CHAPTER 6- Cost of Goods Sold and Inventory
Nature of Inventory and cost of goods sold
Inventory represents products Held for resale and is classified as a current asset on the balance sheet. When companies sell their inventory to customers, the cost of the inventory becomes an expense called cost of goods sold.
Cost of goods sold, cost of sales, or cost of merchandise sold, represents the outflow of resources caused by the sale of inventory and is the most important expense on the income statement of companies that sell goods instead of services.
(Cost of Goods Sold)
Gross margin indicates the extent to which the resources ...view middle of the document...
During 2013, the company purchased goods from a supplier costing $411,000. At the end of 2013, the cost of the unsold inventory was $38,000. Compute cost of goods sold at December 31, 2013?
Beginning Inventory | $26,000 |
+ Purchases | +411,000 |
= Cost of Goods Available for Sale | 437,000 |
- Ending Inventory | -38000 |
= Cost of Goods Sold | 399,000 |
Let’s try one from the textbook that is a little more complicated. Exercise 6-42 page 341
Wilson Company sells a single product. At the beginning of the year, Wilson had 150 units in stock at a cost of $8 each. During the year, Wilson purchased 825 more units at a cost of $8 each and sold 240 units at $13 each, 210 units at $15 each and 335 units at $14 each.
Beginning Inventory $1200
+ Purchases 6600
= Cost of Goods Available for Sale 7800
- Ending Inventory((150+825-240-210-335)x $8)(1520)
= Cost of Goods Sold 6280
Perpetual Inventory System
Balances for inventory and cost of goods sold are continually (perpetually) updated with each sale or purchase of inventory. This system records both the revenue and cost side of sales transactions. Here the accounting system keeps an up-to-date record of both ending inventory and cost of goods sold at any point in time.
Periodic Inventory System
Records the cost of purchases as they occur (in an account separate from the inventory account), takes a physical count of inventory at the end of the period (periodically), and applies the cost of goods sold model to determine the balances of ending inventory and cost of goods sold.
Inventory Cost Flow Methods
An inventory costing method determines how costs are allocated to cost of goods sold and ending inventory.
Four inventory cost flow methods are:
1. SPECIFIC IDENTIFICATION
Determines the cost of ending inventory and the cost of goods sold based on the identification of the actual units sold and in inventory. Detailed records are to be kept for each purchase and sale so that a company knows exactly which items were sold and the cost of those items.
2. FIRST IN FIRST OUT (FIFO)
This method is based on the assumption that costs move through inventory in an unbroken stream, with the costs entering and leaving the inventory in the same order. In other words, the earliest (oldest) purchases (the first in) are assumed to be the first sold (the first out) and the more recent purchases are in ending inventory.
3. LAST IN FIRST OUT (LIFO)
Allocates the cost of goods available for sale between ending inventory and cost of goods sold based on the assumption that the most recent purchases (the last in) are the first to be sold (the first out). The most recent purchases (newest costs) are allocated to the cost of goods sold and the earliest purchases (oldest costs) are allocated to inventory.
4. WEIGHTED AVERAGE
Weighted Average allocates the cost of goods available for sale between ending inventory and cost of...