{"id":3606,"date":"2020-10-21T16:53:30","date_gmt":"2020-10-21T16:53:30","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=3606"},"modified":"2020-11-16T16:49:17","modified_gmt":"2020-11-16T16:49:17","slug":"effects-of-inventory-cost-methods","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/effects-of-inventory-cost-methods\/","title":{"raw":"Effects of Inventory Cost Methods","rendered":"Effects of Inventory Cost Methods"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Compare and contrast the effect of different cost flow assumptions on gross profit and net income<\/li>\r\n<\/ul>\r\n<\/div>\r\nHere is the recap of the four cost assumptions using the periodic method of accounting for ending inventory and COGS using the numbers from the introduction to this section:\r\n<table class=\"fin-table acctstatement\"><caption>NewCo Sporting Goods\r\nGross Profit Calculation - <br>periodic method<\/caption>\r\n<thead>\r\n<tr>\r\n<td><\/td>\r\n<th scope=\"col\">SpecID<\/th>\r\n<th scope=\"col\">WAVE<\/th>\r\n<th scope=\"col\">FIFO<\/th>\r\n<th scope=\"col\">LIFO<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross sales<\/td>\r\n<td class=\"r\">$ 620.00<\/td>\r\n<td class=\"r\">$ 620.00<\/td>\r\n<td class=\"r\">$ 620.00<\/td>\r\n<td class=\"r\">$ 620.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of Goods Sold<\/td>\r\n<td class=\"r\">368.00<\/td>\r\n<td class=\"r\">374.88<\/td>\r\n<td class=\"r\">352.00<\/td>\r\n<td class=\"r\">396.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$252.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$245.12<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$268.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$224.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit %<\/td>\r\n<td class=\"r\">40.65%<\/td>\r\n<td class=\"r\">39.54%<\/td>\r\n<td class=\"r\">43.23%<\/td>\r\n<td class=\"r\">36.13%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nAnd here is that same data presented using the perpetual method:\r\n<table class=\"fin-table acctstatement\"><caption>NewCo Sporting Goods\r\nGross Profit Calculation -\r\nperpetual method<\/caption>\r\n<thead>\r\n<tr>\r\n<td><\/td>\r\n<th scope=\"col\">SpecID<\/th>\r\n<th scope=\"col\">WAVE<\/th>\r\n<th scope=\"col\">FIFO<\/th>\r\n<th scope=\"col\">LIFO<\/th>\r\n<\/tr>\r\n<\/thead>\r\n<tbody>\r\n<tr>\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross sales<\/td>\r\n<td class=\"r\">$ 620.00<\/td>\r\n<td class=\"r\">$ 620.00<\/td>\r\n<td class=\"r\">$ 620.00<\/td>\r\n<td class=\"r\">$ 620.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Cost of Goods Sold<\/td>\r\n<td class=\"r\">368.00<\/td>\r\n<td class=\"r\">369.15<\/td>\r\n<td class=\"r\">352.00<\/td>\r\n<td class=\"r\">384.00<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit<\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$252.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$250.85<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$268.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$236.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Gross profit %<\/td>\r\n<td class=\"r\">40.65%<\/td>\r\n<td class=\"r\">40.46%<\/td>\r\n<td class=\"r\">43.23%<\/td>\r\n<td class=\"r\">38.06%<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nNotice that specific identification is the same under both the periodic and perpetual method since we were using the actual cost of the item matched against the revenue it produced. Also, FIFO is the same under both systems since the oldest layers of inventory are cleared out first, leaving current costs in ending inventory.\u00a0LIFO and moving weighted average are different, though, because of the constant updating of the accounting records.\r\n\r\nIn addition, what differences do you see between the assumptions?\r\n\r\nLIFO gives the lowest gross profit, but only because the prices of our inventory purchases were rising. If our costs were falling, LIFO would give the highest gross profit. FIFO then, in periods of rising prices, will give us a higher gross profit than LIFO because we would be using the oldest (lower) costs for COGS.\r\n\r\nWeighted average (or moving weighted average if you are using a perpetual inventory accounting system) will always fall between FIFO and LIFO. Specific identification will usually be somewhere between the two, but depending on the actual physical flow of goods, it could also be very close to one or the other.\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Question<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23767\r\n\r\n<\/div>\r\n<div class=\"textbox key-takeaways\">\r\n<h3>Summary<\/h3>\r\nIn summary, here are your choices:\r\n\r\nYou can use FIFO, LIFO, weighted average, or specific identification cost flow assumptions, and either a perpetual accounting or periodic accounting to move those costs from inventory to COGS.\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Compare and contrast the effect of different cost flow assumptions on gross profit and net income<\/li>\n<\/ul>\n<\/div>\n<p>Here is the recap of the four cost assumptions using the periodic method of accounting for ending inventory and COGS using the numbers from the introduction to this section:<\/p>\n<table class=\"fin-table acctstatement\">\n<caption>NewCo Sporting Goods<br \/>\nGross Profit Calculation &#8211; <br \/>periodic method<\/caption>\n<thead>\n<tr>\n<td><\/td>\n<th scope=\"col\">SpecID<\/th>\n<th scope=\"col\">WAVE<\/th>\n<th scope=\"col\">FIFO<\/th>\n<th scope=\"col\">LIFO<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<td>Gross sales<\/td>\n<td class=\"r\">$ 620.00<\/td>\n<td class=\"r\">$ 620.00<\/td>\n<td class=\"r\">$ 620.00<\/td>\n<td class=\"r\">$ 620.00<\/td>\n<\/tr>\n<tr>\n<td>Cost of Goods Sold<\/td>\n<td class=\"r\">368.00<\/td>\n<td class=\"r\">374.88<\/td>\n<td class=\"r\">352.00<\/td>\n<td class=\"r\">396.00<\/td>\n<\/tr>\n<tr>\n<td>Gross profit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$252.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$245.12<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$268.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$224.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<tr>\n<td>Gross profit %<\/td>\n<td class=\"r\">40.65%<\/td>\n<td class=\"r\">39.54%<\/td>\n<td class=\"r\">43.23%<\/td>\n<td class=\"r\">36.13%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>And here is that same data presented using the perpetual method:<\/p>\n<table class=\"fin-table acctstatement\">\n<caption>NewCo Sporting Goods<br \/>\nGross Profit Calculation &#8211;<br \/>\nperpetual method<\/caption>\n<thead>\n<tr>\n<td><\/td>\n<th scope=\"col\">SpecID<\/th>\n<th scope=\"col\">WAVE<\/th>\n<th scope=\"col\">FIFO<\/th>\n<th scope=\"col\">LIFO<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<td>Gross sales<\/td>\n<td class=\"r\">$ 620.00<\/td>\n<td class=\"r\">$ 620.00<\/td>\n<td class=\"r\">$ 620.00<\/td>\n<td class=\"r\">$ 620.00<\/td>\n<\/tr>\n<tr>\n<td>Cost of Goods Sold<\/td>\n<td class=\"r\">368.00<\/td>\n<td class=\"r\">369.15<\/td>\n<td class=\"r\">352.00<\/td>\n<td class=\"r\">384.00<\/td>\n<\/tr>\n<tr>\n<td>Gross profit<\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$252.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$250.85<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$268.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$236.00<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<tr>\n<td>Gross profit %<\/td>\n<td class=\"r\">40.65%<\/td>\n<td class=\"r\">40.46%<\/td>\n<td class=\"r\">43.23%<\/td>\n<td class=\"r\">38.06%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Notice that specific identification is the same under both the periodic and perpetual method since we were using the actual cost of the item matched against the revenue it produced. Also, FIFO is the same under both systems since the oldest layers of inventory are cleared out first, leaving current costs in ending inventory.\u00a0LIFO and moving weighted average are different, though, because of the constant updating of the accounting records.<\/p>\n<p>In addition, what differences do you see between the assumptions?<\/p>\n<p>LIFO gives the lowest gross profit, but only because the prices of our inventory purchases were rising. If our costs were falling, LIFO would give the highest gross profit. FIFO then, in periods of rising prices, will give us a higher gross profit than LIFO because we would be using the oldest (lower) costs for COGS.<\/p>\n<p>Weighted average (or moving weighted average if you are using a perpetual inventory accounting system) will always fall between FIFO and LIFO. Specific identification will usually be somewhere between the two, but depending on the actual physical flow of goods, it could also be very close to one or the other.<\/p>\n<div class=\"textbox tryit\">\n<h3>Practice Question<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23767\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23767&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23767\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<div class=\"textbox key-takeaways\">\n<h3>Summary<\/h3>\n<p>In summary, here are your choices:<\/p>\n<p>You can use FIFO, LIFO, weighted average, or specific identification cost flow assumptions, and either a perpetual accounting or periodic accounting to move those costs from inventory to COGS.<\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-3606\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Effects of Inventory Cost Methods. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":17,"menu_order":11,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Effects of Inventory Cost Methods\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"2ecb4f83-4303-430c-b407-e7de5561bcf1, ab910fa6-b923-483f-9009-d39562855a69","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-3606","chapter","type-chapter","status-publish","hentry"],"part":102,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3606","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/users\/17"}],"version-history":[{"count":8,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3606\/revisions"}],"predecessor-version":[{"id":5867,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3606\/revisions\/5867"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/102"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/3606\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/media?parent=3606"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=3606"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/contributor?post=3606"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/wp-json\/wp\/v2\/license?post=3606"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}