The flow of inventory in a merchandising business and determining Cost of Goods Sold (COGS).

It impacts the calculation of Cost of Goods Sold (COGS).

You have to choose a 'cost assignment' method like FIFO, LIFO, Weighted Average, or Specific Identification.

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

The initial stock or inventory you already have on hand.

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

Net Purchases refer to the total inventory acquired after adjusting for factors such as freight-in, purchase returns, and purchase discounts. It represents the effective amount of inventory bought, considering additional costs or reductions associated with the purchase.

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

The sum of Beginning Inventory and Net Purchases combined; it represents the total cost of inventory available for sale.

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

It's either sold (Cost of Goods Sold) or it remains unsold (Ending Inventory).

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

The cost of the inventory that remains unsold at the end of the period.

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

The cost of the inventory that was sold; calculated by subtracting Ending Inventory from Goods Available for Sale (GAFS).

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

It helps understand the cost structure of your inventory. It's crucial for applying inventory costing methods like FIFO, LIFO, and Weighted Average.

20 units @ $10 each = $200 total cost.

500 units @ $8 each = $4,000 total cost.

120 units @ $14 each = $1,680 total cost.

This format helps keep track of inventory items that might come at different costs due to various factors like bulk discounts, rising material costs, etc. It's crucial when applying inventory costing methods like FIFO, LIFO, and Weighted Average as it affects financial statements.

FIFO stands for "First In, First Out." It's an inventory accounting method where the oldest inventory costs are the first to be assigned as Cost of Goods Sold (COGS).

In the Perpetual FIFO method, the oldest inventory costs (the "first in") are the first to be assigned as Cost of Goods Sold (COGS), and the costs of the more recent, unsold inventory remain in ending inventory. This method continually updates inventory and COGS with each transaction.

Unlike Perpetual FIFO, which updates FIFO continuously, Periodic FIFO applies FIFO only once to update COGS and ending inventory at the end of the period.

Only FIFO!

LIFO stands for "Last In, First Out." It's an inventory accounting method where the most recently acquired inventory costs are the first to be assigned as Cost of Goods Sold (COGS).

In the Perpetual LIFO method, the most recently acquired inventory costs (the "last in") are the first to be assigned as Cost of Goods Sold (COGS), and the costs of the older, unsold inventory remain in ending inventory. This method continually updates inventory and COGS with each transaction.

Unlike Perpetual LIFO, which updates LIFO continuously, Periodic LIFO applies LIFO only once to update COGS and ending inventory at the end of the period.

Weighted Average is an inventory accounting method where the total cost of items available for sale is divided by the total number of items available for sale, giving a "weighted average" cost per item.

Total Cost / Total Units

In the Perpetual Weighted Average method, the weighted average cost is recalculated after every purchase. This new weighted average cost is then used to determine the COGS and ending inventory. This method continually updates the inventory and COGS with each transaction.

Unlike the Perpetual Weighted Average method, which recalculates the weighted average cost after every transaction, the Periodic Weighted Average method calculates the weighted average cost only once—at the end of the period—to update both COGS and ending inventory.

A unique inventory accounting method where each item's individual cost is tracked and directly linked to its sale. It does not rely on averaging or prioritizing based on acquisition time like LIFO or FIFO.

Businesses with unique, non-interchangeable items such as art galleries, high-end jewelry stores, antique shops, rare book sellers, and luxury car dealerships.

In a rising price environment, LIFO will lead to a higher COGS.

Under LIFO, COGS would be higher as it uses the latest prices, which are higher in a rising price environment.

In a rising price environment, FIFO will lead to a higher Gross Profit.

Under LIFO, Gross Profit would be lower because COGS is higher (using the latest, higher prices) compared to FIFO.

In a rising price environment, FIFO will lead to a higher Net Income.

Under LIFO, Net Income would be lower because Gross Profit is reduced due to higher COGS.

In a rising price environment, under LIFO, Taxes would be lower because Net Income is reduced, leading to a lower taxable income.

In a rising price environment, Ending Inventory under FIFO is valued at the most recent, higher prices.

In a rising price environment, Ending Inventory under LIFO is valued at older, lower prices.

LCM is an accounting principle used to value inventory at the lower of its original purchase cost or its current market value. It ensures financial statements present a conservative and realistic picture.

LCM is used to recognize losses from holding inventory that has declined in value, aligning with the conservatism principle in accounting.

Market value can be the current selling price, replacement cost, or net realizable value, depending on which is most applicable.

Compare the cost of the inventory (original purchase price) to its market value. The lower of the two becomes the valuation for the inventory on financial statements — after a "write-down" journal entry.

A "write-down" occurs when the market value of inventory is less than its cost. The difference between the two is recognized as a loss.

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

The value of inventory on the balance sheet is reduced by the amount of the "write-down".

It acknowledges the additional expense on the income statement due to the loss in value of the inventory.

It reduces the worth of the inventory on the balance sheet to reflect the decline in its value.

Gross Sales - Sales Discounts - Sales Returns and Allowances = Net Sales

The cost of the items that have been sold, representing how much it initially cost the seller to buy the products.

Net Sales - Cost of Goods Sold = Gross Profit

A system where a merchandiser maintains a continuous, real-time record of inventory on hand, updating instantly with every purchase and sale.

Provides up-to-date information on inventory levels and cost data.

Requires sophisticated systems and software which might be expensive.

Merchandiser does not maintain a real-time record of inventory. Instead, inventory balances are updated at the end of an accounting period.

Ideal for small businesses with limited inventory items due to its simplicity.

Cannot provide real-time data about the cost of goods sold or profit margin.

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