The average cost method is calculated by dividing the

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the inventory. The average cost method is calculated by dividing the cost of goods in inventory by the total number of items available for sale. Example: Date Units Cost per unit Total cost 09/01 20 $1,000 $20,000 09/18 15 $1,020 $15,300 09/10 30 $1,050 $31,500 09/20 10 $1,200 $12,000 09/05 25 $1,380 $34,500 Total 100 $113,300 If the business sold 72 units, the weighted average cost will be $113,300/100 = $1,133/unit. The cost of goods sold would be recorded as 72 x $1,133 = $81,576. The ending inventory at the end of the period will be 28 x $1,133 = $31,724. How are financial statements affected by using the four different methods?
Each of the four methods affects the financial statements in different ways. According to our text “the First in first out method results in lower costs of goods sold and high gross profit when costs rise. The Last in first out method results in highest cost of goods and and the lowest gross profit, which would mean lower taxable income. Weighted average generates amounts that fall between the extremes of LIFO and FIFO methods (Miller-Nobles, Mattison, & Matsumura, 2018, pg. 335).” References Miller-Nobles, T. L., Mattison, B. L., & Matsumura, E. M. (2018). Horngren’s accounting (12th ed.). Retrieved from

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