Methods to calculate cost of goods sold : FIFO and LIFO

There are several methods to calculate cost of goods sold such as FIFO and LIFO.

(1) First-in-first-out (FIFO)

Definition:  FIFO, one kind of inventory costing methods, assumes that the first goods purchased (the first in) are the first goods sold.

Flow chart above shows the purchases of 100L of Gas at $40/per Liter in 2002, 80L of Gas at $50/per liter in 2005 and 50L of Gas at $100/per liter in 2007, which amounts to Goods available for sale of $13000. Under FIFO, each good sold is then assumed to be removed from the bottom in sequence (100L at $40 and 80L at $50). When sale order of 50L is sent to store in 2008, the 50L at $40 is sent to customers first and these goods totaling $2000 become cost of goods sold (COGS). In 2009, the remaining 50L of gas at $40 and the extra 30L at $50 is sent out as response to the order of 80L. Then the remaining amount ((80-30)*50+50*100=7500) become ending inventory. 

(2) Last-in-first-out (LIFO)

Under LIFO, the goods sent out first should be 50L at $100 while the delivery for the second time is coming from purchase in 2005, 80L at $50. The cost of goods sold (COGS) is $9000 (50*100+80*50). Hence, the ending inventory after these two sales is $4000 (100*40).