Chapter 06 – Inventories and Cost of Sales
VISUAL #6-1
Schedule of Cost of Goods Available
Units Cost Total
Jan. 1 Beginning Inventory 60 @ $10 = $ 600
Jan. 7 Purchase 90 @ 11 = 990
Jan. 15 Purchase 100 @ 13 = 1,300
Jan 25 Purchase 50 @ 16 = 800
Goods available for sale 300 $3 ,690
Sold a total of 230 units for $20 per unit. Timing of sales is as follows:
Jan. 1- Sold 30 units (actual CPU* $10)
Jan. 9- Sold 70 units (actual CPU: 20 @ $10 and 50 @ $11)
Jan 17-Sold 100 units (actual CPU: 50 @ $13, 30 @ $11 and 20 @ $10)
Jan 28-Sold 30 units (actual CPU: 20 @ 16, 10 @ $13)
*CPU= Cost per unit
Cost Flow Assumptions or
Methods of Assigning Cost to Units as Sold (CGS)
(Using a Perpetual Inventory System)
(1) Specific Identification – Each time a sale occurs, the actual invoice cost of
the units sold is identified and charged to cost of goods sold. This leaves the
actual cost of units left in inventory.
(2) Weighted Average – Each time a sale occurs, the weighted average cost per
unit is determined (based on total cost of goods available at point of sale
divided by total number of units of goods available at point of sale). This
cost is charged to cost of goods sold, leaving a weighted average cost in
inventory.
(3) First-in, First-out (FIFO) – Each time a sale occurs, the costs of the earliest
units acquired are charged to cost of goods sold, leaving costs of most recent
purchases in inventory.
(4) Last-in, First-out (LIFO) – Each time a sale occurs, costs of the most
6-1
Chapter 06 – Inventories and Cost of Sales
VISUAL #6-2
Schedule of Cost of Goods Available
Units Cost* Total
Jan. 1 Beginning Inventory 60 @ $10 = $ 600
Mar. 27 Purchase 90 @ 11 = 990
Aug. 15 Purchase 100 @ 13 = 1,300
Nov. 6 Purchase 50 @ 16 = 800
Goods available for sale 300 $3 ,690
Units in physical count at year end 70
*CPU= Cost per unit
Cost Flow Assumptions or
Methods of Assigning Cost to Units in Ending Inventory
(Using a Periodic Inventory System)
(1) Specific Identification – requires that each item in an
inventory be assigned its actual invoice cost.
(2) Weighted Average – a weighted average cost per unit is
determined based on total cost and units of goods available for
sale. This cost is assigned to units in the ending inventory.
(3) First-in, First-out (FIFO) – assumes the first units acquired
(beginning inventory) are the first to be sold and that
additional sales flow is in the order purchased. Therefore, the
costs of the last items received are assigned to the ending
inventory.
(4) Last-in, First-out (LIFO) – assumes the last units acquired
(most recent purchase) are the first units sold. Therefore, the
cost of the first items acquired (starting with beginning
inventory) is assigned to the ending inventory.
Note: In all methods, Cost of Good Sold equals Cost of Good Available minus
Ending Inventory (as computed by chosen method).
6-2
Education.
Chapter 06 – Inventories and Cost of Sales
VISUAL #6-3
6-3
Education.
CGA
always
has 2 parts
OBSERVATIONS
CGA Net Sales
– EI (varies by method) – CGS (affected by method)
CGS (affected by method) Gross Profit (affected by method)
Verbally identify the impact of LIFO & FIFO on net income in a period of rising prices
and a period of declining prices.
Which method(s) will result in the same EI and CGS under both a Perpetual and
Periodic Inventory System?
Chapter 06 – Inventories and Cost of Sales
Alternate Demonstration Problem #1
Chapter Six
The ABC Company had the following inventory record for the month of
January:
# of Unit
Date Description Items Price Item
1/1 Beginning
inventory 5 $20 Z1–Z5
1/5 Sale 2 Z2, Z5
1/11 Purchase 9 12 Z6—Z14
1/28 Sale 7 Z1, Z3, Z6, Z7, Z8, Z9, Z14
Required:
Assuming a perpetual inventory system is used, determine the cost of
goods sold and the ending inventory
1. FIFO
2. LIFO
3. Weighted average
4. Specific identification
6-4
Which costs
to assign to
each?
Varies by
method
FIFO
out = sold
(first or earliest
costs)
LIFO
out = sold
(last or most recent)
In an inflationary
period
(rising prices)
highestlowestCGS
most recent
costs
CGS
earliest
costs
CGS
lowesthighest EI
earliest
costs
EI
most recent
costs
EI
Chapter 06 – Inventories and Cost of Sales
Solution: Alternate Demonstration Problem
Chapter Six
1.
FIFO Perpetual
Date Purchases Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $20 = $100
2.
LIFO Perpetual
Date Purchases Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $ 20 = $100
Total CGS $40 + 84 = $124
6-5
Chapter 06 – Inventories and Cost of Sales
3.
Weighted Average Perpetual
Date Purchases Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $20 = $100
4.
Specific Identification Perpetual
Date Purchases Sales at Cost Inventory
Balance
1/1
Beginning
Inventory
5 @ $ 20 = $100
Z1-Z5
1/5 2 @ $20 = $ 40
Z2, Z5
3 @ $20 = $ 60
Z1, Z3, Z4
Ending Inventory
Total CGS $40 + 100= $140
6-6
Chapter 06 – Inventories and Cost of Sales
Alternate Demonstration Problem #2
Chapter Six
M&M Company had the following inventory record for the month of July:
Date Description Quantity Unit Price Total
July 1 Beginning Inventory 100 $5.00 $ 500.00
5 Purchase #1 400 6.00 2,400.00
18 Purchase #2 500 8.00 4,000.00
27 Purchase #3 200 9.00 1,800.00
Available for Sale 1,200 $8,700.00
July 31 Ending Inventory 400
Required:
Compute the cost of the ending inventory and cost of goods sold using
FIFO method, Weighted Average Method and LIFO method. M&M uses the
periodic inventory system to account for its inventory.
6-7
Chapter 06 – Inventories and Cost of Sales
Alternate Demonstration Problem #2 Solution
Chapter Six
M&M Company had the following inventory record for the month of July:
Date Description Quantity Unit Price Total
July 1 Beginning Inventory 100 $5.00 $ 500.00
5 Purchase #1 400 6.00 2,400.00
18 Purchase #2 500 8.00 4,000.00
July 31 Ending Inventory 400
Required:
Compute the cost of the ending inventory and cost of goods sold using
FIFO method, Weighted Average Method and LIFO method. M&M uses the
periodic inventory system to account for its inventory.
FIFO Method
Ending Inventory
From
Ending Inv. 400
$3,400.00
FIFO Method
Cost of Goods Sold
Cost of Goods Sold $
5,300.00
Weighted Average Method
Ending Inventory
$ available for Sale = $8,700 =
$7.25
# available for Sale 1,200
Weighted Average Method
Cost of Goods Sold
Goods Available for Sale
$8,700.00
LIFO Method
Ending Inventory
LIFO Method
Cost of Goods Sold
6-8
Education.
Chapter 06 – Inventories and Cost of Sales
From
Beg. Inventory 100 x $5 = $
500.00
Goods Available for Sale $
8,700.00
6-9