How to Calculate FIFO Ending Inventory

Inventory valuation is fundamental to financial accounting. Accurately determining the cost of goods remaining at the end of an accounting period, known as ending inventory, is important for financial reporting and tax purposes. One widely accepted method for this valuation is First-In, First-Out, commonly known as FIFO.

Understanding the FIFO Principle

The FIFO method assumes that the first units of inventory purchased or produced are the first ones sold, regardless of their physical movement. This means older inventory costs are expensed first, aligning with the idea that businesses typically aim to sell their oldest stock to prevent obsolescence or spoilage.

Under this principle, ending inventory is considered to be composed of the most recently acquired units. If a business buys items at varying costs, FIFO dictates that the cost of the earliest purchased items is assigned to the goods sold. Consequently, ending inventory reflects the costs of the newest purchases. This approach often results in a higher reported inventory value during periods of rising costs.

Information Needed for Calculation

To calculate FIFO ending inventory, specific information must be tracked. This includes beginning inventory, representing units and their associated costs carried over from the prior accounting period. Records of all purchases made during the period are also necessary. For each purchase, the date, number of units acquired, and cost per unit are important data points.

Records of all sales transactions throughout the period are required, noting the date of each sale and the total number of units sold. Maintaining precise and dated records for these inventory movements ensures the integrity of the FIFO calculation. Without this detailed historical data, applying the FIFO method accurately becomes challenging.

Step-by-Step Calculation

The calculation begins by determining total units available for sale during the period, adding beginning inventory units to all units purchased. Next, calculate ending inventory units by subtracting total units sold from total units available for sale.

Assigning costs to these remaining units is crucial. Since FIFO assumes the oldest units were sold first, ending inventory must consist of the most recently purchased units. Identify the most recent purchases that collectively account for the ending inventory units. Multiply the units from these newest purchases by their respective costs per unit and sum these amounts to arrive at the total cost of the ending inventory. This process ensures the ending inventory value reflects current costs.

Practical Example

Consider a small business, “Gadget Co.,” with the following inventory data for a month:

Beginning Inventory (August 1): 100 units at $10 each.
Purchases:
August 10: 150 units at $12 each.
August 20: 200 units at $13 each.
Sales:
August 15: 120 units sold.
August 25: 180 units sold.

First, calculate the total units available for sale: 100 (beginning) + 150 (purchase 1) + 200 (purchase 2) = 450 units available. Next, determine the total units sold: 120 + 180 = 300 units. To find the units in ending inventory, subtract total units sold from total units available: 450 – 300 = 150 units in ending inventory.

Now, apply FIFO to cost these 150 ending inventory units. Since FIFO assumes the oldest units were sold first, the remaining 150 units must come from the most recent purchases. The most recent purchase was 200 units at $13 on August 20. Therefore, all 150 ending inventory units are assigned the cost from this latest batch. The calculation is 150 units $13/unit = $1,950. Thus, Gadget Co.’s FIFO ending inventory for the month is $1,950.