How to Calculate FIFO Ending Inventory

Businesses must accurately determine the value of their inventory at the end of an accounting period. Inventory valuation directly impacts a company’s reported assets on the balance sheet and the cost of goods sold on the income statement. The First-In, First-Out (FIFO) method is a widely used accounting approach for assigning costs to inventory, helping businesses track the flow of goods and their associated costs.

Understanding FIFO Principles

The FIFO method assumes that the first goods purchased or produced are the first ones sold. This principle often aligns with the physical flow of goods for businesses, especially those dealing with perishable items or products with expiration dates, where older stock must be moved out first. Even for non-perishable goods, FIFO reflects a logical inventory management strategy to prevent obsolescence.

Under FIFO, the cost of goods sold is based on the cost of the oldest inventory. Conversely, ending inventory is valued using the costs of the most recently acquired goods. During periods of rising costs, FIFO generally results in a lower cost of goods sold and a higher reported ending inventory value.

Gathering Inventory Data

Calculating FIFO ending inventory requires specific and organized data. Begin by identifying the total units and their corresponding cost in the beginning inventory. Record all purchases made throughout the period, including the date, number of units, and cost per unit. Organizing these purchases chronologically is essential, as FIFO relies on the order of acquisition. Finally, determine the total units sold during the accounting period.

Step-by-Step Calculation of FIFO Ending Inventory

The initial step in calculating FIFO ending inventory involves determining the total units remaining. This is achieved by adding beginning inventory units to all units purchased and then subtracting the total units sold. For instance, if a business started with 100 units, purchased 350 more units, and sold 300 units, the ending inventory would consist of 150 units.

Under the FIFO principle, these ending inventory units are assumed to be composed of the most recently acquired goods. To assign costs, work backward from the latest purchases. If the last purchase consisted of 150 units at $13 per unit, all 150 ending inventory units would be assigned this cost, totaling $1,950 (150 units $13/unit).

Consider a scenario where the most recent purchase was 100 units at $13 per unit, and the purchase before that was 200 units at $12 per unit. With 150 units in ending inventory, the first 100 units would be costed at $13 each. The remaining 50 units needed to reach 150 would then be taken from the next most recent purchase at $12 per unit. In this case, the ending inventory cost would be calculated as (100 units $13/unit) + (50 units $12/unit), totaling $1,300 + $600, which equals $1,900.

Practical Examples and Common Scenarios

Applying the FIFO methodology to varying purchase costs and sales patterns demonstrates its consistent application. Imagine a business with beginning inventory of 50 units at $10 each. During the period, it makes two purchases: 100 units at $12 and then 75 units at $14. If 120 units are sold, the ending inventory would be 105 units (50 + 100 + 75 – 120).

To cost these 105 ending inventory units using FIFO, pull from the most recent purchases first. The most recent purchase was 75 units at $14. These 75 units account for a portion of the ending inventory, costing $1,050. The remaining 30 units (105 – 75) needed for ending inventory would then come from the next most recent purchase, which was 100 units at $12.

These 30 units from the $12 purchase would add $360 to the ending inventory cost. The total FIFO ending inventory cost would be $1,050 plus $360, equaling $1,410. The timing of sales throughout the period does not alter the principle that ending inventory is valued using the costs of the most recently available goods.