{"id":147,"date":"2015-03-18T23:57:44","date_gmt":"2015-03-18T23:57:44","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&#038;p=147"},"modified":"2017-08-22T16:34:01","modified_gmt":"2017-08-22T16:34:01","slug":"inventory-methods-for-ending-inventory-and-cost-of-goods-sold","status":"web-only","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/inventory-methods-for-ending-inventory-and-cost-of-goods-sold\/","title":{"raw":"Inventory Methods under Perpetual Inventory Method","rendered":"Inventory Methods under Perpetual Inventory Method"},"content":{"raw":"<p class=\"p1\"><span class=\"s1\"><b>Cost of goods sold and Inventory<\/b><\/span><\/p>\r\n<p class=\"p2\"><span class=\"s1\">Remember, <strong>cost of goods sold<\/strong> is the cost to the seller of the goods sold to customers. Cost of Goods Sold is an <strong>EXPENSE<\/strong> item. Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a <em>reduction to Revenue<\/em>.\u00a0\u00a0<\/span>For a merchandising company, the cost of goods sold can be relatively large. All merchandising companies have a quantity of goods on hand called merchandise inventory to sell to customers. <b>Merchandise inventory<\/b> (or inventory) is the quantity of goods available for sale at any given time.<\/p>\r\nYou will now learn how to calculate the Cost of Goods Sold using 4 different methods.\r\n\r\nThe 4 methods of Cost of Goods Sold you will learn are:\r\n<ul>\r\n \t<li><strong>FIFO (First in, First out)<\/strong> \u2013 this means you will use the OLDEST inventory first to fill orders. This also means the oldest costs will appear in Cost of Goods Sold (since this is an Expense account this also means oldest costs will appear in the Income Statement). The most recent costs are shown in the Inventory asset account balances and are provided on the Balance Sheet. This is an advantage because you are now reporting Inventory at the current cost which better reflects what it would cost to replace inventory if that would become necessary due to a disaster. FIFO shows the actual flow of goods\u2026typically you will sell the oldest inventory before the newest inventory.<\/li>\r\n \t<li><strong>LIFO (Last in, First out)<\/strong> \u2013 this means you will use the MOST RECENT inventory first to fill orders. Cost of goods sold will reflect the current or most recent costs and are a better representation of matching since you are matching revenue will current costs of the inventory. The Balance Sheet will show inventory at the oldest inventory costs and may not represent current market value.<\/li>\r\n \t<li><strong>Weighted Average (also called Average Cost)<\/strong> \u2013 this method is best used when the prices change from purchase to purchase and you want consistency. The weighted average method smooths out price changes so you have a steady stream of cost instead of sharp increases and decreases. You will calculate a new Average Cost after each Purchase (Sales will not change the average cost).<\/li>\r\n \t<li><strong>Specific Identification<\/strong> \u2013 clearly, this will be your favorite method\u2026it is the easiest to calculate in our examples because it specifically tells you which purchases inventory comes from. This is most often used for high priced inventory \u2013 think car sales for example. When a car dealership purchases a blue BMW convertible for $20,000 and later sells it for $60,000\u2026they will want to show the exact cost of the BMW it sold as opposed to the cost of another car. So, specific identification exactly matches the costs of the inventory with the revenue it creates.<\/li>\r\n<\/ul>\r\nOkay, enough theory \u2013 how do these calculations work exactly?\u00a0 There are a couple of ways you can do them \u2013 there is an Inventory Record or a shortcut calculation.\u00a0\u00a0You will\u00a0see both because they are both beneficial.\u00a0 Most computer systems will show you the Inventory Record form so you need to understand how to read it.\u00a0 However, it can be time consuming and not practical for homework and test situations so you learn the alternative method as well. \u00a0<em><strong>We will be using the perpetual inventory system in these examples which constantly updates the inventory account balance to reflect inventory on hand.<\/strong><\/em>\r\n\r\nWhen calculating the Cost of Goods Sold for a sale, you must <em>IGNORE <\/em>the selling price.\u00a0 The selling price has NOTHING to do with the cost.\u00a0\u00a0 We are trying to determine how much the items we sold originally <strong>COST us<\/strong> \u2013 that is the purpose behind cost of goods sold.\u00a0 Next thing to remember, you can only use items that occurred BEFORE the sale (meaning, you cannot use a purchase from August 28 when calculating cost of goods sold on August 14 \u2013 why?\u00a0 It hasn\u2019t happened yet).\u00a0 We will pick inventory from the different purchases and use the <strong>purchase price<\/strong> to calculate the cost of goods sold.\r\n\r\n<strong>FIFO (First in, First Out)<\/strong>\r\n\r\nUnder the FIFO method, we will use the oldest inventory <em>at the time of the sale<\/em> first.\u00a0 You must calculate Cost of Goods Sold for each sale individually.\u00a0 Watch this video on the FIFO Method.\r\n\r\nhttps:\/\/youtu.be\/BkxcgocMUVo\r\n\r\nUsing the inventory record format, the transactions from the video would look like this under the FIFO method:\r\n\r\n&nbsp;\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td style=\"text-align: center\"><strong>Date<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Goods Purchased<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Cost of Goods Sold<\/strong><\/td>\r\n<td style=\"text-align: center\">\n\n<strong>Inventory Balance (or Ending Inventory)<\/strong>\r\n\r\n<strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Jan 1<\/strong><\/td>\r\n<td>Beginning Balance<\/td>\r\n<td><\/td>\r\n<td>300 units x $10 = $3,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Jan 2<\/strong><\/td>\r\n<td>200 x $15 = $3,000<\/td>\r\n<td><\/td>\r\n<td>\n\n300 units x $10 = $3,000 (from Jan 1)\r\n\r\n200 units x $15 = $3,000 (from Jan 2)\r\n\r\nTOTALS\u00a0 500 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $6,000\r\n\r\n(sum of purchases to date, $3,000 +$ 3,000)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Jan 8<\/strong><\/td>\r\n<td><\/td>\r\n<td>\n\n300 units x $10 = $3,000 (from Jan 1)\r\n\r\nTotal COGS\u00a0for 300 units \u00a0$ 3,000<\/td>\r\n<td>\n\n200 units x $15 = $3,000\r\n\r\n(beg inventory is zero and the\u00a0Jan 2\u00a0purchase remains)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Jan 11<\/strong><\/td>\r\n<td>100 x $17 = $1,700<\/td>\r\n<td><\/td>\r\n<td>\n\n200 units x $15 = $3,000 (from Jan 2)\r\n\r\n100 units x $17 = $1,700 (from Jan 11)\r\n\r\nTOTALS\u00a0 300 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $4,700<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Jan 15<\/strong><\/td>\r\n<td><\/td>\r\n<td>\n\n\u00a0200 units x $15 = $3,000 (from Jan 2)\r\n\r\n50 units x $17 = $850 (from Jan 11)\r\n\r\nTOTAL COGS\u00a0 for 250 units\u00a0 $3,850<\/td>\r\n<td>\n\n50 units x $17 = $850 (from Jan 11)\r\n\r\n(Jan 2 purchase has been used\u00a0and 50 units from the\u00a0Jan\u00a011\u00a0purchase remains)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Jan 18<\/strong><\/td>\r\n<td>300 x $20 = $6,000<\/td>\r\n<td><\/td>\r\n<td>\n\n50 units x $17 = $850 (from Jan 11)\r\n\r\n300 units x $20 = $6,000\r\n\r\nTOTALS (End. Inventory)\u00a0 350 Units\u00a0 $6,850<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nTotal cost of goods sold for January would be $6,850 (3,000 + 3,850).\u00a0 Sales would be Jan 8\u00a0Sales (\u00a0300 units x $30)\u00a0$9,000 + Jan 11\u00a0Sales\u00a0(250 units x $40) $10,000 or $19,000.\u00a0 The gross profit (or margin) would be $12,150 ($19,000 Sales - 6,850 cost of goods sold).\u00a0 The journal entries for these transactions would be (assuming all transactions on credit):\r\n\r\n<em>Note:\u00a0 No journal entry is prepared for beginning inventory since it is a rollover from last period's ending balance.<\/em>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>Date<\/strong><\/td>\r\n<td><strong>Account<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Debit<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Credit<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 2<\/td>\r\n<td>Merchandise Inventory<\/td>\r\n<td style=\"text-align: center\">3,000<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>\u00a0\u00a0 Accounts Payable<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">3,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 8<\/td>\r\n<td>Accounts Receivable<\/td>\r\n<td style=\"text-align: center\">9,000<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0 Sales<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">9,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>Cost of goods sold<\/td>\r\n<td style=\"text-align: center\">3,000<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0 Merchandise Inventory<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">3,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 11<\/td>\r\n<td>Merchandise Inventory<\/td>\r\n<td style=\"text-align: center\">1,700<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>\u00a0\u00a0 Accounts Payable<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">1,700<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 15<\/td>\r\n<td>Accounts Receivable<\/td>\r\n<td style=\"text-align: center\">10,000<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>\u00a0\u00a0 Sales<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">10,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>Cost of goods sold<\/td>\r\n<td style=\"text-align: center\">3,850<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>\u00a0\u00a0\u00a0\u00a0 Merchandise Inventory<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">3,850<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 18<\/td>\r\n<td>Merchandise Inventory<\/td>\r\n<td style=\"text-align: center\">6,000<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td>\u00a0\u00a0 Accounts Payable<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">6,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<strong>\u00a0<\/strong>\r\n\r\n<strong>LIFO (Last in, First out)<\/strong>\r\n\r\nUnder the LIFO method, we will use <strong>most recent purchases<\/strong> <em>at the time of the sale<\/em> first.\u00a0 You must calculate Cost of Goods Sold for each sale individually.\u00a0 Let\u2019s look at the\u00a0this video:\r\n\r\nhttps:\/\/www.youtube.com\/watch?v=zLAvpS6o25E&amp;feature=youtu.be\r\n\r\nUsing the inventory record format, the transactions from the video would look like this under the LIFO method:\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td style=\"text-align: center\"><strong>Date<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Goods Purchased<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Cost of Goods Sold<\/strong><\/td>\r\n<td style=\"text-align: center\">\n\n<strong>Inventory Balance (or Ending Inventory)<\/strong>\r\n\r\n<strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Mar 1 <\/strong><\/td>\r\n<td>200 x $10 = $2,000<\/td>\r\n<td><\/td>\r\n<td>\n\n200 units x $10 = $2,000 (from Mar 1)\r\n\r\nTOTALS\u00a0 200 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $2,000\r\n\r\n&nbsp;<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Mar 16<\/strong><\/td>\r\n<td>\u00a0150 x $12 = $1,800<\/td>\r\n<td><\/td>\r\n<td>\n\n200 units x $10 = $2,000 (from Mar 1)\r\n\r\n150 units x $12 = $1,800 (from Mar 16)\r\n\r\nTOTALS\u00a0 350 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $3,800\r\n\r\n(sum of purchases to date, $2,000 +$ 1,800)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Apr 3\r\n<\/strong><\/td>\r\n<td>225 x $16 = $3,600<\/td>\r\n<td><\/td>\r\n<td>\n\n200 units x $10 = $2,000 (from Mar 1)\r\n\r\n150 units x $12 = $1,800 (from Mar 16)\r\n\r\n225 unit x $16 = $3,600 (from Apr 3)\r\n\r\nTOTALS\u00a0 575 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $7,400\r\n\r\n(sum of purchases to date, $2,000 +$ 1,800 + $3,600)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 1<\/strong><\/td>\r\n<td><\/td>\r\n<td>\n\n\u00a0225 units x $16 = $3,600 (from Apr 3)\r\n\r\n25 units x $12 = $300 (from Mar 16)\r\n\r\n<strong>TOTAL COGS\u00a0 for 250 units\u00a0 $3,900<\/strong><\/td>\r\n<td>\n\n200 units x $10 = $2,000 (from Mar 1)\r\n\r\n125 units x $12 = $1,500 (from Mar 16)\r\n\r\n<strong>TOTALS\u00a0 325 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $3,500<\/strong>\r\n\r\n&nbsp;\r\n\r\n(225 units from Apr 3 purchase have been used\u00a0and 25 units from the Mar 16 purchase was used)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<strong>\u00a0<\/strong>Total cost of goods sold for the month would be $3,900.\r\n\r\n<strong>Weighted Average (or Average Cost)<\/strong>\r\n\r\nThe Weighted Average method strives to smooth out price changes during the period.\u00a0 To do this, we will calculate an average cost of inventory at the end of the month under the periodic method (perpetual method calculates average cost of inventory after each purchase).\u00a0 Sales of inventory will not affect the average cost of inventory.\u00a0 It does NOT matter which purchase the inventory comes from when using the average cost method.\u00a0 Instead, we will use the average cost calculated\u00a0 to determine cost of goods sold for any sales transactions.\u00a0 Average Cost is calculated by taking the TOTAL COST of INVENTORY \/ TOTAL INVENTORY QUANITY.\u00a0 Let\u2019s look at a video:\r\n\r\nhttps:\/\/youtu.be\/7oNqWQhK3b8\r\n\r\nThe Inventory Record for this information in the video would be:\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td style=\"text-align: center\"><strong>Purchases<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Cost of goods sold<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Inventory Balance<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Avg Cost<\/strong><\/td>\r\n<td><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 1<\/td>\r\n<td><\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">300 units $3,000<\/td>\r\n<td style=\"text-align: center\">$10.00<\/td>\r\n<td style=\"text-align: center\">($3,000 \/ 300 units)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 2<\/td>\r\n<td>200 units x $15 = $3,000<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">\n\n500 units $6,000\r\n\r\n(add Jan 1 and Jan 2 together)<\/td>\r\n<td style=\"text-align: center\">$12.00<\/td>\r\n<td style=\"text-align: center\">($6,000 \/ 500 units)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 8<\/td>\r\n<td><\/td>\r\n<td>300 units x $12 avg cost = $3,600<\/td>\r\n<td style=\"text-align: center\">\n\n200 units $2,400\r\n\r\n(take Jan 2 balance - Jan 8 cogs)<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 11<\/td>\r\n<td>100 units x $17 = $1,700<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">\n\n300 units $4,100\r\n\r\n(add Jan 8 balance and Jan 11 purchase)<\/td>\r\n<td style=\"text-align: center\">\n\n13.67\r\n\r\n(rounded)<\/td>\r\n<td style=\"text-align: center\">($4,100 \/ 300 units)<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 15<\/td>\r\n<td><\/td>\r\n<td>250 units x $13.67 avg cost = $3,417.50<\/td>\r\n<td style=\"text-align: center\">\n\n50 units $682.50**\r\n\r\n(take Jan 11 balance - Jan 15 cogs)<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Jan 16<\/td>\r\n<td>300 units x $20 = $6,000<\/td>\r\n<td><\/td>\r\n<td style=\"text-align: center\">\n\n350 units $6,682.50\r\n\r\n(add Jan 15 balance and Jan 16 purchase)<\/td>\r\n<td style=\"text-align: center\">19.09 (rounded)<\/td>\r\n<td style=\"text-align: center\">($6,682.50 \/ 350 units)<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<em>**Jan 15 and 16 off a little from the information in the video due to rounding of the average cost<\/em>.\r\n\r\nTotal cost of goods sold for January would be $7,017.50 ($3600 + 3,417.50).\u00a0 Since total Sales would the same as we calculated\u00a0before $19,000.\u00a0 The gross profit (or margin) would be $11,982.50 ($19,000 Sales - 7017.50 cost of goods sold).\u00a0 The journal entries for these transactions would be would be the same as show above the only thing changing would be the AMOUNT of cost of goods sold used in the Jan 8 and Jan 15 entries.\r\n\r\n<strong>Specific Identification<\/strong>\r\n\r\nFinally, the last method \u2013 we are saving the easiest one for last.\u00a0 Specific identification will tell you exactly which purchase to use when determining cost.\r\n\r\nhttps:\/\/youtu.be\/6x5Qsmo9ozc\r\n\r\nEasy, huh?\u00a0 No guess work, no hard thinking \u2013 just take the information given and calculate based on the purchase prices given.\u00a0 Let's look at another example:\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>Date<\/strong><\/td>\r\n<td><strong>Description<\/strong><\/td>\r\n<td><strong>Qty<\/strong><\/td>\r\n<td><strong>Price per Unit<\/strong><\/td>\r\n<td><strong>Total Amount<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 1<\/strong><\/td>\r\n<td>Beginning Inventory<\/td>\r\n<td style=\"text-align: center\">150<\/td>\r\n<td style=\"text-align: center\">$ 300<\/td>\r\n<td>$ 45,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 6<\/strong><\/td>\r\n<td>Purchase<\/td>\r\n<td style=\"text-align: center\">350<\/td>\r\n<td style=\"text-align: center\">350<\/td>\r\n<td>\u00a0\u00a0122,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 17<\/strong><\/td>\r\n<td>Purchase<\/td>\r\n<td style=\"text-align: center\">80<\/td>\r\n<td style=\"text-align: center\">450<\/td>\r\n<td>\u00a0 36,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 25<\/strong><\/td>\r\n<td>Purchase<\/td>\r\n<td style=\"text-align: center\">100<\/td>\r\n<td style=\"text-align: center\">458<\/td>\r\n<td>\u00a0 45,800<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 30<\/strong><\/td>\r\n<td>Sold<\/td>\r\n<td style=\"text-align: center\">300<\/td>\r\n<td style=\"text-align: center\">1,400<\/td>\r\n<td>\u00a0420,000<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n<ul>\r\n \t<li>On May 9, you sold 180 units consisting of 80 units from beginning inventory and 100 units from the May 6 purchase.<\/li>\r\n \t<li>May 30 sold 300 units consisting of 200 units from the May 6 purchase and 100 units from the May 25 purchase<\/li>\r\n<\/ul>\r\nUsing an Inventory Record,\u00a0cost of goods sold would look like this:\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>Date<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Goods Purchased<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>Cost of Goods Sold<\/strong><\/td>\r\n<td style=\"text-align: center\">\n\n<strong>Inventory Balance<\/strong>\r\n\r\n<strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 1<\/strong><\/td>\r\n<td style=\"text-align: center\">Beginning Balance<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">150 x $300 = $ 45,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 6<\/strong><\/td>\r\n<td style=\"text-align: center\">350\u00a0 x $350 = $122,500<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">\n\n150 x $300 = $45,000\r\n\r\n350 x $350 = 122,500\r\n\r\nTOTALS 500 units\u00a0\u00a0\u00a0\u00a0\u00a0 $167,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 9<\/strong><\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">\n\n\u00a0 80 x $300 =\u00a0 24,000\r\n\r\n100 x $350 =\u00a0 35,000\r\n\r\nCOGS\u00a0180 units\u00a0\u00a0\u00a0 $ 59,000<\/td>\r\n<td style=\"text-align: center\">\n\n70 x $300 = $21,000\r\n\r\n250 x $350 = 87,500\r\n\r\nTOTALS 320 units\u00a0\u00a0 \u00a0\u00a0\u00a0$108,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 17<\/strong><\/td>\r\n<td style=\"text-align: center\">80 x $450 = $36,000<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">\n\n70 x $300 = $21,000\r\n\r\n250 x $350 = 87,500\r\n\r\n80 x $450 = 36,000\r\n\r\nTOTALS\u00a0 400 units\u00a0\u00a0\u00a0\u00a0\u00a0 $144,500<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 25<\/strong><\/td>\r\n<td style=\"text-align: center\">100 x $458 = $45,800<\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">\n\n70 x $300 = $21,000\r\n\r\n250 x $350 =\u00a0\u00a0 87,500\r\n\r\n80 x $450 =\u00a0\u00a0\u00a0\u00a0 36,000\r\n\r\n100 x $458 =\u00a0\u00a0 45,800\r\n\r\nTOTALS\u00a0 500 units\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0$190,300<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>May 30<\/strong><\/td>\r\n<td style=\"text-align: center\"><\/td>\r\n<td style=\"text-align: center\">\n\n200 x $350 =\u00a0 70,000\r\n\r\n100 x $458 =\u00a0 45,700\r\n\r\nCOGS\u00a0\u00a0300 units\u00a0\u00a0 $ 174,800<\/td>\r\n<td style=\"text-align: center\">\n\n70 x $300 = $21,000\r\n\r\n50 x $350 =\u00a0\u00a0 17,500\r\n\r\n80 x $450 =\u00a0\u00a0 36,000\r\n\r\n<strong>End. Inventory<\/strong>\u00a0 200 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $74,500<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nThe total cost of goods sold for May would be $233,800 (59,000 + 174,800).\r\n\r\nhttp:\/\/www.openassessments.org\/assessments\/1275","rendered":"<p class=\"p1\"><span class=\"s1\"><b>Cost of goods sold and Inventory<\/b><\/span><\/p>\n<p class=\"p2\"><span class=\"s1\">Remember, <strong>cost of goods sold<\/strong> is the cost to the seller of the goods sold to customers. Cost of Goods Sold is an <strong>EXPENSE<\/strong> item. Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a <em>reduction to Revenue<\/em>.\u00a0\u00a0<\/span>For a merchandising company, the cost of goods sold can be relatively large. All merchandising companies have a quantity of goods on hand called merchandise inventory to sell to customers. <b>Merchandise inventory<\/b> (or inventory) is the quantity of goods available for sale at any given time.<\/p>\n<p>You will now learn how to calculate the Cost of Goods Sold using 4 different methods.<\/p>\n<p>The 4 methods of Cost of Goods Sold you will learn are:<\/p>\n<ul>\n<li><strong>FIFO (First in, First out)<\/strong> \u2013 this means you will use the OLDEST inventory first to fill orders. This also means the oldest costs will appear in Cost of Goods Sold (since this is an Expense account this also means oldest costs will appear in the Income Statement). The most recent costs are shown in the Inventory asset account balances and are provided on the Balance Sheet. This is an advantage because you are now reporting Inventory at the current cost which better reflects what it would cost to replace inventory if that would become necessary due to a disaster. FIFO shows the actual flow of goods\u2026typically you will sell the oldest inventory before the newest inventory.<\/li>\n<li><strong>LIFO (Last in, First out)<\/strong> \u2013 this means you will use the MOST RECENT inventory first to fill orders. Cost of goods sold will reflect the current or most recent costs and are a better representation of matching since you are matching revenue will current costs of the inventory. The Balance Sheet will show inventory at the oldest inventory costs and may not represent current market value.<\/li>\n<li><strong>Weighted Average (also called Average Cost)<\/strong> \u2013 this method is best used when the prices change from purchase to purchase and you want consistency. The weighted average method smooths out price changes so you have a steady stream of cost instead of sharp increases and decreases. You will calculate a new Average Cost after each Purchase (Sales will not change the average cost).<\/li>\n<li><strong>Specific Identification<\/strong> \u2013 clearly, this will be your favorite method\u2026it is the easiest to calculate in our examples because it specifically tells you which purchases inventory comes from. This is most often used for high priced inventory \u2013 think car sales for example. When a car dealership purchases a blue BMW convertible for $20,000 and later sells it for $60,000\u2026they will want to show the exact cost of the BMW it sold as opposed to the cost of another car. So, specific identification exactly matches the costs of the inventory with the revenue it creates.<\/li>\n<\/ul>\n<p>Okay, enough theory \u2013 how do these calculations work exactly?\u00a0 There are a couple of ways you can do them \u2013 there is an Inventory Record or a shortcut calculation.\u00a0\u00a0You will\u00a0see both because they are both beneficial.\u00a0 Most computer systems will show you the Inventory Record form so you need to understand how to read it.\u00a0 However, it can be time consuming and not practical for homework and test situations so you learn the alternative method as well. \u00a0<em><strong>We will be using the perpetual inventory system in these examples which constantly updates the inventory account balance to reflect inventory on hand.<\/strong><\/em><\/p>\n<p>When calculating the Cost of Goods Sold for a sale, you must <em>IGNORE <\/em>the selling price.\u00a0 The selling price has NOTHING to do with the cost.\u00a0\u00a0 We are trying to determine how much the items we sold originally <strong>COST us<\/strong> \u2013 that is the purpose behind cost of goods sold.\u00a0 Next thing to remember, you can only use items that occurred BEFORE the sale (meaning, you cannot use a purchase from August 28 when calculating cost of goods sold on August 14 \u2013 why?\u00a0 It hasn\u2019t happened yet).\u00a0 We will pick inventory from the different purchases and use the <strong>purchase price<\/strong> to calculate the cost of goods sold.<\/p>\n<p><strong>FIFO (First in, First Out)<\/strong><\/p>\n<p>Under the FIFO method, we will use the oldest inventory <em>at the time of the sale<\/em> first.\u00a0 You must calculate Cost of Goods Sold for each sale individually.\u00a0 Watch this video on the FIFO Method.<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"FIFO Method, First in First Out Method for Expensing Inventory (Financial Accounting Tutorial #36)\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/BkxcgocMUVo?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Using the inventory record format, the transactions from the video would look like this under the FIFO method:<\/p>\n<p>&nbsp;<\/p>\n<table>\n<tbody>\n<tr>\n<td style=\"text-align: center\"><strong>Date<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Goods Purchased<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Cost of Goods Sold<\/strong><\/td>\n<td style=\"text-align: center\">\n<p><strong>Inventory Balance (or Ending Inventory)<\/strong><\/p>\n<p><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Jan 1<\/strong><\/td>\n<td>Beginning Balance<\/td>\n<td><\/td>\n<td>300 units x $10 = $3,000<\/td>\n<\/tr>\n<tr>\n<td><strong>Jan 2<\/strong><\/td>\n<td>200 x $15 = $3,000<\/td>\n<td><\/td>\n<td>\n<p>300 units x $10 = $3,000 (from Jan 1)<\/p>\n<p>200 units x $15 = $3,000 (from Jan 2)<\/p>\n<p>TOTALS\u00a0 500 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $6,000<\/p>\n<p>(sum of purchases to date, $3,000 +$ 3,000)<\/td>\n<\/tr>\n<tr>\n<td><strong>Jan 8<\/strong><\/td>\n<td><\/td>\n<td>\n<p>300 units x $10 = $3,000 (from Jan 1)<\/p>\n<p>Total COGS\u00a0for 300 units \u00a0$ 3,000<\/td>\n<td>\n<p>200 units x $15 = $3,000<\/p>\n<p>(beg inventory is zero and the\u00a0Jan 2\u00a0purchase remains)<\/td>\n<\/tr>\n<tr>\n<td><strong>Jan 11<\/strong><\/td>\n<td>100 x $17 = $1,700<\/td>\n<td><\/td>\n<td>\n<p>200 units x $15 = $3,000 (from Jan 2)<\/p>\n<p>100 units x $17 = $1,700 (from Jan 11)<\/p>\n<p>TOTALS\u00a0 300 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $4,700<\/td>\n<\/tr>\n<tr>\n<td><strong>Jan 15<\/strong><\/td>\n<td><\/td>\n<td>\n<p>\u00a0200 units x $15 = $3,000 (from Jan 2)<\/p>\n<p>50 units x $17 = $850 (from Jan 11)<\/p>\n<p>TOTAL COGS\u00a0 for 250 units\u00a0 $3,850<\/td>\n<td>\n<p>50 units x $17 = $850 (from Jan 11)<\/p>\n<p>(Jan 2 purchase has been used\u00a0and 50 units from the\u00a0Jan\u00a011\u00a0purchase remains)<\/td>\n<\/tr>\n<tr>\n<td><strong>Jan 18<\/strong><\/td>\n<td>300 x $20 = $6,000<\/td>\n<td><\/td>\n<td>\n<p>50 units x $17 = $850 (from Jan 11)<\/p>\n<p>300 units x $20 = $6,000<\/p>\n<p>TOTALS (End. Inventory)\u00a0 350 Units\u00a0 $6,850<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Total cost of goods sold for January would be $6,850 (3,000 + 3,850).\u00a0 Sales would be Jan 8\u00a0Sales (\u00a0300 units x $30)\u00a0$9,000 + Jan 11\u00a0Sales\u00a0(250 units x $40) $10,000 or $19,000.\u00a0 The gross profit (or margin) would be $12,150 ($19,000 Sales &#8211; 6,850 cost of goods sold).\u00a0 The journal entries for these transactions would be (assuming all transactions on credit):<\/p>\n<p><em>Note:\u00a0 No journal entry is prepared for beginning inventory since it is a rollover from last period&#8217;s ending balance.<\/em><\/p>\n<table>\n<tbody>\n<tr>\n<td><strong>Date<\/strong><\/td>\n<td><strong>Account<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Debit<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Credit<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Jan 2<\/td>\n<td>Merchandise Inventory<\/td>\n<td style=\"text-align: center\">3,000<\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>\u00a0\u00a0 Accounts Payable<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">3,000<\/td>\n<\/tr>\n<tr>\n<td>Jan 8<\/td>\n<td>Accounts Receivable<\/td>\n<td style=\"text-align: center\">9,000<\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0 Sales<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">9,000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>Cost of goods sold<\/td>\n<td style=\"text-align: center\">3,000<\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0 Merchandise Inventory<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">3,000<\/td>\n<\/tr>\n<tr>\n<td>Jan 11<\/td>\n<td>Merchandise Inventory<\/td>\n<td style=\"text-align: center\">1,700<\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>\u00a0\u00a0 Accounts Payable<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">1,700<\/td>\n<\/tr>\n<tr>\n<td>Jan 15<\/td>\n<td>Accounts Receivable<\/td>\n<td style=\"text-align: center\">10,000<\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>\u00a0\u00a0 Sales<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">10,000<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>Cost of goods sold<\/td>\n<td style=\"text-align: center\">3,850<\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>\u00a0\u00a0\u00a0\u00a0 Merchandise Inventory<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">3,850<\/td>\n<\/tr>\n<tr>\n<td>Jan 18<\/td>\n<td>Merchandise Inventory<\/td>\n<td style=\"text-align: center\">6,000<\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td>\u00a0\u00a0 Accounts Payable<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">6,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>\u00a0<\/strong><\/p>\n<p><strong>LIFO (Last in, First out)<\/strong><\/p>\n<p>Under the LIFO method, we will use <strong>most recent purchases<\/strong> <em>at the time of the sale<\/em> first.\u00a0 You must calculate Cost of Goods Sold for each sale individually.\u00a0 Let\u2019s look at the\u00a0this video:<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-2\" title=\"LIFO Inventory Method\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/zLAvpS6o25E?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Using the inventory record format, the transactions from the video would look like this under the LIFO method:<\/p>\n<table>\n<tbody>\n<tr>\n<td style=\"text-align: center\"><strong>Date<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Goods Purchased<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Cost of Goods Sold<\/strong><\/td>\n<td style=\"text-align: center\">\n<p><strong>Inventory Balance (or Ending Inventory)<\/strong><\/p>\n<p><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td><strong>Mar 1 <\/strong><\/td>\n<td>200 x $10 = $2,000<\/td>\n<td><\/td>\n<td>\n<p>200 units x $10 = $2,000 (from Mar 1)<\/p>\n<p>TOTALS\u00a0 200 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $2,000<\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<tr>\n<td><strong>Mar 16<\/strong><\/td>\n<td>\u00a0150 x $12 = $1,800<\/td>\n<td><\/td>\n<td>\n<p>200 units x $10 = $2,000 (from Mar 1)<\/p>\n<p>150 units x $12 = $1,800 (from Mar 16)<\/p>\n<p>TOTALS\u00a0 350 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $3,800<\/p>\n<p>(sum of purchases to date, $2,000 +$ 1,800)<\/td>\n<\/tr>\n<tr>\n<td><strong>Apr 3<br \/>\n<\/strong><\/td>\n<td>225 x $16 = $3,600<\/td>\n<td><\/td>\n<td>\n<p>200 units x $10 = $2,000 (from Mar 1)<\/p>\n<p>150 units x $12 = $1,800 (from Mar 16)<\/p>\n<p>225 unit x $16 = $3,600 (from Apr 3)<\/p>\n<p>TOTALS\u00a0 575 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $7,400<\/p>\n<p>(sum of purchases to date, $2,000 +$ 1,800 + $3,600)<\/td>\n<\/tr>\n<tr>\n<td><strong>May 1<\/strong><\/td>\n<td><\/td>\n<td>\n<p>\u00a0225 units x $16 = $3,600 (from Apr 3)<\/p>\n<p>25 units x $12 = $300 (from Mar 16)<\/p>\n<p><strong>TOTAL COGS\u00a0 for 250 units\u00a0 $3,900<\/strong><\/td>\n<td>\n<p>200 units x $10 = $2,000 (from Mar 1)<\/p>\n<p>125 units x $12 = $1,500 (from Mar 16)<\/p>\n<p><strong>TOTALS\u00a0 325 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $3,500<\/strong><\/p>\n<p>&nbsp;<\/p>\n<p>(225 units from Apr 3 purchase have been used\u00a0and 25 units from the Mar 16 purchase was used)<\/td>\n<\/tr>\n<tr>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>\u00a0<\/strong>Total cost of goods sold for the month would be $3,900.<\/p>\n<p><strong>Weighted Average (or Average Cost)<\/strong><\/p>\n<p>The Weighted Average method strives to smooth out price changes during the period.\u00a0 To do this, we will calculate an average cost of inventory at the end of the month under the periodic method (perpetual method calculates average cost of inventory after each purchase).\u00a0 Sales of inventory will not affect the average cost of inventory.\u00a0 It does NOT matter which purchase the inventory comes from when using the average cost method.\u00a0 Instead, we will use the average cost calculated\u00a0 to determine cost of goods sold for any sales transactions.\u00a0 Average Cost is calculated by taking the TOTAL COST of INVENTORY \/ TOTAL INVENTORY QUANITY.\u00a0 Let\u2019s look at a video:<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-3\" title=\"Prepare the Average Cost Method for a Perpetual Inventory System (Moving Average) (#39)\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/7oNqWQhK3b8?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>The Inventory Record for this information in the video would be:<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td style=\"text-align: center\"><strong>Purchases<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Cost of goods sold<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Inventory Balance<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Avg Cost<\/strong><\/td>\n<td><\/td>\n<\/tr>\n<tr>\n<td>Jan 1<\/td>\n<td><\/td>\n<td><\/td>\n<td style=\"text-align: center\">300 units $3,000<\/td>\n<td style=\"text-align: center\">$10.00<\/td>\n<td style=\"text-align: center\">($3,000 \/ 300 units)<\/td>\n<\/tr>\n<tr>\n<td>Jan 2<\/td>\n<td>200 units x $15 = $3,000<\/td>\n<td><\/td>\n<td style=\"text-align: center\">\n<p>500 units $6,000<\/p>\n<p>(add Jan 1 and Jan 2 together)<\/td>\n<td style=\"text-align: center\">$12.00<\/td>\n<td style=\"text-align: center\">($6,000 \/ 500 units)<\/td>\n<\/tr>\n<tr>\n<td>Jan 8<\/td>\n<td><\/td>\n<td>300 units x $12 avg cost = $3,600<\/td>\n<td style=\"text-align: center\">\n<p>200 units $2,400<\/p>\n<p>(take Jan 2 balance &#8211; Jan 8 cogs)<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td>Jan 11<\/td>\n<td>100 units x $17 = $1,700<\/td>\n<td><\/td>\n<td style=\"text-align: center\">\n<p>300 units $4,100<\/p>\n<p>(add Jan 8 balance and Jan 11 purchase)<\/td>\n<td style=\"text-align: center\">\n<p>13.67<\/p>\n<p>(rounded)<\/td>\n<td style=\"text-align: center\">($4,100 \/ 300 units)<\/td>\n<\/tr>\n<tr>\n<td>Jan 15<\/td>\n<td><\/td>\n<td>250 units x $13.67 avg cost = $3,417.50<\/td>\n<td style=\"text-align: center\">\n<p>50 units $682.50**<\/p>\n<p>(take Jan 11 balance &#8211; Jan 15 cogs)<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\"><\/td>\n<\/tr>\n<tr>\n<td>Jan 16<\/td>\n<td>300 units x $20 = $6,000<\/td>\n<td><\/td>\n<td style=\"text-align: center\">\n<p>350 units $6,682.50<\/p>\n<p>(add Jan 15 balance and Jan 16 purchase)<\/td>\n<td style=\"text-align: center\">19.09 (rounded)<\/td>\n<td style=\"text-align: center\">($6,682.50 \/ 350 units)<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><em>**Jan 15 and 16 off a little from the information in the video due to rounding of the average cost<\/em>.<\/p>\n<p>Total cost of goods sold for January would be $7,017.50 ($3600 + 3,417.50).\u00a0 Since total Sales would the same as we calculated\u00a0before $19,000.\u00a0 The gross profit (or margin) would be $11,982.50 ($19,000 Sales &#8211; 7017.50 cost of goods sold).\u00a0 The journal entries for these transactions would be would be the same as show above the only thing changing would be the AMOUNT of cost of goods sold used in the Jan 8 and Jan 15 entries.<\/p>\n<p><strong>Specific Identification<\/strong><\/p>\n<p>Finally, the last method \u2013 we are saving the easiest one for last.\u00a0 Specific identification will tell you exactly which purchase to use when determining cost.<\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-4\" title=\"600 Inventory Tracking Explained \/ Introduction-Specific Ide\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/6x5Qsmo9ozc?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Easy, huh?\u00a0 No guess work, no hard thinking \u2013 just take the information given and calculate based on the purchase prices given.\u00a0 Let&#8217;s look at another example:<\/p>\n<table>\n<tbody>\n<tr>\n<td><strong>Date<\/strong><\/td>\n<td><strong>Description<\/strong><\/td>\n<td><strong>Qty<\/strong><\/td>\n<td><strong>Price per Unit<\/strong><\/td>\n<td><strong>Total Amount<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>May 1<\/strong><\/td>\n<td>Beginning Inventory<\/td>\n<td style=\"text-align: center\">150<\/td>\n<td style=\"text-align: center\">$ 300<\/td>\n<td>$ 45,000<\/td>\n<\/tr>\n<tr>\n<td><strong>May 6<\/strong><\/td>\n<td>Purchase<\/td>\n<td style=\"text-align: center\">350<\/td>\n<td style=\"text-align: center\">350<\/td>\n<td>\u00a0\u00a0122,500<\/td>\n<\/tr>\n<tr>\n<td><strong>May 17<\/strong><\/td>\n<td>Purchase<\/td>\n<td style=\"text-align: center\">80<\/td>\n<td style=\"text-align: center\">450<\/td>\n<td>\u00a0 36,000<\/td>\n<\/tr>\n<tr>\n<td><strong>May 25<\/strong><\/td>\n<td>Purchase<\/td>\n<td style=\"text-align: center\">100<\/td>\n<td style=\"text-align: center\">458<\/td>\n<td>\u00a0 45,800<\/td>\n<\/tr>\n<tr>\n<td><strong>May 30<\/strong><\/td>\n<td>Sold<\/td>\n<td style=\"text-align: center\">300<\/td>\n<td style=\"text-align: center\">1,400<\/td>\n<td>\u00a0420,000<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<ul>\n<li>On May 9, you sold 180 units consisting of 80 units from beginning inventory and 100 units from the May 6 purchase.<\/li>\n<li>May 30 sold 300 units consisting of 200 units from the May 6 purchase and 100 units from the May 25 purchase<\/li>\n<\/ul>\n<p>Using an Inventory Record,\u00a0cost of goods sold would look like this:<\/p>\n<table>\n<tbody>\n<tr>\n<td><strong>Date<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Goods Purchased<\/strong><\/td>\n<td style=\"text-align: center\"><strong>Cost of Goods Sold<\/strong><\/td>\n<td style=\"text-align: center\">\n<p><strong>Inventory Balance<\/strong><\/p>\n<p><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>May 1<\/strong><\/td>\n<td style=\"text-align: center\">Beginning Balance<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">150 x $300 = $ 45,000<\/td>\n<\/tr>\n<tr>\n<td><strong>May 6<\/strong><\/td>\n<td style=\"text-align: center\">350\u00a0 x $350 = $122,500<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">\n<p>150 x $300 = $45,000<\/p>\n<p>350 x $350 = 122,500<\/p>\n<p>TOTALS 500 units\u00a0\u00a0\u00a0\u00a0\u00a0 $167,500<\/td>\n<\/tr>\n<tr>\n<td><strong>May 9<\/strong><\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">\n<p>\u00a0 80 x $300 =\u00a0 24,000<\/p>\n<p>100 x $350 =\u00a0 35,000<\/p>\n<p>COGS\u00a0180 units\u00a0\u00a0\u00a0 $ 59,000<\/td>\n<td style=\"text-align: center\">\n<p>70 x $300 = $21,000<\/p>\n<p>250 x $350 = 87,500<\/p>\n<p>TOTALS 320 units\u00a0\u00a0 \u00a0\u00a0\u00a0$108,500<\/td>\n<\/tr>\n<tr>\n<td><strong>May 17<\/strong><\/td>\n<td style=\"text-align: center\">80 x $450 = $36,000<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">\n<p>70 x $300 = $21,000<\/p>\n<p>250 x $350 = 87,500<\/p>\n<p>80 x $450 = 36,000<\/p>\n<p>TOTALS\u00a0 400 units\u00a0\u00a0\u00a0\u00a0\u00a0 $144,500<\/td>\n<\/tr>\n<tr>\n<td><strong>May 25<\/strong><\/td>\n<td style=\"text-align: center\">100 x $458 = $45,800<\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">\n<p>70 x $300 = $21,000<\/p>\n<p>250 x $350 =\u00a0\u00a0 87,500<\/p>\n<p>80 x $450 =\u00a0\u00a0\u00a0\u00a0 36,000<\/p>\n<p>100 x $458 =\u00a0\u00a0 45,800<\/p>\n<p>TOTALS\u00a0 500 units\u00a0\u00a0\u00a0 \u00a0\u00a0\u00a0\u00a0$190,300<\/td>\n<\/tr>\n<tr>\n<td><strong>May 30<\/strong><\/td>\n<td style=\"text-align: center\"><\/td>\n<td style=\"text-align: center\">\n<p>200 x $350 =\u00a0 70,000<\/p>\n<p>100 x $458 =\u00a0 45,700<\/p>\n<p>COGS\u00a0\u00a0300 units\u00a0\u00a0 $ 174,800<\/td>\n<td style=\"text-align: center\">\n<p>70 x $300 = $21,000<\/p>\n<p>50 x $350 =\u00a0\u00a0 17,500<\/p>\n<p>80 x $450 =\u00a0\u00a0 36,000<\/p>\n<p><strong>End. Inventory<\/strong>\u00a0 200 units\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $74,500<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The total cost of goods sold for May would be $233,800 (59,000 + 174,800).<\/p>\n<p><iframe src=\"https:\/\/lumenoea.herokuapp.com\/assessments\/load?src_url=https:\/\/lumenoea.herokuapp.com\/api\/assessments\/1275.xml&#38;results_end_point=https:\/\/lumenoea.herokuapp.com\/api&#38;assessment_id=1275&#38;confidence_levels=true&#38;enable_start=true&#38;eid=https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/inventory-methods-for-ending-inventory-and-cost-of-goods-sold\/\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><\/iframe><\/p>\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-147\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>FIFO Method, First in First out Method for Expensing Inventory. <strong>Authored by<\/strong>: Note Pirate. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/BkxcgocMUVo\">https:\/\/youtu.be\/BkxcgocMUVo<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><li>LIFO Inventory Method. <strong>Authored by<\/strong>: Education Unlocked. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/www.youtube.com\/watch?v=zLAvpS6o25E&#038;feature=youtu.be\">https:\/\/www.youtube.com\/watch?v=zLAvpS6o25E&#038;feature=youtu.be<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><li>Weighted Average Cost Flow Method for Expensing Inventory. <strong>Authored by<\/strong>: Note Pirate. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/YMWHUi6mU-Q\">https:\/\/youtu.be\/YMWHUi6mU-Q<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><li>600 Inventory Tracking Explained\/Introduction-Specific ID. <strong>Authored by<\/strong>: Accounting Instruction, Help &amp; How to.. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/6x5Qsmo9ozc\">https:\/\/youtu.be\/6x5Qsmo9ozc<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/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":1195,"menu_order":3,"template":"","meta":{"_candela_citation":"[{\"type\":\"copyrighted_video\",\"description\":\"FIFO Method, First in First out Method for Expensing Inventory\",\"author\":\"Note Pirate\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/BkxcgocMUVo\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"},{\"type\":\"copyrighted_video\",\"description\":\"LIFO Inventory Method\",\"author\":\"Education Unlocked\",\"organization\":\"\",\"url\":\"https:\/\/www.youtube.com\/watch?v=zLAvpS6o25E&feature=youtu.be\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"},{\"type\":\"copyrighted_video\",\"description\":\"Weighted Average Cost Flow Method for Expensing Inventory\",\"author\":\"Note Pirate\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/YMWHUi6mU-Q\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"},{\"type\":\"copyrighted_video\",\"description\":\"600 Inventory Tracking Explained\/Introduction-Specific ID\",\"author\":\"Accounting Instruction, Help & How to.\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/6x5Qsmo9ozc\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-147","chapter","type-chapter","status-web-only","hentry"],"part":102,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/147","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/users\/1195"}],"version-history":[{"count":17,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/147\/revisions"}],"predecessor-version":[{"id":2201,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/147\/revisions\/2201"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/102"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/147\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/media?parent=147"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=147"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/contributor?post=147"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/license?post=147"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}