WHBM08 - Inventory & Cost of Goods Sold

Slide 8-1
Chapter
INVENTORIES AND THE COST OF GOODS SOLD
McGraw-Hill/Irwin
The McGraw-Hill Companies, Inc., 2002
Slide 8-2
Inventory Defined
Inventory
Goods owned and held for sale to customers
Current asset
McGraw-Hill/Irwin
Slide 8-3
The Flow of Inventory Costs

BALANCE SHEET
As purchase costs (or manufacturing costs) are incurred
Current assets: Inventory

$ $
INCOME STATEMENT
Revenue Cost of goods sold Gross profit Expenses Net income
McGraw-Hill/Irwin
as goods are sold

$
Slide 8-4
The Flow of Inventory Costs

In a perpetual inventory system, inventory entries parallel the flow of costs.
GENERAL JOURNAL
Date Account Titles and Explanation Entry on Purchase Date Inventory Accounts Payable Entry on Sale Date Cost of Goods Sold Inventory
McGraw-Hill/Irwin
Debit $$$$
Credit
$$$$
$$$$ $$$$
Slide 8-5
Which Unit Did We Sell?

When identical units of inventory have different unit costs, a question naturally arises as to which of these costs should be used in recording a sale of inventory.
GENERAL JOURNAL
Date Account Titles and Explanation Entry on Sale Date Cost of Goods Sold Inventory
McGraw-Hill/Irwin
Debit $$$$
Credit
$$$$
Slide 8-6
Inventory Subsidiary Ledger

A separate subsidiary account is maintained for each item in inventory.
Item LL002 Description Laser Light Location Storeroom 2 Purchased Unit Cost $ 30 50 Primary supplier Electronic City Secondary supplier Electric Company Inventory level: Min: 25 Max: 200 Balance Cost of Goods Unit Sold Units Cost Total 100 $ 30 $ 3,000 100 30 3,000 75 50 3,750 ? ? ? ? ? ? ?
Sold Unit Cost
Date Sept. 5 Sept. 9 Sept. 10
Units 100 75
Total $ 3,000 3,750
Units
10
How can we determine the unit cost for the Sept. 10 sale?
McGraw-Hill/Irwin
Slide 8-7
Inventory Cost Flows

We use one of these inventory valuation methods to determine cost of inventory sold.
Specific identification
Average cost
FIFO
McGraw-Hill/Irwin
LIFO
Slide 8-8
Information for the Following Inventory Examples

The Bike Company (TBC)
Cost of Goods Available for Sale Aug. 1 Beg. Inventory 10 units @ Aug. 3 Purchased 15 units @ Aug. 17 Purchased 20 units @ Aug. 28 Purchased 10 units @ Retail Sales of Goods Aug. 14 Sales Aug. 31 Sales $ $ $ $ 91 106 115 119 = = = = $ 910 $ 1,590 $ 2,300 $ 1,190
20 units @ $ 130 = 23 units @ $ 150 =
$ 2,600 $ 3,450
McGraw-Hill/Irwin
Slide 8-9
Specific Identification
When a unit is sold, the specific cost of the unit sold is added to cost of goods sold.
McGraw-Hill/Irwin
Slide 8-10
Specific Identification Example

Inventory Balance $ 910 $ 2,500
Date Aug. 1 Aug. 3
Purchases
10 15 @ @ $ 91 $ 106 = = $ 910 $ 1,590
Cost of Goods Sold
On August 14, TBC sold 20 bikes for $130 each.
Nine bikes originally cost $91 and 11 bikes originally cost $106.
Continue
McGraw-Hill/Irwin
Slide 8-11

819
Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14
Cost of Goods Sold
9 11
@ @
$ 91 $ 106
= =
$ 1,166
515
The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in inventory.
Continue
McGraw-Hill/Irwin
Lets look at the entries for the Aug. 14 sale.

Slide 8-12

GENERAL JOURNAL
Date Account Titles and Explanation Debit 2,600 2,600 Credit
Aug. 14 Cash Sales 14 Cost of Goods Sold Inventory
Retail Cost
1,985 1,985
A similar entry is made after each sale.

McGraw-Hill/Irwin
Continue
Slide 8-13

819
Aug. 17 Aug. 28 Aug. 31 Additional purchases were made 1 @on$August 91 = 17$and 91 28.
3 @ $ 106 = $ 318
Cost of Goods Sold for August 31 = 20 @ $ 115 = $ 2,300 $2,610 10 @ $ 119 = $ 1,190
Cost of Goods Sold
9 11
@ @
$ 91 $ 106
= =
$ 1,166
$ 515 $ 2,815 $ 4,005
Costs associated with sales on August 31 were as follows: 1 @ $91, 15 @ $ 115 = $ 1,725 3 @ $106, 15 @ $115, & 4 @ $119. 4 @ $ 119 = $ 476 $ 1,395 Continue
McGraw-Hill/Irwin
Slide 8-14

Cost of Goods Sold Inventory Balance $ 910 $ 2,500
819
Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Income Statement Aug. 14
COGS = $4,595
20 10 @ @ $ 115 $ 119
9 11
@ @
$ 91 $ 106
= =
$ 1,166
Aug. 17 Aug. 28 Aug. 31
= =
$ 2,300 $ 1,190 1 3 15 4 @ @ @ @ $ 91 $ 106 $ 115 $ 119 = = = = $ $ $ 91 318 476
$ $ $
515 2,815 4,005
$ 1,725
Balance Sheet
1,395
Inventory = $1,395
McGraw-Hill/Irwin
1 @ $ 106 = $ 106 5 @ $ 115 = 575 6 @ $ 119 = 714 End. Inv. The$ 1,395 Companies, Inc., 2002 McGraw-Hill
Slide 8-15
Since specific identification is so easy, cant we use it all the time?
Not really. Specific identification is hard to use when we sell a lot of inventory that has lots of different costs.
McGraw-Hill/Irwin
Slide 8-16
Average-Cost Method
When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Goods Units on hand Available for on the date of Sale sale
McGraw-Hill/Irwin
Slide 8-17
Average-Cost Method Example

Purchases
10 15 @ @ $ 91 $ 106 = $ 910 = $ 1,590
Date Aug. 1 Aug. 3
Cost of Goods Sold
The average cost per unit must be computed prior to each sale.
$100 = $2,500 25

Continue
McGraw-Hill/Irwin
Slide 8-18

Inventory Balance Cost of Goods Sold $ 910 $ 2,500 20 @ $ 100 = $ 2,000 $ 500
The average cost per unit is $100.
$100 = $2,500 25 Lets look at the entries for the Aug. 14 sale. The McGraw-Hill Companies, Inc., 2002
Continue
McGraw-Hill/Irwin
Slide 8-19

GENERAL JOURNAL
Date
Account Titles and Explanation
Debit 2,600
Credit 2,600
Retail
Cost
2,000 2,000

McGraw-Hill/Irwin
Continue
Slide 8-20

Purchases
10 15 20 10 @ @ @ @ $ 91 $ 106 $ 115 $ 119 = $ 910 = $ 1,590 = $ 2,300 = $ 1,190
Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28
Inventory Balance Cost of Goods Sold $ 910 $ 2,500 20 @ $ 100 = $ 2,000 $ 500 $ 2,800 $ 3,990
Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold.
Continue
McGraw-Hill/Irwin
Slide 8-21

Purchases
10 15 20 10 @ @ @ @ $ 91 $ 106 $ 115 $ 119 = $ 910 = $ 1,590 = $ 2,300 = $ 1,190
Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28
Inventory Balance Cost of Goods Sold $ 910 $ 2,500 20 @ $ 100 = $ 2,000 $ 500 $ 2,800 $ 3,990
Total Purchases Less: Sales to Date Units on Hand

McGraw-Hill/Irwin
55 -20 35
$114 = $3,990 35
Slide 8-22

Purchases
10 15 20 10 @ @ @ @ $ 91 $ 106 $ 115 $ 119 = $ 910 = $ 1,590 = $ 2,300 = $ 1,190
Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28 Aug. 31
Inventory Balance Cost of Goods Sold $ 910 $ 2,500 20 @ $ 100 = $ 2,000 $ 500 $ 2,800 $ 3,990 23 @ $ 114 = $ 2,622 $ 1,368
The average cost per unit is $114.

McGraw-Hill/Irwin
$114 = $3,990 35
Slide 8-23

Inventory Balance Cost of Goods Sold $ 910 $ 2,500 20 @ $ 100 = $ 2,000 $ 500 $ 2,800 $ 3,990 23 @ $ 114 = $ 2,622 $ 1,368
Date Purchases Aug. 1 10 @ $ 91 = $ 910 Income Statement Aug. 3 15 @ $ 106 = $ 1,590 = $4,622 Aug. COGS 14 Aug. 17 20 @ $ 115 = $ 2,300 Aug. 28 10 @ $ 119 = $ 1,190 Aug. 31
Balance Sheet
Inventory = $1,368
$114 12 = $1,368
McGraw-Hill/Irwin
Slide 8-24
First-In, First-Out Method (FIFO)
Oldest Costs
Costs of Goods Sold
Recent Costs
Ending Inventory
McGraw-Hill/Irwin
Slide 8-25
FIFO Example
910
10 10
@ @
$ 91 $ 106
= =
$ 1,060
530
The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory.

Continue
McGraw-Hill/Irwin
Slide 8-26
FIFO Example
GENERAL JOURNAL
Date
Debit 2,600
Credit 2,600
Retail
Cost
1,970 1,970

McGraw-Hill/Irwin
Continue
Slide 8-27
FIFO Example
910
Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Aug. 17 20 @ Aug. 28 10 @ Aug. 31
$ 115 $ 119 = = $ 2,300 $ 1,190
10 10
@ @
$ 91 $ 106
= =
$ 1,060
$ 530 $ 2,830 $ 4,020 $ 1,420
5 18
@ @
$ 106 $ 115
= =
530
$ 2,070
Additional purchases were made on Aug. 17 and Aug. 28. CostOn ofAugust Goods Sold for August 31 = $2,600 31, an additional 23 units were sold.
McGraw-Hill/Irwin
Continue
Slide 8-28
FIFO Example
910
COGS = $4,570
20 10 @ @
10 10
@ @
$ 91 $ 106
= =
$ 1,060
Aug. 17 Aug. 28 Aug. 31
$ 115 $ 119
= =
$ 2,300 $ 1,190 5 18 @ @ $ 106 $ 115 = = $ 530 $ 2,070
$ 530 $ 2,830 $ 4,020 $ 1,420
Balance Sheet
Inventory = $1,420
McGraw-Hill/Irwin
2 @ $ 115 = $ 230 10 @ $ 119 = 1,190 End. Inv. $ 1,420

Slide 8-29
Last-In, First-Out Method (LIFO)
Recent Costs
Costs of Goods Sold
Oldest Costs
Ending Inventory
McGraw-Hill/Irwin
Slide 8-30
LIFO Example
455
15 5
@ @
$ 106 $ 91
= =
$ 1,590 $
455
The Cost of Goods Sold for the August 14 sale is $2,045, leaving $455 and 5 units in inventory. On August 14, TBC sold 20 bikes for $130 each.
Continue
McGraw-Hill/Irwin
Slide 8-31
LIFO Example
GENERAL JOURNAL
Date
Debit 2,600
Credit 2,600
Retail
Cost
2,045 2,045

McGraw-Hill/Irwin
Continue
Slide 8-32
LIFO Example
455
Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Aug. 17 20 @ Aug. 28 10 @ Aug. 31
$ 115 $ 119 = = $ 2,300 $ 1,190
15 5
@ @
$ 106 $ 91
= =
$ 1,590 $
$ 455 $ 2,755 $ 3,945 $ 1,260
10 13
@ @
$ 119 $ 115
= =
$ 1,190 $ 1,495
Additional purchases were made on Aug. 17 and Aug. 28. Cost of Goods Sold for August 31 = $2,685 On Aug. 31, an additional 23 units were sold.
McGraw-Hill/Irwin
Continue
Slide 8-33
LIFO Example
455
COGS = $4,730
20 10 @ @ $ 115 $ 119
15 5
@ @
$ 106 $ 91
= =
$ 1,590 $
Aug. 17 Aug. 28 Aug. 31
= =
$ 2,300 $ 1,190 10 13 @ @ $ 119 $ 115 = = $ 1,190 $ 1,495
$ 455 $ 2,755 $ 3,945 $ 1,260
Balance Sheet
Inventory = $1,260
McGraw-Hill/Irwin
5 @ $ 91 = $ 455 7 @ $ 115 = 805 End. Inv. $ 1,260

Inventory Valuation Methods: A Summary Costs Allocated to: Valuation Cost of Goods Method Sold Inventory Comments Specific Actual cost of Actual cost of units Parallels physical flow identification the units sold remaining Logical method when units are unique May be misleading for identical units Average cost Number of units Number of units on Assigns all units the same sold times the hand times the average unit cost average unit cost average unit cost Current costs are averaged in with older costs First-in, First-out Cost of earliest Cost of most Cost of goods sold is based (FIFO) purchases on recently on older costs hand prior to the purchased units Inventory valued at current sale costs May overstate income during periods of rising prices; may increase income taxes due Last-in, First-out Cost of most Cost of earliest Cost of goods sold shown at (LIFO) recently purchases recent prices purchased units (assumed still in Inventory shown at old (and inventory) perhaps out of date) costs Most conservative method during periods of rising prices; often results in lower The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin income taxes
Slide 8-34
Slide 8-35
The Principle of Consistency

Once a company has adopted a particular accounting method, it should follow that method consistently, rather than switch methods from one year to the next.
McGraw-Hill/Irwin
Slide 8-36
Just-In-Time (JIT) Inventory Systems
This inventory arrived just in time for us to use in the manufacturing process.
McGraw-Hill/Irwin
Slide 8-37
Taking a Physical Inventory

The primary reason for taking a physical inventory is to adjust the perpetual inventory records for unrecorded shrinkage losses, such as theft, spoilage, or breakage.
GENERAL JOURNAL
Date Account Titles and Explanation Inventory Debit $$$$ $$$$ Credit
Dec. 31 Cost of Goods Sold
McGraw-Hill/Irwin
Slide 8-38
LCM and Other Write-Downs of Inventory

Reduces the value of the inventory.
Obsolescence
Lower of Cost or Market (LCM)
Adjust inventory value to the lower of historical cost or current replacement cost (market).
McGraw-Hill/Irwin
Slide 8-39
Goods In Transit
A sale should be recorded when title to the merchandise passes to the buyer.
F.O.B. shipping point title passes to buyer at the point of shipment.

McGraw-Hill/Irwin
Year End
F.O.B. destination point title passes to buyer at the point of destination.

Slide 8-40
Periodic Inventory Systems

In a periodic inventory system, inventory entries are as follows.
GENERAL JOURNAL
Date Account Titles and Explanation Entry on Purchase Date Purchases Accounts Payable $$$$ $$$$ Debit Credit
Note that an entry is not made to inventory.

McGraw-Hill/Irwin
Slide 8-41

In a periodic inventory system, inventory entries are as follows.
GENERAL JOURNAL
Date Account Titles and Explanation Entry on Sale Date No entry to inventory. Accounts Receivable Sales $$$$ $$$$
Debit
Credit
McGraw-Hill/Irwin
Slide 8-42
Periodic Inventory Systems The inventory on hand and the cost of goods sold for the year are not determined until year-end.
McGraw-Hill/Irwin
Slide 8-43

We use one of these inventory valuation methods in a periodic inventory system.
Specific identification
Average cost
FIFO
McGraw-Hill/Irwin
LIFO
Slide 8-44
Information for the Following Inventory Examples

Date Beginning Inventory Purchases: Jan. 3 June 20 Sept. 15 Nov. 29 Goods Available for Sale Ending Inventory Cost of Goods Sold Computers, Inc. Mouse Pad Inventory Units $/Unit 1,000 $ 300 150 200 150 5.25 5.30 5.60 5.80 5.90 Total
$ 5,250.00 1,590.00 840.00 1,160.00 885.00
1,800 1,200 600
$ 9,725.00 ? ?
McGraw-Hill/Irwin
Slide 8-45
By reviewing actual purchase invoices, Computers, Inc. determines that the 1,200 mouse pads on hand at year-end have an actual total cost of $6,400.
Determine the cost of goods sold for the year.

McGraw-Hill/Irwin
Slide 8-46

Date Beginning Inventory 1,000 $ Purchases: Jan. 3 300 June 20 150 Sept. 200 Cost15 of Goods Sold Nov. 29 150 $9,725 Goods $6,400 = $3,325 Available for Sale 1,800 Computers, Inc. Mouse Pad Inventory Units $/Unit 5.25 5.30 5.60 5.80 5.90 Total
$ 5,250.00 1,590.00 840.00 1,160.00 885.00
$ 9,725.00 $ 6,400.00 $ 3,325.00

Ending Inventory Cost of Goods Sold

McGraw-Hill/Irwin
1,200 600
Slide 8-47
Average-Cost Method
The average cost is calculated at yearend as follows:
Total Cost of Goods Available for Sale Total Number of Units Available for Sale
McGraw-Hill/Irwin
Slide 8-48

Date Beginning Inventory Purchases: Jan. 3 June 20 Sept. 15 Nov. 29 Goods Available for Sale Ending Inventory Cost of Goods Sold Computers, Inc. Mouse Pad Inventory Units $/Unit 1,000 $ 300 150 200 150 5.25 5.30 5.60 5.80 5.90 Total $ 5,250.00 1,590.00 840.00 1,160.00 885.00
Avg. Cost $9,725 1,800 = $5.40278

Ending Inventory Avg. Cost $5.40278 1,200 = $6,483 Cost of Goods Sold Avg. Cost $5.40278 600 = $3,242
1,800 1,200 1,200 600
$ 9,725.00 $ 6,483.00 ? $ 3,242.00 ?
McGraw-Hill/Irwin
Slide 8-49
First-In, First-Out Method (FIFO)
Oldest Costs
Costs of Goods Sold
Recent Costs
Ending Inventory
McGraw-Hill/Irwin
Slide 8-50
FIFO Example
Remember: Start with the 11/29 purchase and then add other purchases until you reach the number of units in ending inventory.
1,800 1,200 600
$ 9,725.00 ? ?
McGraw-Hill/Irwin
Slide 8-51
FIFO Example
Date Beg. Inv. Purchases 1,000@$5.25 300@$5.30 150@$5.60 200@$5.80 150@$5.90 End. Inv. 400@$5.25 300@$5.30 150@$5.60 200@$5.80 150@$5.90 1,200 150 $6,575 Cost of Goods Sold 600@$5.25
Jan. 3 June 20 Sept. 15 Nov. 29 Units
600 $3,150
Now, we have allocated Costs
Now, the cost to all 1,200 lets units complete the table. ending inventory. Cost in of Goods Available for Sale $9,725
McGraw-Hill/Irwin
Slide 8-52
FIFO Example
Completing the table summarizes the computations just made.
1,800 1,200 600
$ 9,725.00 $ 6,575.00 $ 3,150.00
McGraw-Hill/Irwin
Slide 8-53
Last-In, First-Out Method (LIFO)
Recent Costs
Costs of Goods Sold
Oldest Costs
Ending Inventory
McGraw-Hill/Irwin
Slide 8-54
LIFO Example
Remember: Start with beginning inventory and then add other purchases until you reach the number of units in ending inventory.
1,800 1,200 600
$ 9,725.00 ? ?
McGraw-Hill/Irwin
Slide 8-55
LIFO Example
Date Jan. 3 June 20 Sept. 15 Nov. 29 Units Beg. Inv. Purchases End. Inv. 1,000@$5.25 1,000@$5.25 300@$5.30 200@$5.30 150@$5.60 200@$5.80 150@$5.90 1,000 1,200 Cost of Goods Sold
100@$5.30 150@$5.60 200@$5.80 150@$5.90 100 600
Now, we have allocated Costs

the cost to all 1,200 units inventory. Cost in of ending Goods Available for Sale
McGraw-Hill/Irwin
$6,310 $3,415 Next, lets
complete the $9,725 table.

Slide 8-56
LIFO Example
Completing the table summarizes the computations just made.
1,800 1,200 600
$ 9,725.00 $ 6,310.00 $ 3,415.00
McGraw-Hill/Irwin
Slide 8-57
Importance of an Accurate Valuation of Inventory

Errors in Measuring Inventory
Beginning Inventory Ending Inventory 0 0
Effect on Income Statement Overstated Understated Overstated Understated Goods Available for Sale Cost of Goods Sold Gross Profit Net Income Effect on Balance Sheet Ending Inventory Retained Earnings 0 0
+ + -
+ +
+ + + +
+ -
An error in ending inventory in a year will result in the same error in the beginning inventory of the next year.
McGraw-Hill/Irwin
Slide 8-58
McGraw-Hill/Irwin
Slide 8-59
The Gross Profit Method

Determine cost of goods available for sale. Estimate cost of goods sold by multiplying the net sales by the cost ratio. Deduct cost of goods sold from cost of goods available for sale to determine ending inventory.
McGraw-Hill/Irwin
Slide 8-60
Gross Profit Method Example

In March of 2003, Chemicos inventory was destroyed by fire. Chemicos normal gross profit ratio is 30% of net sales. At the time of the fire, Chemico showed the following balances:
Sales $ 31,500 Sales returns 1,500 Beginning Inventory 12,000 Net cost of goods purchased 20,500
McGraw-Hill/Irwin
Slide 8-61
Gross Profit Method Example

Computing Inventory using the Gross Profit Method
Goods Available for Sale: Beginning Inventory $ Net cost of goods purchased Goods available for sale $ Less estimated cost of goods sold: Sales $ 31,500 Less sales returns (1,500) Net sales $ 30,000 Estimated cost of goods sold Estimated March inventory loss $
McGraw-Hill/Irwin
12,000 20,500 32,500
70%
(21,000) 11,500
Slide 8-62
Inventory Turnover Rate

Measures how quickly a company sells its merchandise inventory.
Merchandise Turnover
Cost of goods sold Average inventory
Average Inventory = (Beg. Inv. + End. Inv.) 2
A ratio that is low compared to competitors suggests inefficient use of assets.

McGraw-Hill/Irwin
Slide 8-63
Accounting Methods Can Affect Analytical Ratios

Remember that identical companies that use different inventory methods (e.g., FIFO and LIFO) will have different inventory turnover ratios.
McGraw-Hill/Irwin
Slide 8-64
End of Chapter 8
Careful! If you drop the inventory we will have another write down.
McGraw-Hill/Irwin

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Slide 8-1

INVENTORIES AND THE COST OF GOODS SOLD

The McGraw-Hill Companies, Inc., 2002

Goods owned and held for sale to customers

The McGraw-Hill Companies, Inc., 2002

The Flow of Inventory Costs

Current assets: Inventory

as goods are sold

The McGraw-Hill Companies, Inc., 2002

The Flow of Inventory Costs

Which Unit Did We Sell?

Inventory Subsidiary Ledger

Sold Unit Cost

Date Sept. 5 Sept. 9 Sept. 10

Total $ 3,000 3,750

Inventory Cost Flows

Information for the Following Inventory Examples

20 units @ $ 130 = 23 units @ $ 150 =

The McGraw-Hill Companies, Inc., 2002

The McGraw-Hill Companies, Inc., 2002

Specific Identification Example

Date Aug. 1 Aug. 3

Cost of Goods Sold

On August 14, TBC sold 20 bikes for $130 each.

Specific Identification Example

Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14

Cost of Goods Sold

Lets look at the entries for the Aug. 14 sale.

Specific Identification Example

Aug. 14 Cash Sales 14 Cost of Goods Sold Inventory

A similar entry is made after each sale.

Specific Identification Example

Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14

Cost of Goods Sold

$ 515 $ 2,815 $ 4,005

Specific Identification Example

Aug. 17 Aug. 28 Aug. 31

$ 2,300 $ 1,190 1 3 15 4 @ @ @ @ $ 91 $ 106 $ 115 $ 119 = = = = $ $ $ 91 318 476

515 2,815 4,005

Since specific identification is so easy, cant we use it all the time?

The McGraw-Hill Companies, Inc., 2002

The McGraw-Hill Companies, Inc., 2002

Average-Cost Method Example

Date Aug. 1 Aug. 3

Cost of Goods Sold

Inventory Balance $ 910 $ 2,500

On August 14, TBC sold 20 bikes for $130 each.

Average-Cost Method Example

Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14

The average cost per unit is $100.

Average-Cost Method Example

Account Titles and Explanation

Aug. 14 Cash Sales 14 Cost of Goods Sold Inventory

A similar entry is made after each sale.

Average-Cost Method Example

Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28

Average-Cost Method Example

Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28

Total Purchases Less: Sales to Date Units on Hand

The McGraw-Hill Companies, Inc., 2002

Average-Cost Method Example

Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28 Aug. 31

The average cost per unit is $114.