30 terms

# Inventory & Cost of Goods Sold

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Is cost of inventory on hand an asset or expense; on the balance sheet or income statement?
cost of inventory on hand = asset on balance sheet
is cost of inventory that has been sold an asset or expense ; on the balance sheet or income statement?
cost of inventory that has been sold= COST OF GOODS SOLD= expense on income statement
Formula for Gross Profit
Net Sales Revenue - Cost of Goods Sold= Gross Profit
Formula for Cost of Goods Sold
Net Purchases + beginning inventory - ending inventory= Cost of Goods Sold OR
Number of Units of Inventory Sold x Cost per Unit of Inventory
Describe Periodic Inventory System
used for inexpensive goods, count goods on hand periodically, or at least once a year; cost is low
Describe Perpetual Inventory System
uses computer software to keep a running record of inventory on hand; used for all types of goods
Calculate Net Purchases
Purchases - Purchase returns and allowances - Purchase discounts + Freight in
Calculate Net Sales
Sales revenue - Sales returns and allowances - Sales discounts
List different Inventory Cost Methods
1) Specific Unit Cost
2) Average Cost
3) FIFO
4) LIFO
Formula for Average Cost
Cost of Goods Available/ Number of Units Available= Average Cost
Calculation for Cost of Goods Available
Beginning Inventory + Purchases (SUBTRACT any purchase discounts or purchase returns if present) (add Freight In cost if present) = Cost of Goods Available
Formula for Cost of Goods sold using Average Cost
Number of Units sold x average cost per unit
Formula for Ending Inventory using Average Cost
Number of Units on hand x Average Cost per Unit
Define FIFO cost
first costs into inventory are first costs assigned to Cost of Goods Sold
Formula to find ENDING INVENTORY using FIFO
beginning inventory + purchases - Cost of goods sold = Ending Inventory
(Cost of Goods Sold= Units x FIRST unit cost)
Define LIFO cost
costs opposite of FIFO; LAST costs into inventory go immediately to cost of good sold
When inventory costs are increasing what happens to COGS and Ending inventory using FIFO?
COGS= lowest
Ending inventory= highest
When inventory costs are increasing what happens to COGS and Ending inventory using LIFO?
COGS=highest
Ending inventory= lowest
When inventory costs are decreasing what happens to COGS and Ending inventory using FIFO?
COGS=highest
Ending inventory= lowest
When inventory costs are decreasing what happens to COGS and Ending inventory using LIFO?
COGS= lowest
Ending inventory= highest
What advantage in Taxes does LIFO provide as well as in measuring COGS?
results in lowest taxable income; LIFO income is more realistic
reports most up to date inventory cost on balance sheet when measuring ending inventory
Lower-of-Cost or Market Value
inventory must be reported in financial statements at whichever is lower- the inventory's historical cost or market value.
DECREASES inventory
INCREASES cost of good sold
Formula for Gross Profit Percentage
gross profit/ net sales revenue= Gross Profit Percentage
What does inventory turnover show?
how many times a company sold its average level of inventory during the year
Formula for inventory turnover
Cost of Goods Sold/ Average Inventory = Inventory Turnover
Average Inventory Turnover= Beginning Invent/End Invent. /2
COGS Model
Beginning Inventory
+Purchases
= Goods Available
- Ending Inventory
=Cost of Goods Sold
Model to Calculate Net Purchases: How much Inventory should be bought?
Cost of Goods Sold
+ Ending Inventory
=Goods Available
- Beginning Inventory
= Purchases
Calculate Ending Inventory Using Gross Profit Method
Beginning Inventory
+Purchases
= Goods Available
-Cost of Goods Sold
= Ending Inventory
What effects do inventory errors have on two consecutive periods?
COUNTERBALANCE; have opposite effects so beginning is added to COGS so ending is subtracted to COGS