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Unformatted text preview: ns. Importantly, the assumptions bear no
relation to the physical flow of goods; they are merely used to assign costs to inventory units. (Note:
FIFO and LIFO are pronounced with a long “i” and long “o” vowel sound). Another method that
will be discussed shortly is the specific identification method; as its name suggests, it does not
depend on a cost flow assumption. Download free ebooks at bookboon.com
26 Inventory Costing Methods Current Assets: Part II 6.3 First-in, First-out Calculations
With first-in, first-out, the oldest cost (i.e., the first in) is matched against revenue and assigned to
cost of goods sold. Conversely, the most recent purchases are assigned to units in ending inventory.
For Mueller’s nails the FIFO calculations would look like this: Please click the advert Budget-Friendly. Knowledge-Rich.
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27 Inventory Costing Methods Current Assets: Part II 6.4 Last-in, First-out Calculations
Last-in, first-out is just the reverse of FIFO; recent costs are assigned to goods sold while the oldest
costs remain in inventory: 6.5 Weighted average Calculations
The weighted-average method relies on average unit cost to calculate cost of units sold and ending
inventory. Average cost is determined by dividing total cost of goods available for sale by total units
available for sale. Mueller Hardware paid $330 for 300 pounds of nails, producing an average cost
of $1.10 per pound ($330/300). The ending inventory consisted of 140 pounds, or $154. The cost of
goods sold was $176 (160 pounds X $1.10): 6.6 Preliminary Recap and Comparison
The preceding discussion is summarized by the following comparative illustrations. Examine each,
noting how the cost of beginning inventory and purchases flow to ending inventory and cost of
goods sold. As you examine this drawing, you need to know that accountants usually adopt one of
these cost flow assumptions to track inventory costs within the accounting system. The actual
physical flow of the inventory may or may not bear a resemblance to the adopted cost flow
assumption. Download free ebooks at bookboon.com
28 Inventory Costing Methods Current Assets: Part II 6.7 Detailed Illustrations
Having been introduced
to the basics of FIFO, LIFO,
and weighted-average, it is
now time to look at a more
In this illustration, there will
also be some beginning
inventory that is carried
over from the preceding
year. Assume that Gonzales
Chemical Company had a beginning inventory balance that consisted of 4,000 units with a cost of
$12 per unit. Purchases and sales are shown in the sch...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.
- Fall '13