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Inventories & Cost of Goods

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Chapter 8

Inventory
Items held by the company for re-sale
Current asset on the Balance Sheet

Items sold shifted to Cost of Goods Sold


Expense on the Income Statement

Sales revenue based on retail price of


inventory
Cost of Goods Sold based on cost of
inventory

Two Inventory Systems

Periodic
Count items to
determine quantity on
hand
Used for inexpensive
items
Used by small
businesses
Low cost

Perpetual
Running record of
inventory kept by
computer program
Used by large
businesses
Scanners and bar
codes used to record
transactions

Perpetual Entries (Purchases)


To record purchases of inventory on cash
JOURNAL
Date

Accounts

Inventory
Cash

Debit

Credit

Perpetual Entries (Sales)


To record sale of inventory on cash
Two entries required
JOURNAL
Date

Accounts

Cash
Sales

Debit

Credit

Retail price

Cost of goods sold


Inventory

Cost

Periodic Entries (Purchases)


To record purchases of inventory on cash
JOURNAL
Date

Accounts

Inventory
Cash

Debit

Credit

Periodic Entries (Sales)


To record sale of inventory on cash
Only one entry required
JOURNAL
Date

Accounts

Cash
Sales

Debit

Credit

Retail price

Inventory Costing Methods


To determine the cost of inventory sold or
on hand, the units are multiplied by the
unit cost
Inventory items are often purchased at
different prices throughout the year
Company selects a costing method to
determine which unit cost to use

Inventory Costing Methods

Specific-unit-cost
Average cost
First-in, first-out (FIFO)
Last-in, first-out (LIFO)

Specific-unit-cost
Each item in inventory can be separately
identified
Used for unique items
Cars, Machines etc.

Too expensive for homogeneous items

Average-cost
An average of inventory costs
Cost of goods available
Number of units available

= Average cost per unit

Average cost per unit x units sold = Cost of goods sold


Average cost per unit x units on hand = Ending inventory

FIFO
Oldest items assumed to be sold first
Ending inventory will consist of most
recent items purchased

LIFO
Newest items are assumed to be sold first
Ending inventory consists of oldest items
in inventory

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