Professional Documents
Culture Documents
of Goods Sold
Learning Objectives
Account for inventory transactions
Analyze the various inventory methods
Identify the income and the tax effects of the
inventory methods
Use the gross profit percentage and inventory
turnover to evaluate a business
Estimate inventory by the gross profit method
Show how inventory errors affect cost of goods
sold and income
Beginning Inventory
Quantities of Merchandise on hand
Purchases
New Purchases or Manufactured products
Ending Inventory
Remaining Unsold Merchandise
Calculation
Cost of Beginning
Inventory
+Cost of Purchases
___________________
=Cost of Goods
Available for Sale
- Cost of Ending
Inventory
___________________
=Cost of Goods Sold
Cost of Beginning
Inventory
+Cost of Purchases
___________________
=Cost of Goods
Available for Sale
- Cost of Goods Sold
___________________
=Cost of Ending
Inventory
Inventory Sold
Purchases
Ending
As Inventory is Sold we remove its cost from the Asset side of A=L+E and
Insert its cost into an Expense on the Equity side of A = L + E
This property exists for all Assets: As they are used up or sold the cost
Transfers from the Balance Sheet as a Future Economic Resource (Asset)
To the Income Statement as an Expense incurred to generate Revenue
Perpetual system
Keeps a running record of all goods bought and
sold.
Inventory counted at least once a year.
Used for all types of goods.
Number of units of
inventory on hand
Inventory
560,000
Accounts Payable
Purchased inventory on account
Inventory
Beg. 100,000
560,000
Accounts Payable
560,000
560,000
Recording Transactions
and the T-Accounts
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory
900,000
900,000
540,000
540,000
Recording Transactions
and the T-Accounts
Inventory
Beg. 100,000 540,000
560,000
120,000
Reporting in the
Financial Statements
Income Statement (partial)
Sales revenue
$900,000
Cost of goods sold
540,000
Gross profit
$360,000
Ending Balance Sheet (partial)
Current assets:
Cash
$ XXX
Short-term investments
XXX
Accounts receivable, net
XXX
Inventory
120,000
Prepaid expenses
XXX
Inventory Costing
Sum of all costs incurred to bring asset to
its intended use
Methods for determining per unit
Inventory Cost
Specific unit cost
Average cost
First-in, first-out (FIFO) cost
Last-in, first-out (LIFO) cost
Illustrative Data
Beginning inventory (10 units @ $10)
$ 100
No. 1 (25 units @ $14 per unit)
$350
No. 2 (25 units @ $18 per unit)
450
Total purchases
800
Cost of goods available for sale
$ 900
Ending inventory:
Cost of goods sold:
20 units
40 units
Average Costing
Average Cost
per unit
100
350
450
300
Weighted-Average
FIFO
First costs into inventory are first costs assigned to cost of
goods sold.
100
350
450
360
LIFO
Last costs into inventory are first costs assigned to cost of
goods sold.
100
350
450
240
Income Effects of
Inventory Methods
Assumed
Sales
Revenue
Cost of
Goods
Sold
640
600
540
660
Gross
Profit
=
=
=
=
$360
$400
$460
$340
Income Effects
When inventory costs are increasing
LIFO cost of goods sold is highest, gross profit
is lowest.
FIFO cost of goods sold is lowest, gross profit
is highest.
Other Issues
Tax advantages of LIFO in periods of
rising prices
Higher Cost of Goods Sold = Lower Net Income
= Lower Income Taxes
Inventory Errors
Each inventory error affects:
Inventory
Cost of goods sold
Gross profit
Net income