 Hello in this lecture, we're gonna be taking a look at first in first out inventory method We will be selling coffee mugs and we won't be specifically identifying the coffee mugs in this case as we've talked about in a prior lecture This time we're gonna be using a cost flow assumption that cost flow assumption being the first in first out assumption this time To set up this problem in any cost flow assumption I highly recommend putting together a worksheet that worksheet including headers of Purchases columns then we got the cost of merchandise columns then we have the ending inventory I highly recommend setting up a worksheet like this whether it's by hand or in a computer or in excel because it answers all the types of questions That could come up with an inventory cost flow type of assumption within those sections We will then have the quantity and then the unit cost and the total cost We're gonna ask if we sell something we're calculating the cost of that sale We're gonna same thing we're gonna have the quantity the unit cost and the total cost and then the Indian inventory We're saying what is left again? We can represent that with the quantity the unit cost and then I have two costs Totals here because there's gonna be different layers So we're the first cost is going to be the cost per layer the second cost We're gonna be adding up total layer that'll make more sense as we go We're gonna start off here with inventory on the trial balance represented in terms of dollars of five thousand Trial balance represented in terms of dollars remember that when we look at inventory It's gonna be represented in terms of units and we're gonna have to convert those units into dollars So when we see it on the trial balance We need to back that number up any similar way that we needed to back up save the accounts receivable by customer Who owes us that 44 900 in terms of inventory? What makes up that five thousand dollars worth of inventory in this case? We're gonna start off with a hundred units Times the fifty dollars. I know they're very expensive coffee mugs. They don't look like much But a hundred units times fifty dollars and that's gonna give us the five thousand So that is the only layer so that's gonna be the total cost that five thousand represents the five thousand on the trial balance Let's take a look at some journal entries and see how we track this first transaction will be the purchase of 400 more units at fifty five dollars in terms of units that means of course we had 100 units now We purchased another 400 units meaning we have 500 units the journal entry is pretty straightforward Because we paid for what we paid for it's not there's no estimate involved in the journal entry That's the cash we pay we paid 400 times fifty five dollars So we're gonna say inventories going up with a debit of twenty two thousand five thousand plus the debit of twenty two thousand brings inventory on our trial balance up to twenty seven thousand dollars worth of Inventory and then we're gonna say we bought them on account so the credit's gonna go to accounts payable we had twelve thousand one fifty We're gonna credit increase in accounts payable to thirty four thousand one fifty That's what we have at this point in time now the challenge here Of course is that we're gonna have to back that number up this twenty seven thousand now needs to be backed up on our Worksheet last time we left off with one layer of a hundred units at fifty dollars now Of course, we've got that 100 units plus the 400 to the 500 units What we're gonna do is draw a line under the prior transact first We're gonna say that we have purchases the purchases are gonna be 400 units in the purchases column We purchased them for 55 dollars note that that's a higher cost than they were before Rising prices in this case 400 times 55 gives us that twenty two thousand then in terms of ending inventory We now have two layers. We had some that cost one hundred Fifty dollars and some that cost fifty five I want to have both those layers under this red line as of the point in time of the latest transaction this purchase Therefore, I'm just gonna bring this number down I'm just gonna bring these down here hundred units at fifty dollars gives us that five thousand Then we're just gonna bring these over here and say the second layer was 400 units at fifty five dollars for twenty two thousand So the five thousand plus the twenty two thousand gives us the total cost of the twenty seven thousand that dollar amount now Is what is represented on our trial balance. We have that backed up now Of course the question will be when we make a sale Which ones did we sell did we sell the cheap ones the old ones at fifty dollars or the more expensive newer ones at fifty five Remember that the mug itself completely the same. It's just the increase in price Due to the time period in which we purchased it answer when we look at FIFO Will be the old one the first ones that we're in will be the first ones of war out in this case being the cheaper ones But we are getting our head of their sales. So let's take a look at a sales transaction We're gonna say we sell four hundred and twenty units at eighty five dollars. There's two journal entries related to the sale Remember that the first half of the journal entry is no different We're not tracking the sales price if they give us the sales price in a problem It's common for us to think well have what does that have to do with our cost sheet nothing I mean we might have used the cost sheet to come up with the sales price But the sales price is not what we are tracking first half of the journal entry. Nothing is different We're gonna take the four hundred twenty times the eighty five and that's gonna be our journal entry in terms of the units Of course, we've got the five hundred units minus the four twenty gives us the eighty left That's what we're gonna have left Transaction for the first half of the journal entry will be the debit of the thirty five seven The four twenty times the eighty five And that will be increasing the receivable assuming we made the sale on account So we're increasing the receivable and the second half of it will be the revenue account because we're earning revenue at that point in time Crediting the revenue for the four twenty times the eighty five increasing the revenue This journal entry often gets neglected when we're looking at the cost-flow assumption because that's not where we're focusing in on But we need to recognize it when make a sale that that journal entry is still there That's the journal entry we normally focus on when we make the sale what we need to track now Of course is the decrease in the inventory. We had twenty seven thousand in the inventory What's the cost of those four hundred and twenty units that were sold? That's when we need to go to our worksheet and say hmm. Well, we have we're gonna say these two layers Hundred units at fifty four hundred units at fifty five We sold four hundred and twenty units therefore we're gonna be working in the cost of merchandise because that's what we're trying Calculate the cost of the goods sold here and we're saying which ones did we sell first? Well, we sold four hundred twenty units We sold the old ones first under the first and first out those being the units at fifty dollars There's only a hundred of them. We sold four twenty. Therefore. We're wiping out that entire hundred units We throw a hundred units at fifty. That's the assumption that we are making that's given us that five thousand this layer Wiped out then we have four hundred units and we sold Four hundred twenty, so we're gonna say the four hundred twenty minus the hundred that we took out of the prior layer means we have another Three hundred twenty that are in the second layer. Those are at fifty five dollars three twenty times fifty five gives us the 17 six so five thousand plus seventeen six That's the cost of goods a question could ask that or they could be asking what's left in Indian inventory Which we would then have to calculate using our worksheet here We're gonna say well, there was a hundred units on this layer We sold all of them hundred minus a hundred means there's zero left Therefore zero times a hundred fifty is zero then we had four hundred in the second layer We sold three hundred and twenty of them leaving us with that eighty There's that eighty and those eighty that are left then are at that higher cost of fifty five eighty times fifty five Is four thousand four hundred of the zero in the first layer in the four thousand four hundred second layer gives us Four thousand four hundred that is left in Indian inventory So remember we have two things here that are going on that question could ask what's the cost of goods sold twenty two six That's the journal entry that we need to record Leaving us with what's left in Indian inventory after we record that journal entry, which will be Four thousand four hundred let's post the journal entry So here's gonna be our journal entry for the cost of goods side of this sales And we're gonna say that the inventory is going down by that twenty two six that we just calculated and we're gonna credit the inventory So that's gonna bring the inventory down to that four thousand four hundred That's what's left cost of goods sold the expense related to us using the inventory in order to help us generate revenue 22,600 bringing the cost of goods sold to that twenty two thousand six hundred. There's the transaction and We can see that that four thousand four hundred now of course matches what is in our worksheet You