Ch 7 Reporting and Interpreting Cost of Goods Sold and Inventory 04 20 2014 Inventory Management goals Have sufficient quantity of high quality inventory Minimize costs of holding inventory Merchandizers hold merchandize inventory goods for resale on the normal course of business Manufacturer hold raw materials acquired to turn into finished goods hold work in progress inventory not yet finished hold finished goods inventory ready for sale Cost of Goods Sold COGS Equation We start with beginning inventory during the acct period new purchases of inventory are added these two are the goods available for sale What remains at the end of the period becomes ending inventory on the The portion of goods available for sale that is sold becomes Cost of Goods Balance Sheet Sold Equation Beg Inventory Purchases COGS End Inventory or Beg Inventory Purchases End Inventory COGS Perpetual an Periodic Inventory Systems Perpetual Assume that every time there is a sale of inventory a journal entry is created Periodic They count the physical goods remaining at the end of the period Problem with periodic is that there might be some inexplicable low or excess of inventory Inventory costing methods Prices increase decrease of fluctuate over time Specific Identification We know the specific cost of each item and when it is sold Used for high value goods like diamonds cars etc FIFO First in First out First goods purchased are the first goods sold last goods purchased are left in ending inventory The ending Inventory will always be bigger than on LIFO LIFO Last in First out Last goods purchased are the first goods sold first goods purchased are left in ending inventory The COGS will always be bigger than on FIFO Average Cost method Cost of Goods available for sale Unit of Goods available for sale Cost of goods available for sale cost of beg inventory cost of purchases COGS and Ending Inventory will always be in between FIFO and LIFO When unit costs are rising FIFO Higher ending inventory LIFO Higher COGS When unit costs are falling FIFO Higher COGS LIFO Higher ending inventory Ex For inventory with increasing costs LIFO is used on tax return because it normally result in lower income taxes Since net income revenues COGS if COGS is higher then net income will be lower and so will be the taxes EXAMPLE Gator Co has the following records for inventory for the year Date Beginning Inventory February Purchases June Purchases October Purchases Units Unit 3 00 450 150 300 400 200 1 050 4 00 4 50 5 00 Total Cost 1 200 1 800 1 000 4 450 During the year 650 units were sold at 8 each Calculate the dollar amounts for Ending Inventory Cost of Goods Sold and Gross Profit under the following three inventory costing methods FIFO Ending Inventory 200 x 5 200 x 4 5 1 000 900 1900 COGS 150 x 3 300 x 4 200 x 4 5 450 1 200 900 2550 Gross Profit Sales Rev 650 x 8 5 200 GP Sales Revenue COGS 5 200 2 550 2650 LIFO Ending Inventory 150 x 3 250 x 4 450 1 000 1450 COGS 200 x 5 400 x 4 5 50 x 4 1 000 1 800 200 3 000 Gross Profit Sales Rev 650 x 8 5 200 GP SR COGS 5 200 3 000 2200 Weighted Average Round your weighted average to 2 decimal places 4450 1050 Cost of goods available for sale Number of units availb for sale Price per unit 4 238 Ending Inventory 400 units x 4 24 1695 COGS 650 units x 4 24 2755 Gross Profit Sales Rev 650 x 8 5 200 GP SR COGS 5 200 2 755 2445 Inventory Count Errors Overstated Inventory this year Gross Profit will be overstated this year and understated the next Understated Inventory this year Gross Profit will be understated this year and overstated the next When the Market value of ending inventory is lower than the historical cost we report the market value the lower value 04 20 2014 04 20 2014
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