12.3 How is the cost of sales calculated? Flashcards
What is a trading business most likely to do?
Buy and sell goods continually.
Is the cost for each purchase likely to be different?
Yes, the cost for each purchase of goods may be different.
As every item purchased by the business for sale looks the same, would the business know the exact cost of the goods that are sold?
No, the business will not know the exact cost of the goods that are sold and it would be very laborious if the business has to track the cost of every item that it sells in order to calculate the cost of sales.
As it would be very laborious if the business has to track the cost of every item that it sells in order to calculate the cost of sales, what is one method that is used by some trading businesses to calculate the cost of sales?
A method used to calculate the cost of sales is to assume that the goods are sold on a First-in-First Out (FIFO) basis.
Explain the FIFO basis of calculating cost of sales?
Goods purchased earliest are assumed to be sold first. Hence, it is also assumed that what is left in the inventory are goods that are purchased last.
or
FIFO assumes that old goods are sold first and that goods which are on hand are valued at current prices.
What is the advantage of using the FIFO method of calculating the cost of sales?
It simplifies how the cost of sales and ending inventory are calculated.
Do trading businesses in reality, physically move goods that are bought first to their customers before goods that are bought later?
No.
What does FIFO stand for?
FIFO stands for First-In-First-Out.
