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Items to Memorize

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🔹 Understanding the “Flow” of Cost of Goods Sold

📌 Chapter 5 is all about the flow of inventory in a merchandising business. And, most importantly, determining what your Cost of Goods Sold (“COGS”) is when you sell goods. While this chapter might seem challenging initially, understanding it is crucial — and much easier than you think. Dive into the hypothetical scenario below, where we use a cell phone manufacturer as an example, to understand the core essence of this chapter.

In the real world, the purchase prices of inventory are changing constantly. How does this impact the calculation of Cost of Goods Sold (COGS)?

How do you determine our COGS when the price of the inventory we purchase fluctuates? (Hint: you have to choose a ‘cost assignment’ method!)

Given these inventory transactions, can you calculate the COGS? Did the 60 units we sold cost $100, $110, or $115 per unit? (Hint: you have to choose a ‘cost assignment’ method!)

Depending on which method a company chooses (FIFO, LIFO, Weighted Average, or Specific Identification) will have major implications on both our Cost of Goods Sold (COGS) and the $ value of our ending inventory. We’re just getting started… more to come on this concept in the sections below!

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🔹 The “Holy Grail” Inventory Formula

Beginning Inventory + Net Purchases = Goods Available for Sale (GAFS) - Ending Inventory = Cost of Goods Sold (COGS)

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1. Understand this Formula Conceptually

Understanding this formula is crucial, not just for memorization but to grasp its underlying logic. Let's dive into an analogy:

Imagine you're organizing a party and you're responsible for the drinks.

“Beginning Inventory” — like the initial bottles of alcohol you already have at home.
“Plus Net Purchases” — the additional drinks you buy for the party.
“Goods Available for Sale (GAFS)” — Combine what you already had with what you just bought, and you get the total number of bottles available for the party.

Now, post-party, only two things could have happened with the drinks:

They were consumed (equivalent to goods being sold).
They remain unconsumed (equivalent to ending inventory).

Beginning Inventory + Net Purchases = Goods Available for Sale (GAFS) - Ending Inventory = Cost of Goods Sold (COGS)

The formula captures this simple reality. What's not consumed (Ending Inventory) when subtracted from what was available (GAFS) gives you what was consumed (COGS).

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2. Visualize the Formula Using an Example

From the example:

You began with an inventory worth $47,000.
Purchased additional inventory worth $62,200.
Giving a total of $109,200 available for sale.
At the period's end, assume that inventory worth $17,000 remains.
Therefore, inventory worth $92,200* was sold. 109,200 - 17,000 = $92,200

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3. Another Perspective: Units of Inventory

Exam questions can show inventory in terms of total $ value or in terms of # of units. Luckily, the same formula works for both! Beginning Inventory + Net Purchases = Goods Available for Sale - Ending Inventory = COGS

For instance, explore this hypothetical scenario:

Beginning Inventory: 500 units.
Net Purchases: Another 700 units.
Equals GAFS of 1200 units.

If 300 units are left remaining by the period's end, this means 900* units were sold. 1200 - 300 = 900

Key Takeaway: All inventory available for sale has two potential outcomes — it’s either sold (Cost of Goods Sold) or it remains unsold (Ending Inventory). Knowing your beginning inventory and what you've added to it (net purchases) provides clarity on what was available for sale in the first place. The subtraction of Ending Inventory simply indicates the outcome: sold or unsold. This concept, understood deeply, becomes a foundational tool for handling inventory questions in exams.

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🔹 Understanding the ‘Units @ $/unit = Total $ Cost’ Format

📌 Imagine you're shopping and you pick up several items of the same product, but they have different prices. To understand how much you're spending, you'd multiply the quantity of each item by its individual price. This is the essence of the ‘Units @ $/unit = Total $ Cost’ format.

Examples:

2 @ $10 = $20

This means you have 2 units, each priced at $10. So, 2 units x $10 each = $20 total cost.

5 @ $8 = $40

You're looking at 5 units, each costing $8. Doing the math: 5 units x $8 each = $40 total cost.

120 @ $14 = $1,680

Here, there are 120 units, with each priced at $14. Multiply them: 120 units x $14 each = $1,680 total cost.

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Why is this important for inventory costing?

In the real world, inventory items might come at different costs due to factors like bulk discounts, rising material costs, etc. Therefore, it's common to have multiple batches of the same item at various prices in a store or warehouse.

This format helps us keep track of these batches distinctly. Knowing the specific cost of each batch is crucial, especially when applying inventory costing methods like FIFO (First-In-First-Out), LIFO (Last-In-First-Out), and Weighted Average. These methods dictate how we value and deplete our inventory based on purchase costs, which affects our financial statements.

In summary, the ‘Units @ $/unit = Total $ Cost’ format is a straightforward way to represent and understand the cost structure of your inventory, making the application of inventory costing methods more manageable and accurate.

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🔹 Inventory Cost Assignment Methods (7 total)

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‘Perpetual FIFO’ Method

📌 FIFO, standing for "First In, First Out," is an inventory accounting method. The oldest inventory costs, or the "first in," are the first to be assigned as Cost of Goods Sold (COGS). The costs of the more recent, unsold inventory remain in ending inventory.

⚠️

To truly understand the FIFO Perpetual method, hands-on practice is crucial. Merely watching my videos or reading the guides isn't enough. Be sure you try out my 3-step Method for yourself!

Dive into my video, example problem, and accompanying guides below!

‣

🔹 FIFO Perpetual Example Problem (using 3-Step Method)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using the above transactions and the Perpetual FIFO method, calculate the Cost of Goods Sold and the total cost of the Ending Inventory for October.

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🔹 Step 1: Write out the “Holy Grail” formula and input the problem’s values.

STEP 1	Units	$ Cost
Beginning Inventory	100	$5,000
Plus All Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	(250)	🔹 (???)
Equals Cost of Goods Sold (COGS)	150	🔹 ???

	Of the 400 units available for sale, 150 were sold, leaving 250 units in the ending inventory. The challenge now is to determine the dollar value of the Ending Inventory and the Cost of Goods Sold, which we will tackle in Step 2!

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🔹 Step 2: Organize the Data using the ‘Four Column Table’ (Date | Sales | COGS | Inventory Balance)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using Perpetual FIFO, determine the COGS and the ending inventory cost for October.

Step 2: Write out the “Four Column” Table; Organize the Data Chronologically	Date	Sales	Cost of Goods Sold	Inventory Balance
Beginning Inventory	Oct 1	-	-	100 units @ $50/unit = $5,000
Purchase	Oct 12	-	-	100 units @ $50/unit = $5,000 200 units @ $60/unit = $12,000
Sale	Oct 15	50 units @ $100/unit = $5,000	50 units @ $50/unit = $2,500	50 units @ $50/unit = $2,500 200 units @ $60/unit = $12,000
Purchase	Oct 17	-	-	50 units @ $50/unit = $2,500 200 units @ $60/unit = $12,000 100 units @ $70/unit = $7,000
Sale	Oct 30	100 @ $100/unit = $10,000	50 units @ $50/unit = $2,500 50 units @ $60/unit = $3,000 150 units sold at a total “Cost of Goods Sold” of $8,000	150 units @ $60/unit = $9,000 100 units @ $70/unit = $7,000 250 units in ending inventory at a total cost of $16,000

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Helpful Hints for the “Four Column Table”

Purpose of the Table:

This table is designed to answer: “Using FIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

When entering Beginning Inventory or Purchases, only focus on the Inventory Balance column. Skip the Sales & COGS columns as these transactions only influence our inventory balance.
New purchases should be listed underneath the current inventory, maintaining a chronological "top-to-bottom" order. This ensures easy application of FIFO or LIFO.
After recording a transaction in the Inventory Balance, draw a line beneath it. It’s a simple trick to keep data organized.

Handling Sales:

Sales require attention in both the Sales & COGS columns.
The units sold (in the Sales column) should always equal the units in the COGS column.
Deduct sold items from the Inventory Balance. It’s essential to update your balance to represent the items sold at specific price points.
Determine COGS for all units sold. If you sold 100 units, establish the COGS for each one of those 100 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

🔹 Step 3: Use the “Holy Grail” Formula to Check Your Work

Check your work by plugging COGS and Ending Inventory from Step 2 into the “Holy Grail” Formula

	Units	$ Cost
Beginning Inventory	100	$5,000
Plus Net Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	- 250	- $16,000
Equals Cost of Goods Sold (COGS)	= 150	= $8,000
		Notice that the figures from Step 2 in our ‘Four Column Table’ align perfectly with the formula! Goods Available for Sale (GAFS) = $24,000 - MINUS Ending Inventory of $16,000 Equals a COGS of $8,000. 24,000 - 16,000 = 8,000! The formula **works, so our answer is correct!**

		*What if a question also asks you to calculate Gross Profit?* Total Sales Revenue: $15,000 MINUS COGS: ($8,000) Gross Profit: $7,000

Remember, the "Holy Grail" formula is your exam safety net! - If Step 2's results deviate from the formula, there's an error. - If Step 2’s results follow the formula, like above, you've nailed it! It's a huge confidence booster to know you've got an answer correct!

Additional Guides:

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Visual Aid for understanding FIFO

Struggling with FIFO? These visual aids should hopefully make it clearer!

‣

“3-Step Method” For Solving Chapter 5 Problems

Having trouble with FIFO from Chapter 5 homework or exams? Practice using my 3-step method to make them super easy!

Master (and memorize!) the following steps:

Step 1: Write out the “Holy Grail” formula, with columns for both units and $ cost, and input the variables from your problem.
Step 2: Write out the "Four Column Table" (Date | Sales | COGS | Inventory Balance). Chronologically sort the problem's data, applying whichever Cost Assignment method the problem requires for determining COGS.
Step 3: Check your work by plugging in the final values from your table (Total COGS and Total Ending Inventory) into the "Holy Grail” Formula.

Note: This method might differ from your professor's or textbook. However, regardless of the approach, you'll reach the same conclusion. Over my 8 years as a tutor, students have consistently found my method simpler. Plus, it's versatile for any problem in Chapter 5 — FIFO, LIFO, Weighted Average, or Specific Identification, Perpetual or Periodic — they’re all worked the same!

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Guide to the "Four Column Table" (Perpetual)

Setting Up: Regardless of what type of problem you’re working (FIFO, LIFO, Weighted Average, etc.) you should always write out a table with these four columns: Date | Sales | COGS | Inventory Balance.

	Date	Sales	Cost of Goods Sold	Inventory Balance

Helpful hints to remember:

Inventory and Purchases:

For Beginning Inventory and new Purchases, ONLY update the Inventory Balance column. Skip the Sales & COGS Columns.
List new Purchases below the current Inventory in the Inventory Balance column to maintain a chronological order.

Sales Transactions:

Only during a sale should you fill in the Sales & COGS columns.
Ensure the units sold in the Sales column match the units in the COGS column.
Adjust the Inventory Balance to reflect the items sold.

Organization:

Draw a line below the Inventory Balance after each transaction for clarity.

FIFO Principle: Always pull (or sell) items from the topmost (oldest) available inventory.
Determine COGS & Ending Inventory:

For COGS, sum up all the amounts in the COGS column.
For Ending Inventory, add up the costs in the last Inventory Balance section.

Validation:

Double-check that the ending units in your table match the units from Step 1. If they differ, review your work for mistakes.

Final Step: Always take a moment to verify your calculations (Step 3!) and ensure you've captured all the given data.

‣

‘Periodic FIFO’ Method

📌 FIFO, standing for "First In, First Out," is an inventory accounting method. The oldest inventory costs, or the "first in," are the first to be assigned as Cost of Goods Sold (COGS). The costs of the more recent, unsold inventory remain in ending inventory.

⚠️

To truly understand the FIFO Periodic method, hands-on practice is crucial. Merely watching my videos or reading the guides isn't enough. Be sure you try out my 3-step Method for yourself!

Dive into my video, example problem, and accompanying guides below!

‣

🔹 FIFO Periodic Example Problem (using 3-Step Method)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using the above transactions and the Periodic FIFO method, calculate the Cost of Goods Sold and the total cost of the Ending Inventory for October.

‣

🔹 Step 1: Write out the “Holy Grail” formula and input the problem’s values.

STEP 1	Units	$ Cost
Beginning Inventory	100	$5,000
Plus All Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	(250)	🔹 (???)
Equals Cost of Goods Sold (COGS)	150	🔹 ???

	Of the 400 units available for sale, 150 were sold, leaving 250 units in the ending inventory. The challenge now is to determine the dollar value of the Ending Inventory and the Cost of Goods Sold, which we will tackle in Step 2!

‣

🔹 Step 2: Organize the Data using the ‘Four Column Table’ (Date | Sales | COGS | Inventory Balance)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using Periodic FIFO, determine the COGS and the ending inventory cost for October.

Step 2: Write out the “Four Column” Table; Organize the Data ACROSS THE WHOLE PERIOD!	~~Date~~	Sales (WHOLE PERIOD)	Cost of Goods Sold (WHOLE PERIOD)	Inventory Balance (WHOLE PERIOD)
				~~→ 100 units @ $50/unit = $5,000~~ 200 units @ $60/unit = $12,000 100 units @ $70/unit = $7,000
		150 Units Sold Across Whole Period!	100 units @ $50/unit = $5,000 50 units @ $60/unit = $3,000 150 units sold at a total “Cost of Goods Sold” of $8,000	150 units @ $60/unit = $9,000 100 units @ $70/unit = $7,000 250 units in ending inventory at a total cost of $16,000

‣

Helpful Hints for the “Four Column Table”

Purpose of the Table:

This table is designed to answer: “Using Periodic FIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

Plug in your inventory balance (Beginning Inventory + Purchases) across the entire period in chronological order.
Don’t forget to update your inventory balance after considering the COGS you “pulled” from your units sold.

Handling Sales:

Combine all the units sold across the entire period.
Determine COGS for all units sold. If you sold 150 units, establish the COGS for each one of those 150 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

🔹 Step 3: Use the “Holy Grail” Formula to Check Your Work

Check your work by plugging COGS and Ending Inventory from Step 2 into the “Holy Grail” Formula

	Units	$ Cost
Beginning Inventory	100	$5,000
Plus Net Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	- 250	- $16,000
Equals Cost of Goods Sold (COGS)	= 150	= $8,000
		Notice that the figures from Step 2 in our ‘Four Column Table’ align perfectly with the formula! Goods Available for Sale (GAFS) = $24,000 - MINUS Ending Inventory of $16,000 Equals a COGS of $8,000. 24,000 - 16,000 = 8,000! The formula **works, so our answer is correct!**

		*What if a question also asks you to calculate Gross Profit?* Total Sales Revenue: $15,000 MINUS COGS: ($8,000) Gross Profit: $7,000

Additional Guides:

‣

Visual Aid for understanding FIFO

Struggling with FIFO? These visual aids should hopefully make it clearer!

‣

“3-Step Method” For Solving Chapter 5 Problems

Having trouble with FIFO from Chapter 5 homework or exams? Practice using my 3-step method to make them super easy!

Master (and memorize!) the following steps:

Step 1: Write out the “Holy Grail” formula, with columns for both units and $ cost, and input the variables from your problem.
Step 2: Write out the "Four Column Table" (Date | Sales | COGS | Inventory Balance). Chronologically sort the problem's data, applying whichever Cost Assignment method the problem requires for determining COGS.
Step 3: Check your work by plugging in the final values from your table (Total COGS and Total Ending Inventory) into the "Holy Grail” Formula.

‣

Guide to the "Four Column Table" (Periodic)

	Date	Sales	Cost of Goods Sold	Inventory Balance

Helpful hints to remember:

Purpose of the Table:

This table is designed to answer: “Using Periodic FIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

Plug in your inventory balance (Beginning Inventory + Purchases) across the entire period in chronological order.
Don’t forget to update your inventory balance after considering the COGS you “pulled” from your units sold.

Handling Sales:

Combine all the units sold across the entire period.
Determine COGS for all units sold. If you sold 150 units, establish the COGS for each one of those 150 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

‘Perpetual LIFO’ Method

📌 LIFO, standing for "Last In, First Out," is an inventory accounting method. The newest inventory costs, or the "last in," are the first to be assigned as Cost of Goods Sold (COGS). The costs of older unsold inventory remain in ending inventory.

⚠️

To truly understand the LIFO Perpetual method, hands-on practice is crucial. Merely watching my videos or reading the guides isn't enough. Be sure you try out my 3-step Method for yourself!

Dive into my video, example problem, and accompanying guides below!

‣

🔹 LIFO Perpetual Example Problem (using 3-Step Method)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using the above transactions and the Perpetual LIFO method, calculate the Cost of Goods Sold and the total cost of the Ending Inventory for October.

‣

🔹 Step 1: Write out the “Holy Grail” formula and input the problem’s values.

STEP 1	Units	$ Cost
Beginning Inventory	100	$5,000
Plus All Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	(250)	🔹 (???)
Equals Cost of Goods Sold (COGS)	150	🔹 ???

	Of the 400 units available for sale, 150 were sold, leaving 250 units in the ending inventory. The challenge now is to determine the dollar value of the Ending Inventory and the Cost of Goods Sold, which we will tackle in Step 2!

‣

🔹 Step 2: Organize the Data using the ‘Four Column Table’ (Date | Sales | COGS | Inventory Balance)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using Perpetual LIFO, determine the COGS and the ending inventory cost for October.

Step 2: Write out the “Four Column” Table; Organize the Data Chronologically	Date	Sales	Cost of Goods Sold	Inventory Balance
Beginning Inventory	Oct 1	-	-	100 units @ $50/unit = $5,000
Purchase	Oct 12	-	-	100 units @ $50/unit = $5,000 200 units @ $60/unit = $12,000
Sale	Oct 15	50 units @ $100/unit = $5,000	50 units @ $60/unit = $3,000	100 units @ $50/unit = $5,000 150 units @ $60/unit = $9,000
Purchase	Oct 17	-	-	100 units @ $50/unit = $5,000 150 units @ $60/unit = $9,000 100 units @ $70/unit = $7,000
Sale	Oct 30	100 @ $100/unit = $10,000	100 units @ $70/unit = $7,000 150 units sold at a total “Cost of Goods Sold” of $10,000	100 units @ $50/unit = $5,000 150 units @ $60/unit = $9,000 250 units in ending inventory at a total cost of $14,000

‣

Helpful Hints for the “Four Column Table”

Purpose of the Table:

This table is designed to answer: “Using LIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

When entering Beginning Inventory or Purchases, only focus on the Inventory Balance column. Skip the Sales & COGS columns as these transactions only influence our inventory balance.
New purchases should be listed underneath the current inventory, maintaining a chronological "top-to-bottom" order. This ensures easy application of FIFO or LIFO.
After recording a transaction in the Inventory Balance, draw a line beneath it. It’s a simple trick to keep data organized.

Handling Sales:

Sales require attention in both the Sales & COGS columns.
The units sold (in the Sales column) should always equal the units in the COGS column.
Deduct sold items from the Inventory Balance. It’s essential to update your balance to represent the items sold at specific price points.
Determine COGS for all units sold. If you sold 100 units, establish the COGS for each one of those 100 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

🔹 Step 3: Use the “Holy Grail” Formula to Check Your Work

Check your work by plugging COGS and Ending Inventory from Step 2 into the “Holy Grail” Formula

	Units	$ Cost
Beginning Inventory	100	$5,000
Plus Net Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	- 250	- $14,000
Equals Cost of Goods Sold (COGS)	= 150	= $10,000
		Notice that the figures from Step 2 in our ‘Four Column Table’ align perfectly with the formula! Goods Available for Sale (GAFS) = $24,000 - MINUS Ending Inventory of $14,000 Equals a COGS of $10,000. 24,000 - 14,000 = 10,000! The formula **works, so our answer is correct!**

		*What if a question also asks you to calculate Gross Profit?* Total Sales Revenue: $15,000 MINUS COGS: ($10,000) Gross Profit: $5,000

Additional Guides:

‣

Visual Aid for understanding LIFO

Struggling with LIFO? These visual aids should hopefully make it clearer!

‣

“3-Step Method” For Solving Chapter 5 Problems

Having trouble with FIFO from Chapter 5 homework or exams? Practice using my 3-step method to make them super easy!

Master (and memorize!) the following steps:

Step 1: Write out the “Holy Grail” formula, with columns for both units and $ cost, and input the variables from your problem.
Step 2: Write out the "Four Column Table" (Date | Sales | COGS | Inventory Balance). Chronologically sort the problem's data, applying whichever Cost Assignment method the problem requires for determining COGS.
Step 3: Check your work by plugging in the final values from your table (Total COGS and Total Ending Inventory) into the "Holy Grail” Formula.

‣

Guide to the "Four Column Table" (Perpetual)

	Date	Sales	Cost of Goods Sold	Inventory Balance

Helpful hints to remember:

Inventory and Purchases:

For Beginning Inventory and new Purchases, ONLY update the Inventory Balance column. Skip the Sales & COGS Columns.
List new Purchases below the current Inventory in the Inventory Balance column to maintain a chronological order.

Sales Transactions:

Only during a sale should you fill in the Sales & COGS columns.
Ensure the units sold in the Sales column match the units in the COGS column.
Adjust the Inventory Balance to reflect the items sold.

Organization:

Draw a line below the Inventory Balance after each transaction for clarity.

LIFO Principle: Always pull (or sell) items from the bottom (oldest) available inventory.
Determine COGS & Ending Inventory:

For COGS, sum up all the amounts in the COGS column.
For Ending Inventory, add up the costs in the last Inventory Balance section.

Validation:

Double-check that the ending units in your table match the units from Step 1. If they differ, review your work for mistakes.

Final Step: Always take a moment to verify your calculations (Step 3!) and ensure you've captured all the given data.

‣

‘Periodic LIFO’ Method

📌 LIFO, standing for "Last In, First Out," is an inventory accounting method. The newest inventory costs, or the "last in," are the first to be assigned as Cost of Goods Sold (COGS). The costs of older unsold inventory remain in ending inventory.

⚠️

To truly understand the LIFO Perpetual method, hands-on practice is crucial. Merely watching my videos or reading the guides isn't enough. Be sure you try out my 3-step Method for yourself!

Dive into my video, example problem, and accompanying guides below!

‣

🔹 LIFO Periodic Example Problem (using 3-Step Method)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using the above transactions and the Perpetual LIFO method, calculate the Cost of Goods Sold and the total cost of the Ending Inventory for October.

‣

🔹 Step 1: Write out the “Holy Grail” formula and input the problem’s values.

STEP 1	Units	$ Cost
Beginning Inventory	100	$5,000
Plus All Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	(250)	🔹 (???)
Equals Cost of Goods Sold (COGS)	150	🔹 ???

	Of the 400 units available for sale, 150 were sold, leaving 250 units in the ending inventory. The challenge now is to determine the dollar value of the Ending Inventory and the Cost of Goods Sold, which we will tackle in Step 2!

‣

🔹 Step 2: Organize the Data using the ‘Four Column Table’ (Date | Sales | COGS | Inventory Balance)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using Periodic LIFO, determine the COGS and the ending inventory cost for October.

Step 2: Write out the “Four Column” Table; Organize the Data ACROSS THE WHOLE PERIOD!	Date	Sales (WHOLE PERIOD)	Cost of Goods Sold (WHOLE PERIOD)	Inventory Balance (WHOLE PERIOD)
				100 units @ $50/unit = $5,000 → 200 units @ $60/unit = $12,000 ~~100 units @ $70/unit = $7,000~~
		150 Units Sold Across Whole Period!	100 units @ $70/unit = $7,000 50 units @ $60/unit = $3,000 150 units sold at a total “Cost of Goods Sold” of $10,000	100 units @ $50/unit = $5,000 150 units @ $60/unit = $9,000 250 units in ending inventory at a total cost of $14,000

‣

Helpful Hints for the “Four Column Table”

Purpose of the Table:

This table is designed to answer: “Using Periodic FIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

Plug in your inventory balance (Beginning Inventory + Purchases) across the entire period in chronological order.
Don’t forget to update your inventory balance after considering the COGS you “pulled” from your units sold.

Handling Sales:

Combine all the units sold across the entire period.
Determine COGS for all units sold. If you sold 150 units, establish the COGS for each one of those 150 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

🔹 Step 3: Use the “Holy Grail” Formula to Check Your Work

Check your work by plugging COGS and Ending Inventory from Step 2 into the “Holy Grail” Formula

	Units	$ Cost
Beginning Inventory	100	$5,000
Plus Net Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	- 250	- $14,000
Equals Cost of Goods Sold (COGS)	= 150	= $10,000
		Notice that the figures from Step 2 in our ‘Four Column Table’ align perfectly with the formula! Goods Available for Sale (GAFS) = $24,000 - MINUS Ending Inventory of $14,000 Equals a COGS of $10,000. 24,000 - 14,000 = 10,000! The formula **works, so our answer is correct!**

		*What if a question also asks you to calculate Gross Profit?* Total Sales Revenue: $15,000 MINUS COGS: ($10,000) Gross Profit: $5,000

Additional Guides:

‣

Visual Aid for understanding LIFO

Struggling with LIFO? These visual aids should hopefully make it clearer!

‣

“3-Step Method” For Solving Chapter 5 Problems

Having trouble with FIFO from Chapter 5 homework or exams? Practice using my 3-step method to make them super easy!

Master (and memorize!) the following steps:

Step 1: Write out the “Holy Grail” formula, with columns for both units and $ cost, and input the variables from your problem.
Step 2: Write out the "Four Column Table" (Date | Sales | COGS | Inventory Balance). Chronologically sort the problem's data, applying whichever Cost Assignment method the problem requires for determining COGS.
Step 3: Check your work by plugging in the final values from your table (Total COGS and Total Ending Inventory) into the "Holy Grail” Formula.

‣

Guide to the "Four Column Table" (Periodic)

	Date	Sales	Cost of Goods Sold	Inventory Balance

Helpful hints to remember:

Purpose of the Table:

This table is designed to answer: “Using Periodic FIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

Plug in your inventory balance (Beginning Inventory + Purchases) across the entire period in chronological order.
Don’t forget to update your inventory balance after considering the COGS you “pulled” from your units sold.

Handling Sales:

Combine all the units sold across the entire period.
Determine COGS for all units sold. If you sold 150 units, establish the COGS for each one of those 150 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

‘Perpetual Weighted Average’ Method

📌 Weighted Average is an inventory accounting method that takes the combined cost of all items and averages them out. This average cost is used for both Cost of Goods Sold (COGS) and any remaining units in the ending inventory. Unlike LIFO, which prioritizes the latest costs, or FIFO, which focuses on the earliest, Weighted Average considers the overall average.

⚠️

To truly understand the Perpetual Weighted Average method, hands-on practice is crucial. Merely watching my videos or reading the guides isn't enough. Be sure you try out my 3-step Method for yourself!

Dive into my video, example problem, and accompanying guides below!

‣

🔹 Perpetual Weighted Average Example Problem (using 3-Step Method)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using the above transactions and the Perpetual Weighted Average method, calculate the Cost of Goods Sold and the total cost of the Ending Inventory for October.

‣

🔹 Step 1: Write out the “Holy Grail” formula and input the problem’s values.

STEP 1	Units	$ Cost
Beginning Inventory	100	$5,000
Plus All Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	(250)	🔹 (???)
Equals Cost of Goods Sold (COGS)	150	🔹 ???

	Of the 400 units available for sale, 150 were sold, leaving 250 units in the ending inventory. The challenge now is to determine the dollar value of the Ending Inventory and the Cost of Goods Sold, which we will tackle in Step 2!

‣

🔹 Step 2: Organize the Data using the ‘Four Column Table’ (Date | Sales | COGS | Inventory Balance)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using Perpetual Weighted Average, determine the COGS and the ending inventory cost for October.

Step 2: Write out the “Four Column” Table; Organize the Data Chronologically	Date	Sales	Cost of Goods Sold	Inventory Balance
Beginning Inventory	Oct 1	-	-	100 units @ $50/unit = $5,000
Purchase	Oct 12	-	-	100 units @ $50/unit = $5,000 200 units @ $60/unit = $12,000
Sale	Oct 15	50 units @ $100/unit = $5,000	?????
Purchase	Oct 17	-	-
Sale	Oct 30	100 @ $100/unit = $10,000

‣

Helpful Hints for the “Four Column Table”

Purpose of the Table:

This table is designed to answer: “Using LIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

When entering Beginning Inventory or Purchases, only focus on the Inventory Balance column. Skip the Sales & COGS columns as these transactions only influence our inventory balance.
New purchases should be listed underneath the current inventory, maintaining a chronological "top-to-bottom" order. This ensures easy application of FIFO or LIFO.
After recording a transaction in the Inventory Balance, draw a line beneath it. It’s a simple trick to keep data organized.

Handling Sales:

Sales require attention in both the Sales & COGS columns.
The units sold (in the Sales column) should always equal the units in the COGS column.
Deduct sold items from the Inventory Balance. It’s essential to update your balance to represent the items sold at specific price points.
Determine COGS for all units sold. If you sold 100 units, establish the COGS for each one of those 100 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

🔹 Step 3: Use the “Holy Grail” Formula to Check Your Work

Check your work by plugging COGS and Ending Inventory from Step 2 into the “Holy Grail” Formula

	Units	$ Cost
Beginning Inventory	100	$5,000
Plus Net Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	- 250	- ???
Equals Cost of Goods Sold (COGS)	= 150	= ???
		Notice that the figures from Step 2 in our ‘Four Column Table’ align perfectly with the formula! Goods Available for Sale (GAFS) = $24,000 - MINUS Ending Inventory of $??? Equals a COGS of $??? 24,000 - ??? = ???! The formula **works, so our answer is correct!**

		*What if a question also asks you to calculate Gross Profit?* Total Sales Revenue: $15,000 MINUS COGS: ($???) Gross Profit: $5,000

Additional Guides:

‣

Visual Aid for understanding Weighted Average

Struggling with Weighted Average? These visual aids should hopefully make it clearer!

‣

“3-Step Method” For Solving Chapter 5 Problems

Having trouble with FIFO from Chapter 5 homework or exams? Practice using my 3-step method to make them super easy!

Master (and memorize!) the following steps:

Step 1: Write out the “Holy Grail” formula, with columns for both units and $ cost, and input the variables from your problem.
Step 2: Write out the "Four Column Table" (Date | Sales | COGS | Inventory Balance). Chronologically sort the problem's data, applying whichever Cost Assignment method the problem requires for determining COGS.
Step 3: Check your work by plugging in the final values from your table (Total COGS and Total Ending Inventory) into the "Holy Grail” Formula.

‣

Guide to the "Four Column Table" (Perpetual)

	Date	Sales	Cost of Goods Sold	Inventory Balance

Helpful hints to remember:

Inventory and Purchases:

For Beginning Inventory and new Purchases, ONLY update the Inventory Balance column. Skip the Sales & COGS Columns.
List new Purchases below the current Inventory in the Inventory Balance column to maintain a chronological order.

Sales Transactions:

Only during a sale should you fill in the Sales & COGS columns.
Ensure the units sold in the Sales column match the units in the COGS column.
Adjust the Inventory Balance to reflect the items sold.

Organization:

Draw a line below the Inventory Balance after each transaction for clarity.

Weighted Average Principle: Always pull (or sell) items at the weighted average cost per unit of your inventory as a whole.
Determine COGS & Ending Inventory:

For COGS, sum up all the amounts in the COGS column.
For Ending Inventory, add up the costs in the last Inventory Balance section.

Validation:

Double-check that the ending units in your table match the units from Step 1. If they differ, review your work for mistakes.

Final Step: Always take a moment to verify your calculations (Step 3!) and ensure you've captured all the given data.

‣

‘Periodic Weighted Average’ Method

📌 Weighted Average is an inventory accounting method that takes the combined cost of all items and averages them out. This average cost is used for both Cost of Goods Sold (COGS) and any remaining units in the ending inventory. Unlike LIFO, which prioritizes the latest costs, or FIFO, which focuses on the earliest, Weighted Average considers the overall average.

⚠️

Dive into my video, example problem, and accompanying guides below!

‣

🔹 Periodic Weighted Average Example Problem (using 3-Step Method)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using the above transactions and the Perpetual Weighted Average method, calculate the Cost of Goods Sold and the total cost of the Ending Inventory for October.

‣

🔹 Step 1: Write out the “Holy Grail” formula and input the problem’s values.

STEP 1	Units	$ Cost
Beginning Inventory	100	$5,000
Plus All Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	(250)	🔹 (???)
Equals Cost of Goods Sold (COGS)	150	🔹 ???

	Of the 400 units available for sale, 150 were sold, leaving 250 units in the ending inventory. The challenge now is to determine the dollar value of the Ending Inventory and the Cost of Goods Sold, which we will tackle in Step 2!

‣

🔹 Step 2: Organize the Data using the ‘Four Column Table’ (Date | Sales | COGS | Inventory Balance)

Assume you’re running a clothing store.

On October 1, your inventory has 100 jackets, each costing $50, totaling $5,000.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 100 jackets at $70 each, costing $7,000.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

Using Perpetual Weighted Average, determine the COGS and the ending inventory cost for October.

Step 2: Write out the “Four Column” Table; Organize the Data ACROSS THE WHOLE PERIOD!	Date	Sales (WHOLE PERIOD)	Cost of Goods Sold (WHOLE PERIOD)	Inventory Balance (WHOLE PERIOD)
				100 units @ $50/unit = $5,000 200 units @ $60/unit = $12,000 100 units @ $70/unit = $7,000
		150 Units Sold Across Whole Period!	150 units sold at a total “Cost of Goods Sold” of $???	250 units in ending inventory at a total cost of $???

‣

Helpful Hints for the “Four Column Table”

Purpose of the Table:

This table is designed to answer: “Using Periodic FIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

Plug in your inventory balance (Beginning Inventory + Purchases) across the entire period in chronological order.
Don’t forget to update your inventory balance after considering the COGS you “pulled” from your units sold.

Handling Sales:

Combine all the units sold across the entire period.
Determine COGS for all units sold. If you sold 150 units, establish the COGS for each one of those 150 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

🔹 Step 3: Use the “Holy Grail” Formula to Check Your Work

Check your work by plugging COGS and Ending Inventory from Step 2 into the “Holy Grail” Formula

	Units	$ Cost
Beginning Inventory	100	$5,000
Plus Net Purchases	+ 300	+ $19,000
Equals Goods Available for Sale (GAFS)	= 400	= $24,000
Minus Ending Inventory	- 250	- ???
Equals Cost of Goods Sold (COGS)	= 150	= ???
		Notice that the figures from Step 2 in our ‘Four Column Table’ align perfectly with the formula! Goods Available for Sale (GAFS) = $24,000 - MINUS Ending Inventory of $??? Equals a COGS of $??? 24,000 - ??? = ???! The formula **works, so our answer is correct!**

		*What if a question also asks you to calculate Gross Profit?* Total Sales Revenue: $15,000 MINUS COGS: ($???) Gross Profit: $5,000

Additional Guides:

‣

Visual Aid for understanding Weighted Average

Struggling with Weighted Average? These visual aids should hopefully make it clearer!

‣

“3-Step Method” For Solving Chapter 5 Problems

Having trouble with FIFO from Chapter 5 homework or exams? Practice using my 3-step method to make them super easy!

Master (and memorize!) the following steps:

Step 1: Write out the “Holy Grail” formula, with columns for both units and $ cost, and input the variables from your problem.
Step 2: Write out the "Four Column Table" (Date | Sales | COGS | Inventory Balance). Chronologically sort the problem's data, applying whichever Cost Assignment method the problem requires for determining COGS.
Step 3: Check your work by plugging in the final values from your table (Total COGS and Total Ending Inventory) into the "Holy Grail” Formula.

‣

Guide to the "Four Column Table" (Periodic)

	Date	Sales	Cost of Goods Sold	Inventory Balance

Helpful hints to remember:

Purpose of the Table:

This table is designed to answer: “Using Periodic FIFO, determine the COGS and the ending inventory cost for October.”
Familiarize yourself with the end goal, so you understand the steps leading up to it.

Handling Inventory:

Plug in your inventory balance (Beginning Inventory + Purchases) across the entire period in chronological order.
Don’t forget to update your inventory balance after considering the COGS you “pulled” from your units sold.

Handling Sales:

Combine all the units sold across the entire period.
Determine COGS for all units sold. If you sold 150 units, establish the COGS for each one of those 150 units.

Determining COGS & Ending Inventory:

COGS: Sum up all amounts in the COGS column.
Ending Inventory Cost: Add up the values in the final block of the Inventory Balance column.
Validate your work: Ensure the total units in your table's ending block correspond with the ending inventory units from Step 1 in the Holy Grail Formula. Discrepancies indicate an error.

Final Tips:

Always double-check your work — like we’ll see in Step 3! Mistakes can happen, but catching them early saves time and effort.
Regularly practice using this table. With repetition, the process becomes intuitive.

‣

‘Specific Identification’ Method

📌 Specific Identification is a unique inventory accounting method. With this approach, we “specifically identify” the cost of each item sold to determine Cost of Goods Sold (COGS). Each item's individual cost is tracked and directly linked to its sale, rather than averaging or prioritizing based on acquisition time as in LIFO or FIFO.

⚠️

To truly understand the Specific Identification method, hands-on practice is crucial. Merely watching my videos or reading the guides isn't enough. Be sure you try out my 3-step Method for yourself!

Dive into my video, example problem, and accompanying guides below!

‣

🔹 Specific Identification Example Problem (using “Holy Grail” Formula)

Assume you’re running a clothing store.

On October 1, your inventory has 150 jackets, each costing $50, totaling $7,500.
On October 12, you buy an additional 200 jackets at $60 each, costing $12,000.
On October 15, you sell 50 jackets for $100 each, generating $5,000.
On October 17, you buy an additional 150 jackets at $70 each, costing $10,500.
On October 30th, you sell 100 jackets for $100 each, generating $10,000.

The ending inventory consists of 50 jackets from October 1st, 170 jackets from October 12th, and 130 jackets from October 17th.

Using the above transactions and the Specific Identification method, calculate the Cost of Goods Sold and the total cost of the Ending Inventory for October.

‣

🔹 Write out the “Holy Grail” formula and input the problem’s values.

	Units	$ Cost
Beginning Inventory	150	$7,500
Plus All Purchases	+ 350	+ $22,500
Equals Goods Available for Sale (GAFS)	500	$30,000
Minus Ending Inventory	(350)	50 units @ $50/unit = $2,500 170 units @ $60/unit = $10,200 130 units @ $70/unit = $9,100 🔹 MINUS total cost of ending inventory = $21,800
Equals Cost of Goods Sold (COGS)	150	🔹 Total Cost of Goods Sold = $8,200

Additional Guides:

‣

Visual Aid for understanding Specific Identification

Struggling with Specific Identification? These visual aids should hopefully make it clearer!

‣

🔹 Cost Assignment Effects on Financial Results

‣

🔹 Cost of Goods Sold

‣

🔹 Gross Profit

‣

🔹 Net Income

‣

🔹 Taxes

‣

🔹 Ending Inventory

‣

🔹 Lower of Cost or Market

📌 The Lower of Cost or Market (LCM) method is an accounting principle used to value inventory at the lower of its original purchase cost or its current market value. This method is used to recognize losses from holding inventory that has declined in value, ensuring that the financial statements present a more conservative and realistic picture.

Explanation:

Under LCM, you compare the cost of your inventory to its market value. The lower of the two becomes the valuation for your inventory.

Cost: This is the original purchase price of the inventory.
Market Value: This can be the current selling price, replacement cost, or net realizable value, depending on which is most applicable.

After comparing these two amounts for each inventory item, you'll use the lower of cost or market for your financial statements.

Example:

Let's say you have 100 units of a particular type of electronic component in your inventory. The cost of each component was $5 when you purchased it.

Cost of Inventory = 100 units * $5/unit = $500 total cost

Now, due to technological advancements, newer models are available and the market value for the type of component you hold drops to $4 per unit.

Market Value = 100 units * $4/unit = $400 total cost

Using LCM, you would compare the cost of $500 to the market value of $400. You'll choose the lower amount, $400, to value your inventory on your balance sheet.

By doing this, you're recognizing a "write-down" of $100, using the following journal entry:

Transaction: Recording a “write-down” for Lower of Cost or Market calculations

📝

Cost of Goods Sold 100 Merchandise Inventory 100

‣

What It Means:

Credit to Merchandise Inventory ($100):

Simple: Your inventory lost value, so you reduce its worth on the balance sheet by $100.
Why: You're adjusting the books to show that your assets are now worth less than before, in line with accounting's conservatism principle.

Debit to Cost of Goods Sold ($100):

Simple: Consider this the "dump" for the $100 loss in value—this is the other side of the entry needed to make the books balance
Why: You're acknowledging that it'll effectively cost you an extra $100 to generate revenue from the inventory you have left. This is captured as an additional expense on the income statement.