 Hello, in this lecture, we will define first-in, first-out inventory method, also known as FIFO. Two fundamental accounting principles while 20-second addition, the definition of first-in, first-out is method to assign cost to inventory that assumes items are sold in the order acquired. Earliest items purchased are the first sold. So we're talking about a method and inventory assumption method, meaning we're not doing specific identification, we're not specifically identifying the cost of the specific inventory sold, we're having a cost flow assumption, that assumption being that the items we purchase first are the first ones that we sell. That assumption does not mean that the physical flow happens that way all the time, although the first-in, first-out assumption is probably closer to what most would imagine we would at least want the inventory flow to be, meaning the first ones we purchased are going to hopefully be the first ones that we sell, but that's not necessarily the case when we're making an assumption. Let's take a look at an example. If we have an example here, we're going to sell 420 units at $85. That $85 is the sales price, not the cost. When we look at the cost, we got to go to our worksheet and say, okay, how much did we purchase these items for? On our worksheet, we're going to have two layers of inventory. Now, it's all the same inventory as these coffee mugs, but we purchased them for different amounts because we purchased them at different times. We purchased 100 of them at an earlier point in time for $50. Yes, they're expensive coffee mugs, but they're nicer than they look here, so $50 was the earlier purchase for a total of 5,000 of that purchase. Then, we purchased another 400 at $55. The price went up to $55, even though it's the same coffee mug. Now, we're selling 420 of them. Question is, which ones do we sell first under first and first out FIFO? We sell the older ones first. If we're trying to decide which ones we're going to sell, we're going to sell 100 of them at $50. That's going to wipe out that category. Then, we're going to sell another 320 to bring us up to the 420 that we sold at $55. That's going to give us the 176. If we multiply that out, what does that mean is leftover? What's an ending inventory? Well, there's no more of these 100 left over at 50. Those are gone. Of the 400 minus the 320, 80 are left at the 55, meaning ending inventory in terms of dollars is now 4,400 backed up by 80 units at $50. The cost of goods sold for this transaction then is the 5,000 plus the 176 or the 226. If we were to record this transaction, the second half of the transaction, not the sales half, the sales half being a debit to cash or cost of goods sold and a credit to sales, then our inventory side of things, which means that we're reducing the inventory here to the 4,004 and we're recording the related expense to cost of goods sold. That's going to be our transaction. Of course, what's going to be left in the trial bounce or the balance sheet after this transaction, that same 4,400 that is on our inventory worksheet under the FIFO method.