Corporate managers and investors closely monitor the value of a company's inventory to determine how quickly the company sells the goods it produces. A growing inventory balance suggests that the company is not producing goods people want; additionally, carrying a large inventory balance reduces the company's cash flow because producing the inventory costs money. There are a number of ways to calculate inventory, but the two most popular are the last-in-first-out (LIFO) method and the first-in-first-out (FIFO) method. Under LIFO, the newest units in inventory are assumed to be sold first, so the cost of goods sold is based on the most recent inventory costs. Under FIFO, the oldest units are assumed to be sold first, so the cost of goods sold is based on historical inventory costs.

## Calculating LIFO

#### Step

Download the price and unit list of the products currently in the company's inventory. The price list will include the number of units purchased and the prices at which the units were purchased. The information will be ranked according to date of purchase; the units purchased most recently will be at the top of the list.

#### Step

Determine the number of units sold from inventory. Suppose the company sold 350 units of inventory on August 1.

#### Step

Multiply the prices the company paid for the most recent units by the number of units sold to determine LIFO cost of goods sold. Suppose the company purchased 100 units of inventory for $5 on January 1, 200 units for $8 on March 1, and 100 units for $10 on June 1. The LIFO cost of goods sold for these units would equal (100 x $10) + (200 x $8) + (50 x $5) = $2,850. The value of units remaining in inventory according to LIFO equals (50 x $5), or $250.

## Video of the Day

## Calculating FIFO

#### Step

Download the same price and unit list of the products currently in the company's inventory, and rank the information according to date so that the most recent inventory purchases are at the top of the list.

#### Step

Determine the number of units sold from inventory. Using the same example, suppose the the company sold 350 units on August 1.

#### Step

Multiply the prices the company paid for the oldest units by the number of units sold to determine the FIFO cost of goods sold. Again, suppose the company purchased 100 units of inventory for $5 on January 1, 200 units for $8 on March 1 and 100 units for $10 on June 1. The FIFO cost of goods sold for these units will equal (100 x $5) + (200 x $8) + (50 x $10) = $2,600. The value of units remaining in inventory according to FIFO equals (50 x $10), or $500.