Available goods for sale beginning inventory

Available goods for sale = beginning inventory + inventory purchased during period
 Ending inventory on balance sheet: What remains unsold from available goods
 Cost of goods sold in income statement: What is sold from available goods
 The ending inventory of one, becomes the beginning for the next
 Cost of goods sold equation : BI + P – EI = CGS
 Amount of cost of goods sold in ending inventory can be determined by using these inventory systems:

Disadvantages of periodic:
 Number of units on hand * unit cost = $ ending inventory
 Cost of goods sold must be calculated with equation
 Periodic has lack of inventory info. Only available periodically when inventory is
counted
Gross profit = net sales revenue - cost of goods sold
Pretax income = gross profit – expenses
Cost of goods available = beginning inventory + purchases
Cost of goods sold = cost of goods available – ending inventory
How to determine cost of ending inventory and cost of goods sold:
When all units are purchased at same unit cost it is simple, if not:
Inventory costing methods:
1. Specific identification : not used
2. First in first out (FIFO): fruit and food
 Earliest goods purchased are the first sold
 FIFO allocates the oldest unit costs to the cost of goods sold and the newest unit costs to ending inventory
 Example : first 2 units of $70 were beginning inventory, 4 units of $80 and 1 of $100 were purchased = $560 goods available
for sale. 4 units are sold (2 $70 and 2 $80). Cost of goods sold = $300, and cost of ending inventory = $260
3. Last in first out (LIFO): products like cured oil, minerals
 Last goods purchased are the first sold.
 LIFO allocated the newest unit costs to cost of goods sold and the oldest unit costs to ending inventory
 Example : first 2 units of $70 were beginning inventory, 4 units of $80 and 1 of $100 were purchased = $560 goods available
for sale. 4 units were sold (1 $100 and 3 at $80). Cost of goods sold = $340 and cost of ending inventory = $220
4. Average cost (weighted average cost): gas (when new is added it is mixed with old)
 Uses weighted average cost of goods available for sale for both cost of goods sold and ending inventory costs
 Average cost = cost of goods available for sale / number of units available for sale
 Cost of goods sold = # units sold * weighted average cost per unit
 Ending inventory = # units still on hand * weighted average cost per unit
Accounting method choosing:
 Net income effects: prefer to report higher earnings
 Income tax effects: pay least taxes as late as possible
Choice of inventory costing methods:
LIFO conformity rule : if LIFO is used on the US income tax return, it must also be used for financial reporting
 When inventory costs are increasing, managers will choose LIFO
 When inventory costs are decreasing, managers will chose FIFO
Report inventory at the lower cost or market (LCM):
 Net realizable value = sales value – selling costs
 When the cost of a product is less than its market value then, it can be sold at that price. If the cost is higher than the market
value it should be sold at the market price and a write down needs to be made
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