6.2 Inventory Cost Determination Formulas Flashcards
What are the methods to determine cost of goods sold
1) Specific Identifications
2) FIFO
3) Average cost
Specific Identification
when all goods are specific and identifiable, with different costs/items/barcodes
if you have items A (woth 75) B (250) C(910)
and you sell A and B for 2000 each
whats your inventory and whats your cogs
Inventory: 910
cogs: 75+250
do you use the sale price or the cost of th good sold amount to reduce the inventory acct when selling goods?
always use the cost of the goods sold!!!! because sale price is profit genrating
What is the speciific identification cost formula
Cost of goods sold= the goods you sold
Ending inventory= goods not sol
when to use speciifc identification formula
Companies use this formula primarily in businesses with a relatively small number of costly items that are easily distinguishable
can u use specific identification in perpetual or periodic?
both
FIFO meaning
first in-first out
what is the basic assumption of fifo
the earilest goods purchased are the first to be sold
how is cogs determined in fifo?
use the cost of the earliest goods purchased
how is the cost of ending inventory determined in fifo
the costs of the most recently purchased items
does FIFO mean the company HAS to sell the oldest inventory firsT?
no!!! since you cant speicifically identify them we assume
Because it is normally good business practice to sell first those units that have been in inventory the longest (the oldest units), using FIFO often corresponds with the actual flow of inventory.
Because it is normally good business practice to sell first those units that have been in inventory the longest (the oldest units), using FIFO often corresponds with the actual flow of inventory.
how to read those purchases/ cogs/ balance charts?
basically things get used up! the first purchase units needs to be sold first and then the second
how to check costs of goods solvd and ending inventory values
COGS+ Ending Inventory=
COGavailable for sale (beginning inventory+purchases)
what is the main check to do in FIFO:
Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale
Cost of Goods Sold + Ending Inventory = Cost of Goods Available for Sale
Beginning Inventory + Cost of Goods Purchased = Cost of Goods Sold + Ending Inventory
WHAT IS the average cost formula
cog available for sale/ units available for sale= weight avg unit cost
why do we need the average cost formula
-> because you cant really determine a specific physical flow of inventory when all the goods you are selling are the same/interchangeable
-> when u fill ur car, the old gas + new gas mix and mingle
what does avg cost formula do?
find the weighted average unit cost!
Calculate the weighted average unit cost after each purchase of goods under a perpetual inventory system.
Calculate the weighted average unit cost after each purchase of goods under a perpetual inventory system
is the average cost a moving average!!
yes! you calculate with each new purchase
should you use rounded or unrounded values in avg cost calculationS?
always unrounded !!!! keep in calculator
Although FIFO assumes that the oldest inventory is sold first, this does not necessarily mean that the company actually sells the oldest units first. It just means that the first costs that the company records in cost of goods sold are the costs of the oldest units.
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