INVENTORIES AND THE COST OF GOODS SOLD

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INVENTORIES AND COST OF GOODS SOLD

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INVENTORIES AND THE COST OF GOODS SOLD Chapter 8 INVENTORIES AND THE COST OF GOODS SOLD 2

Goods owned and held for sale to customers Inventory Defined Inventory Goods owned and held for sale to customers Current asset

The Flow of Inventory Costs BALANCE SHEET Current assets: Inventory As purchase costs (or manufacturing costs) are incurred $ $ as goods are sold INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income $

The Flow of Inventory Costs In a perpetual inventory system, inventory entries parallel the flow of costs.

Which Unit Did We Sell? Does it make a difference? When identical units of inventory have different costs, a question arises as to which of these costs should be used in recording the sales transaction.

Specific identification Inventory Cost Flows We use one of these inventory valuation methods to determine cost of inventory sold. Specific identification LIFO Average cost FIFO 4

Specific Identification When a unit is sold, the specific cost of the unit sold is added to cost of goods sold. *Record Exact Price

Units on hand on the date of sale Average-Cost Method When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost Of Goods Available for Sale Units on hand on the date of sale ÷ Ex: COGAS ($2,000) / units (100) = $20.00 per unit Sold 10 units @ $20.00 = $200 COGS

Average-Cost Method – Example Retail Cost A similar entry is made after each sale. Continue

First-In, First-Out Method (FIFO) Oldest Costs Recent Costs Costs of Goods Sold Ending Inventory

Let’s determine the COGS for selling 10 oranges using the FIFO method: Shipment #1 12 Oranges cost 2 cents each Shipment #2 24 Oranges cost 4 cents each Determine COGS for selling 14 oranges using FIFO:

Last-In, First-Out Method (LIFO) Recent Costs Oldest Costs Costs of Goods Sold Ending Inventory

Let’s determine the COGS for selling 10 oranges using the LIFO method: Shipment #1 12 Oranges cost 2 cents each Shipment #2 24 Oranges cost 4 cents each Determine COGS for selling 26 oranges using LIFO: