102B: Section 1

Kimmie George
August 30, 2019
Overview
• Introduction/Administrative
• Inventory Accounting!
About Me
• Second year PhD student in the Accounting
Department
• BA Economics, BBA Accounting from the University of
Texas (hook em!)
• I love being a GSI!
• OH: Thursdays 1:00 – 2:30 in F621 or by appointment
• Email: kimberlyn@berkeley.edu
• Please include “102B” in subject line of all e-mails
• Please give me feedback on how I can make section
more useful for you!
Kirby: Assistant
GSI
It’s been a long summer…
• COGS?
• LIFO?
• FIFO?
Inventory Accounting
• What we will cover:
• Inventory flows
• COGS equation
• Journal entries
• Costing methods
Flows of Inventory
• Merchandiser

Merchandise Merchandise Cost of

purchased Inventory Goods Sold
Recall: Matching Principle

Costs incurred to generate revenues must be

recognized in the same period revenues are earned
Cost of Goods Sold Equation

Beginning
Inventory + Purchases Inventory
Beginning Inventory

= Purchases
Goods
Cost of Goods Sold
Available
for Sale
Ending Inventory

Ending Cost of
Inventory Goods Sold
Inventory remaining Inventory sold
Reported on B/S Reported on I/S
Cost of Goods Sold Equation

Beginning Inventory + Purchases –

Ending Inventory = COGS
Typical Journal Entries
Purchase Inventory - Merchandiser
Inventory (+A) …………………………………….XX
Accounts Payable (+L)…………….... XX

Make a Sale
Accounts Receivable (+A)…………………….XX
Revenue (+SE)………………………….. XX
Cost of Goods Sold (-SE)……………………..XX
Inventory(-A)……………………………. XX
Inventory Costing Methods
• Alternative ways to assign total dollar amount of
Goods Available for Sale between ending inventory
and COGS
• Four inventory costing methods
• Specific Identification
• FIFO
• LIFO
• Average Cost
Specific Identification
• When units are sold, the specific cost of the unit
sold is added to cost of goods sold
• Best used when business has low sales volume and
high dollar items
• Luxury cars
• Homes
• Jewelry
First-In, First-Out (FIFO)

Oldest Cost of
Costs Goods Sold

Recent Ending
Costs Inventory
FIFO Example
Assume the following inventory on hand and transactions
for Fashion Company during the month of January:

January 1: Had beginning inventory of 2 units of

Handbag A previously purchased for $70 each
January 12: Purchased 4 units of Handbag A at $80
each with cash
January 14: Purchased 1 unit of Handbag A at $100
with cash
January 15: Sold 4 units of Handbag A for $120 each, on
account
Calculate Goods Available for Sale
Beginning Inventory $140 (2 at $70)

+ Purchases $420 (4 at $80, 1 at $100)

= Goods Available for Sale $560 (7 units)

Calculate COGS using FIFO

Oldest Cost of
Costs Goods Sold

Total Units Sold = 4

# Units Unit Cost

2 70
2 80

COGS = 2*70 + 2*80 = $300

Calculate Ending Inventory using FIFO

Recent Ending
Costs Inventory

Total Units Left in Inventory= 3

# Units Unit Cost

2 80
1 100

Ending Inventory = 2*80 + 1*100 = $260

Inventory T-Account

Inventory

Beginning Inventory 140

January 12 320

January 14 100

300 COGS

Ending Inventory 260

Record journal entries for the
transactions on 1/12, 1/14, and 1/15
1/12 Inventory (+A) 320
Cash (-A) 320

1/14 Inventory (+A) 100

Cash (-A) 100

1/15 AR (+A) 480

Revenue (+SE) 480

COGS (-SE) 300

Inventory (-A) 300
Last-In, First-Out (LIFO)

Recent Cost of
Costs Goods Sold

Oldest Ending
Costs Inventory
LIFO Example
Assume the following inventory on hand and transactions
for Fashion Company during the month of January:

January 1: Had beginning inventory of 2 units of

Handbag A previously purchased for $70 each
January 12: Purchased 4 units of Handbag A at $80
each with cash
January 14: Purchased 1 unit of Handbag A at $100
with cash
January 15: Sold 4 units of Handbag A for $120 each;
customers paid immediately in cash
Calculate Goods Available for Sale
Beginning Inventory $140 (2 at $70)

+ Purchases $420 (4 at $80, 1 at $100)

= Goods Available for Sale $560 (7 units)

Calculate COGS using LIFO

Recent Cost of
Costs Goods Sold

Total Units Sold = 4

# Units Unit Cost

1 100
3 80

COGS = 1*100 + 3*80 = $340

Calculate Ending Inventory using LIFO

Older Ending
Costs Inventory

Total Units Left in Inventory= 3

# Units Unit Cost

1 80
2 70

Ending Inventory = 1*80 + 2*70 = $220

Average Cost
• Weighted average cost per unit is applied to both
COGS and Ending Inventory
• Calculate weighted average cost as cost of goods
available for sale divided by number of units
available for sale
Inventory Accounting for
Manufacturers - Introduction

Raw Raw Work in Finished Cost of

materials Materials Process Goods Goods
purchased Inventory Inventory Inventory Sold

Direct Labor
Incurred

Overhead
Incurred
Inventory Accounting for
Manufacturers - Introduction

Raw Materials Work in Process Finished Goods

Beginning Beginning Inventory Beginning Inventory
Inventory
Cost of Goods
Direct Materials Manufactured
Purchases
Used
Cost of
Direct Direct Labor Goods Sold
Materials Used
Manufacturing
Ending Inventory Overhead
Cost of Goods Ending Inventory
Manufactured

Ending Inventory
Questions?