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

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

3. 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 $

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

5. 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.

6. 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

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

8. 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 $20.00 = $200 COGS

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

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

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

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

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