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Video instructions and help with filling out and completing Form 1125-a - valuation methods
Instructions and Help about Form 1125-a - valuation methods
In this video we're going to talk about fifl which means first-in first-out and FIFO is what we call an inventory costing assumption and what we mean by that is that when we have a certain number of units that we've purchased so we have our inventory over here and we actually go and make a sale of that inventory we sell some of it then we have to decide okay which units are we actually going to place in the cost of goods sold and which in which units are going to end up in ending inventory and this will be a little bit easier to understand in the context of an example so let's say that you have a t-shirt company you sell custom t-shirts and and let's say that you end up selling 250 t-shirts you sell 250 t-shirts now this is all the exact same type of t-shirt so you sell 250 of your best-selling t-shirt and that t-shirt is exactly the same all 250 are exactly the same so you look in your your inventory you look at your purchases of all the t-shirts that you have and you have to say okay well now how do i compute my cost of goods sold and what's my ending inventory I I going to be because look you've purchased here's there's the amount of units that you've purchased you've purchased you purchased 200 then 150 and then 225 on three different dates so you have to go ahead and say ok well I've sold now 250 shirts but I've got a lot more that I've actually purchased than 250 so which 250 did I sell because I sold them or I bought them excuse me at different prices right the ones that I bought on March 1st I bought 200 t-shirts for $10 each and then on March 16th I went and bought 150 shirts for $12 so now I have to say okay well now that I've sold these t-shirts right you remember we're going to be making an entry a journal entry about cost of goods sold we're going to be reducing our inventory we've got to do these different things but we don't know which of these units it was that that is comprising this 250 if we did know if we knew specifically which 250 we sold we could use what was called the specific identification method and say okay here are the ones that we sold on these dates and this is what they cost but we know when we buy our when we buy our t-shirts when we got purchases let's just say we take all these t-shirts and we just throw them in one big pile so we just got one big pile of inventory and so when we sell the 250 we don't know which ones they were that we actually sold it could have been any of these so that's why we make an assumption we.