In which cost flow method do cost of goods sold and ending inventory represent actual costs?
Cost of goods sold and Inventory Show
Remember, cost of goods sold is the cost to the seller of the goods sold to customers. Cost of Goods Sold is an EXPENSE item. Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a reduction to Revenue. For a merchandising company, the cost of goods sold can be relatively large. All merchandising companies have a quantity of goods on hand called merchandise inventory to sell to customers. Merchandise inventory (or inventory) is the quantity of goods available for sale at any given time. You will now learn how to calculate the Cost of Goods Sold using 4 different methods.
Okay, enough theory –
how do these calculations work exactly? There are a couple of ways you can do them – there is an Inventory Record or a shortcut calculation. You will see both because they are both beneficial. Most computer systems will show you the Inventory Record form so you need to understand how to read it. However, it can be time consuming and not practical for homework and test situations so you learn the alternative method as well. We will be using the perpetual inventory system in these
examples which constantly updates the inventory account balance to reflect inventory on hand. When calculating the Cost of Goods Sold for a sale, you must IGNORE the selling price. The selling price has NOTHING to do with the cost. We are trying to determine how much the items we sold originally COST us – that is the purpose behind cost of goods sold. Next thing to remember, you can only use items that occurred BEFORE the sale (meaning, you cannot use a
purchase from August 28 when calculating cost of goods sold on August 14 – why? It hasn’t happened yet). We will pick inventory from the different purchases and use the purchase price to calculate the cost of goods sold. Using the inventory record format, the transactions from the video would look like this under the FIFO method:
Total cost of goods sold for January would be $6,850 (3,000 + 3,850). Sales would be Jan 8 Sales ( 300 units x $30) $9,000 + Jan 11 Sales (250 units x $40) $10,000 or $19,000. The gross profit (or margin) would be $12,150 ($19,000 Sales - 6,850 cost of goods sold). The journal entries for these transactions would be (assuming all transactions on credit):
LIFO (Last in, First out) Using the inventory record format, the transactions from the video would look like this under the LIFO method:
Total cost of goods sold for the month would be $7,200 (4,000 + 3,200). Since total Sales would the same as we calculated above Jan 8 Sales ( 300 units x $30) $9,000 + Jan 11 Sales (250 units x $40) $10,000 or $19,000. The gross profit (or margin) would be $11,800 ($19,000 Sales - 7,200 cost of goods sold). The journal entries for these transactions would be would be the same as show above the only thing changing would be the AMOUNT of cost of goods sold used in the
Jan 8 and Jan 15 entries. The Inventory Record for this information in the video would be:
**Jan 15 and 16 off a little from the information in the video due to rounding of the average cost.
Using an Inventory Record, cost of goods sold would look like this:
The total cost of goods sold for May would be $233,800 (59,000 + 174,800). Licenses and AttributionsAll rights reserved content
In which inventory cost flow method is the cost of the units sold and in ending inventory a weighted average of the purchase costs?However, for tax purposes, LIFO is now widely used even when it does not represent the physical flow of units. the cost of the units sold and in ending inventory is a weighted average of the purchase costs.;a weighted average unit cost for each item is computed each time a purchase is made.
What are the 4 types of cost flow methods?There are four generally accepted methods for assigning costs to ending inventory and cost of goods sold: specific cost; average cost; first‐in, first‐out (FIFO); and last‐in, first‐out (LIFO).
What is the method of accounting for inventory in which the cost of goods sold is recorded each time a sale is made?Key Takeaways. The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold. The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.
Under which method of inventory cost flows is the cost flow assumed to be in the reverse?FIFO and LIFO. Under which method of inventory cost flows is the cost flow assumed to be in the reverse order in which the expenditures were made? a. FIFO.
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