 Hello in this lecture we will define last and first out. According to fundamental accounting principles while 22nd edition the definition of last and first out is method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold. So we are talking about a method of inventory assumption. We're not talking about specific identification where we would be specifically identifying the inventory that's sold and know exactly what we purchased that unit for but some kind of cost flow assumption method. Last and first out is similar to first and first out or an average method in that those are going to be the types of assumption methods. Last and first out usually being a method that's more counterintuitive to most of our thoughts when we try to think of the physical flow of inventory. We would generally think that we would want the physical flow of the inventory to be that the first unit that we purchase would be the first unit that we sell but if we're not talking about specific identification we could assume the opposite. We could assume that the units that are being sold are the last units we purchased. You can imagine it if we're going to stack the shelves that we just put the new stuff in front of the old stuff so we're always selling the new stuff. Again it's just a cost flow assumption it doesn't really match what actually happens the actual flow but if you think about the flow that's kind of the way the flow would be assumed to work. If we take a look at an example we can say that we have inventory we're selling these coffee mugs and we're going to sell these 420 mugs at $85 are really expensive but that $85 is the sales price not the cost. If we want to know the cost we have to go to our worksheet over here and we see that we purchased 100 units at $50 for 5,000 of the ending inventory and we purchased another 400 units at $55 for 22,000 of the ending inventory. If we sold 420 of these question is what's the cost of those 420 units is it the $50 or the $55? In last and first out we're going to take the last ones we purchased the 400 first those will be the first units we sold therefore we're going to wipe out this category we're going to say we sold 400 of those at the higher cost the $55 for the 22,000 then we need another 20 in order to get up to the 420 that we sold we're going to assume that we sold those from this batch the $50 to bring it up to 1,000. What does that leave us with at the end leaves us with zero of these 400 units at $55 those are gone it leaves us with 100 minus the 20 or 80 of these $50 units at 50 and that's the 4,000 units so we have 4,000 left over in dollars in ending inventory and the cost of goods sold for this sale is the 23,000 in a last and first out method.