ACCT 240 004 10 22 Chapter 7 Reporting and interpreting cost of goods sold and inventory Primary goals of inventory management Provide sufficient quantities of high quality inventory Minimize costs of doing so Inventory Tangible Held for Sale Used to produce goods or service Merchandise Inventory Raw Materials Inventory Work in Progress Inventory Finished Goods Inventory Cost Principle Inventory be recorded at price paid or the consideration given Invoice Price Freight Inspection Costs Preparation Costs Beginning Inventory Purchases Cost of goods available for sale Goods available for sale ending inventory cost of goods sold Inventory Costing Methods 1 Specific identification 2 First in first out 3 Last in First out 4 Weighted Average Specific Identification When units are sold the specific cost of the unit sold is added to the cost of goods sold If you have 4 things and you sell one then the cost of goods sold income statement is just the cost of the one that was sold and the ending inventory balance sheet is just the 3 that were not sold FIFO First in first out Oldest Costs Costs of goods sold Recent Costs Ending Inventory If you had those same four things this method would have CGS just be the first purchased one and then all the rest would be considered ending inventory Work from top of chart down and account for sum of cost of number of units sold so 1000 5 25 50 5 3 and then for ending inventory subtract that from goods available for sale 2k 6k 4k 12k total goods 3k remaining means 9k were sold E7 6 FIFO 2000 x 5 10k 6000 x 4 24k 1000 x 2 2k 36 000 Cost of goods sold 3000 x 2 6000 Ending Inventory LIFO 4000 x 2 8000 5000 x 4 20000 28000 Cost of goods sold 1000 x 4 4000 2000 x 5 10000 14000 Ending Inventory Weighted average 2000 x 5 10k 6000 x 4 24k 4000 x 2 8k 42k 12k units 3 5 unit x 9k units sold 31 5 k cost of goods sold LIFO Exactly the opposite of FIFO you just consider cost of good sold as the more recent as opposed to the least recent costs 3000 x 3 5 10 500 ending inventory Average cost method When a unit is sold the average cost of each unit in inventory is assigned to cost of goods sold Internationally IFRS currently does not allow use of LIFO GAAP allows different inventory accounting methods to be used for different types of inventory items IFRS requires same method be used for all inventory items that have a similar nature and use These differences can create comparability problems when one attempts to compare companies across international borders Managers choice of inventory methods Net income effects Managers prefer to report higher earnings Income tax effects Managers prefer to pay least amount of taxes LIFO Conformity If LIFO used must apply to all documents E7 13 Turnover ratio cgs avg inventory 50 144 1180 867 2 48 99 365 48 99 7 5 days