How to Calculate Ending Inventory Using the LIFO Method and Beginning Inventory
Inventory consists of raw materials, unfinished goods awaiting further assembly and finished goods awaiting shipment to retailers and customers. A uniform inventory valuation is important because it affects the cost of goods sold and the value of the ending inventory. Last-in first-out (LIFO) is an inventory valuation method by which the cost of goods calculation includes the most recent items to enter inventory. The older items remain in ending inventory. In a period of rising prices, the LIFO method means higher costs of goods sold, thus lower profits and lower taxes.
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Instructions
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Get the beginning inventory, which is the ending inventory of the prior period. For example, if you operate a small clothing store and you have 50 suits valued at $200 each remaining at the end of the first quarter, the beginning inventory for the second quarter is $10,000 (50 multiplied by $200).
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Compute the cost of goods available for sale, which is equal to the beginning inventory plus purchases during the period. Continuing with the example, if you bought 20 suits for $225 each followed by 10 suits for $215 each, then the total cost of goods available for sale during the period is $10,000 plus $4,500 (20 multiplied by $225) plus $2,150 (10 multiplied by $215), or $16,650.
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Determine the cost of goods sold. In LIFO, you take from the top of the pile, meaning the most recent items to enter inventory get used in production. Continuing with the example, if you sold 24 suits during the period, the cost of goods sold would include the cost of the most recent purchase of 10 suits at $215 each and 14 suits (24 minus 10) from the first 20-suit purchase at $225 each. Therefore, the total cost of goods sold is $2,150 (10 multiplied by $215) plus $3,150 (14 multiplied by $225), or $5,300.
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Calculate the ending inventory. In LIFO, the older items remain in inventory. To conclude the example, the items remaining in inventory are the unsold 6 units (20 minus 14) from the 20-suit lot at $225 each and the beginning inventory of 50 suits at $200 each. Therefore, the ending inventory is equal to $1,350 (6 multiplied by $225) plus $10,000, or $11,350.
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Check your work. Cost of goods sold plus ending inventory must equal cost of goods available for sale, which equals beginning inventory plus purchases during the period. In the example, the numbers do match because cost of goods sold, which is $5,300, plus ending inventory, which is $11,350, equal the cost of goods available for sale, which is $16,650.
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