How to Find Ending Inventory Using the FIFO Method

Inventory costing methods are fundamental accounting practices businesses use to assign monetary values to goods they purchase or produce and sell. Among these methods, First-In, First-Out, commonly known as FIFO, stands out as a widely adopted approach. FIFO allocates costs to inventory remaining at period-end and to goods sold (cost of goods sold). Businesses with physical inventory use these methods to accurately reflect their financial position and performance. The consistent application of a chosen inventory method is important for maintaining clear and comparable financial reporting over time.

Core Principle of FIFO

The FIFO method assumes the first goods a business acquires are the first ones it sells or uses. This means that, for accounting purposes, the costs associated with the oldest inventory items are the first to be recognized as expenses when sales occur. Imagine a queue where the first person to join is also the first person served; similarly, in FIFO, the cost of the first item received is the first cost assigned to a sale. This principle dictates the flow of costs, not necessarily the actual physical movement of goods within a warehouse.

Even if a business physically moves newer inventory before older stock due to practical reasons, the FIFO accounting method still presumes that the costs of the older items were expensed first. For instance, a grocery store might physically rotate perishable goods to sell the oldest items first to prevent spoilage, which aligns with the FIFO cost flow assumption. However, for non-perishable items, the physical flow might not strictly follow FIFO, yet the accounting remains consistent with the assumption that the earliest costs are recognized first.

Information Required for Calculation

Accurately calculating ending inventory using FIFO relies on precise, organized financial records. Businesses must gather specific inventory transaction data before calculations. These records provide the foundation for applying the FIFO cost flow assumption.

One category of essential information includes detailed purchase records. For each inventory acquisition, necessary details include:
Date of purchase
Quantity of units obtained
Cost per unit

These individual purchase layers, with their associated costs, form the pool from which inventory costs will be drawn. Without accurate records of when and at what price each batch of inventory was acquired, a FIFO calculation cannot be performed reliably.

Another crucial set of data comes from sales records. Businesses need to track the date of each sale and the total quantity of units sold during the accounting period. Knowing the volume of sales is a prerequisite for identifying units that have left inventory. Lastly, the quantity and cost of inventory on hand at the very beginning of the accounting period, known as beginning inventory, are also important inputs. This initial inventory forms the first layer of goods available for sale, preceding any purchases made during the current period.

Performing the Ending Inventory Calculation

Calculating ending inventory under FIFO involves a systematic process prioritizing the most recent costs. Since FIFO assumes that the oldest goods are sold first, the inventory remaining at the end of a period must logically consist of the most recently acquired items. This approach ensures the balance sheet reflects inventory values closely approximating current market prices, particularly in periods of rising costs.

The first step in this calculation is to determine the total number of units that are still in inventory at the end of the period. This is found by taking the beginning inventory units, adding all units purchased during the period, and then subtracting the total units sold. For example, if a business started with 50 units, purchased an additional 250 units, and sold 220 units, the ending inventory would be 80 units (50 + 250 – 220 = 80). This quantity represents the physical units that remain on hand.

Once the total units in ending inventory are known, the next step is to assign costs to these units by working backward through the purchase history. Begin with the most recent purchases and assign their costs to the ending inventory units until the total quantity of ending inventory is fully accounted for. For instance, if the business’s most recent purchase was 70 units at $13.00 each, and 80 units are in ending inventory, then all 70 of these most recent units would be included, totaling $910.00 (70 units $13.00).

Since 10 units of ending inventory still need to be costed (80 total units – 70 units from the last purchase), you would then move to the next most recent purchase. If the purchase before the last one was 80 units at $12.00 each, then the remaining 10 units of ending inventory would be assigned this cost. This would add $120.00 (10 units $12.00) to the ending inventory value. Finally, sum the costs of all units identified from the most recent layers to arrive at the total ending inventory value. In this example, the total ending inventory would be $1,030.00 ($910.00 + $120.00). This methodical assignment ensures that the inventory remaining on the balance sheet is valued at the costs of the latest acquisitions.