrates the relationship of the cost of merchandise sold for January and the ending inventory for January for Item 127B using the LIFO method. The chart is divided into four columns: Purchases, Merchandise Available for Sale, Cost of Merchandise Sold, and Merchandise Inventory. In each of the columns, color-coded boxes containing data are shown, with arrows between them showing their relationships. In the Purchases column, there are three orange boxes. In the Merchandise Available for Sale column, there is one gray box that extends the length of the three orange boxes in the Purchases column. In the Cost of Merchandise Sold column, there is one green box that sits to the lower-right of the box in the Merchandise Available for Sale column. In the Merchandise Inventory column, there is one blue box that sits to the upper-right of the box in the Cost of Merchandise Sold column. In the first box in the Purchases column, Jan. 1 is shown on the top line and 1,000 units at $20.00 is shown below it. A black arrow leading from this box points to $20,000, shown near the top of the box in the Merchandise Available for Sale column. A black arrow leading from $20,000 points to $4,000, shown at the top of the box in the Cost of Merchandise Sold column. The arrow is labeled with the words 200 units at $20.00. Another black arrow leading from $20,000 points to $16,000, shown near the top of the box in the Merchandise Inventory column. A double rule appears below $16,000. The arrow is labeled with the words 800 units at $20.00. In the second box in the Purchases column, Jan. 10 is shown on the top line and 500 units at $22.40 is shown below it. A black arrow leading from this box points to 11,200, shown in the middle of the box in the Merchandise Available for Sale column. A black arrow leading from 11,200 points to 11,200, shown near the top of the box in the Cost of Merchandise Sold column. The arrow is labeled with the words 500 units at $22.40. In the third box in the Purchases column, Jan. 30 is shown on the top line and 600 units at $23.30 is shown below it. A black arrow leading from this box points to 13,980, shown near the bottom of the box in the Merchandise Available for Sale column. A single rule appears below 13,980. A black arrow leading from 13,980 points to 13,980, shown near the middle of the box in the Cost of Merchandise Sold column. The arrow is labeled with the words 600 units at $23.30. A single rule appears below the number 13,980 in the box in the Cost of Merchandise Sold column. Below the single rule in the box in the Merchandise Available for Sale column, a total of $45,180 is shown. A double rule appears below this number. Below the single rule in the box in the Cost of Merchandise Sold column, a total of $29,180 is shown. A double rule appears below this number.

Weighted Average Cost Method The weighted average cost method uses the weighted average unit cost for determining the cost of merchandise sold and the ending merchandise inventory. If purchases are relatively uniform during a period, the weighted average cost method provides results that are similar to the physical flow of goods. The weighted average unit cost is determined as follows

To illustrate, the data for Item 127B are used as follows:

The cost of the January 31 ending inventory is as follows:

Deducting the cost of the January 31 inventory of $17,208 from the cost of merchandise available for sale of $45,180 yields the cost of merchandise sold of $27,972, computed as follows:

A table shows how the cost of merchandise sold at the end of January for Item 127B using the weighted average cost method is computed. The first line shows Beginning inventory, January 1, $20,000. The next line shows Purchases, 25,180. The computation ($11,200 plus $13,980) is shown after the word Purchases. A single rule appears below 25,180. The next line shows Cost of merchandise available for sale in January, $45,180, which is the sum of Beginning inventory, January 1 and Purchases. Less ending inventory, January 31, 17,208, is shown on the next line. A single rule appears below the number 17,208. The next line shows Cost of merchandise sold, $27,972. A double rule appears below $27,972. Example Exercise 7-5. Periodic Inventory Using FIFO, LIFO, and Weighted Average Cost Methods

The units of an item available for sale during the year were as follows:

Jan. Inventory Mar. 20 Purchase Oct. 30 Purchase Available for sale 6 units at $50 14 units at $55 20 units at $62 40 units 300 77C 1.24C $2.310

Jan. Inventory Mar. 20 Purchase Oct. 30 Purchase Available for sale 6 units at $50 14 units at $55 20 units at $62 40 units 300 77C 1.24C $2.310