ASC 210 Balance Sheet: Inventory Valuation under LIFO Transaction Explained with Journal Entries

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Inventory valuation is a critical part of a company's financial reporting, and the ASC 210 Balance Sheet provides guidance on the recognition and presentation of assets and liabilities, including inventory. The Last-In, First-Out (LIFO) method is one of the most popular inventory valuation techniques, as it helps businesses save on taxes during times of rising prices. In this article, we will explore how the LIFO method works in the context of the ASC 210 Balance Sheet, and explain the associated journal entries.

 

Understanding the LIFO Method

The LIFO method of inventory valuation assumes that the most recently acquired items are the first to be sold or used up. This method results in the oldest items remaining in the inventory, and their costs being reported on the balance sheet. By using LIFO, companies can match their current selling prices with the most recent costs, which often leads to a higher cost of goods sold (COGS) and lower taxable income.

 

ASC 210 Balance Sheet: Inventory Valuation under LIFO Transaction

The ASC 210 Balance Sheet requires companies to present inventory at the lower of cost or net realizable value (NRV). Under the LIFO method, the cost of inventory is determined using the most recent purchase costs, and these costs are matched against the revenues generated from selling the inventory.

 

To illustrate the LIFO method, let's look at an example:
 

XYZ Company purchases 100 units of inventory on three separate occasions:

1. January: 100 units at $10 each

2. February: 100 units at $12 each

3. March: 100 units at $14 each

During April, XYZ Company sells 150 units. According to the LIFO method, the most recently purchased inventory (March and February) will be considered sold first.

 

Journal Entries for LIFO Transactions

The journal entries for the LIFO method are as follows:
 

1. Purchasing Inventory:

January:

Dr. Inventory $1,000 (100 units x $10)

• Cr. Accounts Payable $1,000
   

February:

Dr. Inventory $1,200 (100 units x $12)

• Cr. Accounts Payable $1,200
   

March:

Dr. Inventory $1,400 (100 units x $14)

• Cr. Accounts Payable $1,400

 

2. Selling Inventory:
 

Sales (150 units at a selling price of $20 each):

Dr. Accounts Receivable $3,000 (150 units x $20)

• Cr. Sales Revenue $3,000

 

Cost of Goods Sold (COGS):
 

Dr. COGS $2,000 (100 units x $14) + (50 units x $12)

• Cr. Inventory $2,000

The remaining 50 units in inventory have a cost of $10 each, resulting in an inventory balance of $500.

 

The LIFO method of inventory valuation is a useful technique for companies looking to save on taxes during periods of rising prices. By following the guidance provided by the ASC 210 Balance Sheet, businesses can ensure that their inventory is presented accurately and consistently in their financial statements. Understanding the journal entries for LIFO transactions can help both financial professionals and business owners to better grasp the impact of inventory valuation on their company's financial health.