In this workout, Sam Co has the following transactions. Assume the opening inventory balance is zero What we can see is that there have been two purchases One that happens on January 1st and another that happens on January 10th We notice that there were a different number of units bought but in total there were 200 units purchased Interestingly, the cost of these was different. The units bought first, cost 2 and the units bought second on January 10, cost 2.2 We then make some sales and interestingly we only sell 190 units compared to the 200 that we purchased (so we'll have some left in inventory) And this brings us onto our first question We're asked to calculate the ending balance of inventory at the end of the month under LIFO and FIFO Which is the lower? First of all we'll do LIFO LIFO means "Last In First Out". So if we look at the items that were purchased, those that were purchased on January 10 will be the first to go Because we've sold 190 units and January 10 was only 95 units, we know that all 95 have gone That means that the 10 units left in inventory (remember we purchased 200 and only sold 190, so that's 10 units) Those 10 units must be from January 1st We know they're from January 1st We know there's going to be 10 units and the value of them was 2 (the cost of them was 2) So total costs multiply the units in value, to give us a figure of 20 Now let's compare that to FIFO, "First In First Out" This means that the first ones that came in (the January 1 units, the 105), they have all gone because we sold 190 units The 10 units in inventory must be from January 10th So ending inventory under FIFO, I'm now looking at January 10th units I know I've got 10 and I know the value of them was 2.2 So the total cost is 22 Which is the lower of these two? Clearly we can see that LIFO has come out as 20 Where as the FIFO has given us inventory value of 22 And this teaches us a really good rule of LIFO and FIFO And that rule says, "in an inflationary environment, LIFO should give the lower inventory value" Quite handy to remember that one So LI for LIFO also stands for lower inventory