Accounting 1 for IBA

Lecture 7

Chapter 7: reporting and interpreting cost of goods sold and inventory

Topics discussed in this lecture:

- Nature of inventory
- Invento…

Example

Apple retailer sold 12 Iphones for $700 per Iphone. The retailer paid $620 per iphone to apple inc.

inventory

inventory is tangible property that is:

(1) Held for sale in the normal course of a business o

(2) Used to produce goods and services for sale

Inventory of merchandisers (retailers/wholesales): goods usually acquired in finished condition and

are ready to sale

Merchandisers can be seen as shops that just resell a product from a manufacturer at a price higher
than the price they acquired the products for.

Inventory of manufacturing business:

- Raw material inventory

- Work in process inventory
- Finished products
Inventory management

Having sufficient quantities of high quality inventory available to serve customers’ needs while
minimizing the cost of carrying inventory

Inventory costing method

1. Specific identification

The method does not depend on physical flow of goods!

Specific identification
- specific cost of each inventory item is known
- used with low volume, high dollar cost inventory items

Example:

- Beginning inventory: 20 * 5000

- Purchases: 20 * 10000

Costs of goods available for sale:

20 * 5000 + 20 * 10000 = 300.000

Example: 10 units sold from beginning inventory and 20 from purchased items. Sales price 15.000

Sales revenue: (30 * 15000) = 450000

cost of goods sold (10 * 5000 + 20 * 10000) = - 250000
net income = 200000

ending inventory: 10 * 5000

1. Specific identification
 In most companies = difficult or impossible to match the flows of physical inventory with
sales to determine the exact cost of goods sold

How to assign amount of goods available for sale between ending inventory and cogs?

Several methods are used in practice:

2. FIFO (first in first out) the oldest product is the first to go

3. LIFO (last in first out
4. Average costs
 2. LIFO

First you sell the newest products

Net income differs from net income according to FIFO because flow of goods is not equal to flow of
costs
4) weighted average (average-cost) methid

Mix all the types of inventory

Average cost per unit:

cost of goods available for sale (beginning inventory + purchases)

number of units available for sale

- Ending inventory: Units in ending inventory X average cost per unit

- Cost of goods sold: unit sold X average cost per unit

Slide average cost per unit = 608,3

slide ending inventory = 2433,33
slide cogs = 3041,7