 FIFO inventory valuation which stands for first in first out results in the oldest purchases being recorded as cost of goods hold Let's look at an example Let's assume the following inventory data March 1 beginning inventory is 200 units at $10 each March 4th. We purchased an additional 300 units at $20 each March 10th. We sold 400 units at $50 each now the $50 is the retail price not the cost We will need to figure out the cost of goods sold by applying FIFO valuation to our data March 20th. We purchased an additional 500 units at $30 each March 25th sold 300 units at $50 the price of $50 again. We'll figure out the cost in a minute Finally March 30th. We purchased 100 units at $40 each if you want to pause the video at this point and write down those numbers I would encourage you to do that and then just start it right up So with this data and using FIFO let's record the March 10th and 25th sales as well as determine the value of any inventory Assuming this is a perpetual inventory tracker Since this company uses the perpetual method of tracking inventory the dates of the transactions matter So we need to list them in chronological order Additionally, the purchases and sales are recorded when they happen So I like to present the same data in a big inventory T account In fact everything that I have listed here isn't dependent on the valuation method The items are the items that are dependent are the ones highlighted on the credit side of the account Let's figure out what those are So we know on March 10th, we sold 400 units at $50 each which gives us sales revenue of $20,000 But how much is cost of goods sold? Well, let's apply FIFO to figure that out We sold 400 units FIFO means first in first out. So the first units in are the 200 of beginning inventory So we sold all 200 units of beginning inventory leaving zero However, that doesn't account for all 400 units The next oldest items are March 4th We sold 200 units from here leaving 100 in inventory So we assume that the 400 units sold on March 10th came from 200 units of beginning inventory and 200 units from the March 4th purchase We total those and the costs of goods sold is $6,000 The next decision we need to make happens with a sale on March 25th We sold 300 units. So which 300 units did we sell using FIFO? The oldest purchases remaining are from March 4th We sold all 100 units leaving zero The next oldest purchases came from March 20th. We sold 200 of these leaving 300 in inventory So we assume that 300 units sold on March 25th came from 100 units from March 4th and 200 units from the March 20th purchase We total those and costs of goods sold is $8,000 Of course, the revenue comes from the fact that we sold 300 units at $50 each So what's the total amount of costs of goods sold and what's the value of the ending inventory? Costs of goods sold is the total of the credit side of the inventory account which in this case is $14,000 Ending inventory is the remaining amount on the debit side of the inventory account There are 300 units from the March 20th purchase with a cost a total cost of $9,000 and 100 units from the March 30th purchase with a total cost of $4,000 This totals 400 units and a value of $13,000 Finally if we were completing a perpetual inventory record you can see the purchases were entered in the purchase columns The units sold are recorded and notice that they total the costs of goods sold already computed March 10th $6,000 and March 25th $8,000 Finally ending inventory is a running total that results in 400 units of inventory with a cost of $13,000