 Hello, in this lecture we're going to be talking about the last and first out inventory method. We will once again be selling our coffee mugs here. We will not be specifically identifying the coffee mugs that we sell, but rather using a cost flow method. That method being the last and first out this time. Whenever doing a cost flow method, I do recommend setting up a worksheet such as this with three parts to it, having the purchases, the cost of the merchandise and the ending inventory and then calculating the units that we're going to sell, the unit cost and the total cost for those particular categories. As we will do here, this will answer the most amount of questions in any format that those questions could be asked. What we are trying to do here is of course say that the inventory that is reported on the trial balance needs to be backed up in terms of a worksheet. Why? Because on the trial balance it's reported in terms of dollars and of course when we think about inventory, we often think about it in terms of units. We then need to back up this dollar amount with a unit amount and the cost per unit. That's what we're doing with the cost flow assumptions. We're going to start off with 100 units. We're going to say those 100 units started with a cost of $50, meaning that the total cost will be $5,000 and that's the only layer we have so far. So the total is $5,000. That $5,000 now matches what is on our trial balance. That will be the purpose of this worksheet. Next we're going to say that a purchase happened. We purchased 400 units at $55, therefore in terms of units, we have the 100 units. Now we purchase 400, we have 500 units. The purchase price, the journal entry for the purchase, straightforward. It's the same for FIFO or LIFO or AVERAGE. It is what it is. We bought 400 units at $55. We're going to have to pay that either now or sometime in the future. There's no estimate going on in terms of the journal entry. We're going to put it on the books, we're going to say the $55 times the $4,000, 22,000 inventory increasing from $5,000 in the debit direction of $22,000 to $27,000. Then the other side, we're going to say we bought it on account. We'll then go to accounts payable, increasingly payable by the $22,234.150. No change with that journal entry. However, we now have this $27,000 on the books in terms of inventory. We need to put that into our worksheet and be able to back that up with the amount of units that we then have. At this point in time, we have the 100 units at $50. We're going to say that we bought another 400 units. So we're going to go into the purchases column and say that we have 400 more units at the $55 for a total of $22,000. We're going to have two layers. We're going to put all the layers under this red line. This red line represented the last transaction. We want to have everything in Indian inventory under this red line as of the end of this process. Therefore, we're going to bring that 100 units at $50 down, and we're going to pull this $455 over. Therefore we have 100 units that cost $50, 400 units that cost $55 for a total of $5,000 plus the $22,000 given us that $27,000. That of course is the amount that we have on our trial balance, so we have now backed up the dollar amount using our worksheet. Now the question will be, when we make a sale, which ones did we sell? The older ones have had 100 units at $50, or the newer ones at $55. Under LIFE, we will be selling the newer units. You would think we'd want to sell the older ones first, but it's just an inventory assumption, and if we don't know which ones were actually sold, we can make whatever assumption we want. In this case, we're making the assumption that we sold the newer ones. But once again, we're getting ahead of ourselves. Let's take a look at a sales transaction in which we sell 420 units at $85. So we had 500 units minus the 420 units. In terms of units, we are then going to have the 80 units left after this process. The sales journal entry often is overlooked when we focus on the costs of goods sold because we're looking at the cost, not the sales price. So when we see this $85 in a problem, when we spent so much time working on the cost sheet, we may try to figure out how that 85 ties into the cost sheet. It doesn't. So when we do this first journal entry of the two sales journal entries, there's really no difference that happens. We're going to say the sales price that's going to be on the sticker price times the number of units 420 means that we're going to have accounts receivable, assuming we sold it on account of the 35.7, the 420 times the 85, that will increase the receivable. And the revenue will then be the same amount for the 420 crediting revenue, increasing revenue for the amount that we sold. How much did the inventory go down by in terms of dollars? And how much of the cost of goods sold should we report? We know the number of units that we sold. We don't know the cost of those units without our worksheet. So let's go to our worksheet. We're going to say another red line here. We have these two layers. We've got the 100 units at 50, the 400 at 55. Which one of those are we going to take pull from first, assuming we use a last and first out assumption. If we sold 420 of them, answer is the last ones we purchase. So the 400, the newer ones, we're going to say in our cost of goods sold column, we're going to say we sold the entire 400 units and those cost $55. 400 times 55 will give us the 22,000. We sold 420 total. So if we sold 400 and wiped out that layer, we're going to have to sell the rest for 20 minus 400 or 20 to give us the total of 420. And that's going to be of the $50 units. And that will give us 20 times 50 of 1,000. So this is the calculation of the cost of goods sold, of 22 plus the 100, 1,000. And now we're going to have to figure out what is going to be left. What's going to be left? Well, of that 400 units, we sold all of them. So that second layer, I'm going to take that off first. That's gone. Of the first layer, we had 100 units. We sold 20 of them. 100 minus 20 gives us that 80 that are left at the $50. 80 times 50 is that 4,000. And then of course, the 4,000 plus the 100 gives us that 4,000. After we do this journal entry, the cost of goods sold journal entry, 23,000, we will then be left with an Indian inventory on the trial bounce, a dollar amount of 4,000. Let's see that process. So we're going to do the second half of the journal entry, reducing inventory, recording cost of goods sold for the amount we just discussed, inventory going down by 23,000, crediting 23,000, bringing inventory from 27,000 down by 23,000 to that 4,000. And then we're going to debit the cost of goods sold, second half of that journal entry, and that will increase the cost of goods sold, bringing down net income. Now of course, the point being is that after we've recorded that cost of goods sold half and the reduction in the inventory, we are then left with $4,000 worth of inventory, the amount that matches our inventory worksheet.