Chapter 7 - Inventory and the Cost of Goods Sold

Goals of inventory managers

Maintain a sufficient quantity of inventory to meet customers’ needs, ensure quality meets customers’ expectations and company standards, and minimize the cost of acquiring and carrying the inventory.

Specific Identification

Individually identifies and records the cost of each item sold as part of COGS. The items would be identified as the cost of each specific item sold and would be records at the cost of goods sold. The remaining items would be reported as inventory on the balance sheet based on the actual cost of each item that remains.

FIFO

first in, first out, higher profit

LIFO

last in, first out

Weighted average

Cost per unti times the amount of the unit, divided by the total amount of units.

What does a lower COGs mean?

More gross profit, more income tax

What does a higher COGS mean?

Less gross profit, less income tax

When costs are rising, which methods produces a lower COGS?

FIFO

When costs are decreasing, which method produces a lower COGS?

LIFO

Lower of cost or market/net realizable value?

Journal entry writes down the item
Inventory decreases (CR) and COGS expense decreases (DR). 4