2. Inventory Costing Under a Perpetual System

Review

When identical amounts are purchased at different costs, we must decide which amounts to record in cost of goods sold (COGS) and which amounts remain in inventory.

What are the four methods to assign costs to inventory and to cost of goods sold?

1. Specific identification.

2. FIFO

3. LIFO

4. Weight average

Does the cost flow assumption have to match the actual physical flow of goods?

No.

Review example:

For example, Kroger's grocery chain sells food FIFO, meaning they selling the oldest inventory first. However Kroger can use LIFO to assign costs to food sold. With the exception of specific identification, the physical flow and cost flow do not have to be the same.

In what order does FIFO assume cost flow?

In the order occured, first in, first out.

In what order does LIFO assume cost flow?

In the reverse order incurred, last in first out.

In what order does weighted average assume cost flow?

At an average of the costs available. Total / number of units = cost per unit.

What numbers do cost flow methods impact?

Gross profit and inventory numbers.

Review entire example under Inventory Cost Flow Methods section.

When using FIFO, LIFO, and Weighted average using the perpetual system to compute inventory, in the chart that is made what is there a line for?

The dates for beginning inventory, when purchases happen, and when sales happen are included as a line. This is different when using the periodic system for FIFO, LIFO, and Weighted Average where there is only a line for dates where purchases happen and no line for dates where sales happen.

This is because for the perpetual system, cost of goods sold is updated every time a sale is made whereas in the periodic system cost of goods sold is updated at the end of the period. The cost of goods sold column under the periodic method is used to calculate the total cost of goods sold at the end of the period.

When using FIFO, LIFO, and Weighted average using the perpetual system to compute inventory, what column is the amount purchased listed under?

Goods Purchased

When using FIFO, LIFO, and Weighted average using the perpetual system to compute inventory, what column are sales listed under?

Cost of goods sold.

When using specific identification for computing inventory is it the same in both the perpetual and periodic system?

yes.

When can specific identification be used?

When each item in inventory can be matched with a specific purchase and invoice, we can use specific identification to assign costs.

When using specific identification to to compute inventory costs, what are the columns that appear in the table?

The column titles for the chart are Date, Goods Available for Sale, Cost of Goods Sold, and Ending Inventory.

What types of merchandise is specific identification common for?

Specific identification is common for custom-made inventory such as jewelry.

Review example of when specific identification can be used on other side of flashcard.

Trekking's internal documents show goods sold consist of:

- 10 from the August 1 purchase

- 15 from the August 3 purchase

- 15 from August 17 purchase

- 3 from August 28 purchase.

Each item is matched with a specific purchase date and invoice. The above is the invoice detailing how many items from each date were sold. (See table in notes under specific identification)

At the end, what should be in the ending inventory column?

The units not sold and the total cost of the untis not sold.

What financial statement does cost of goods sold go on?

The income statement.

What financial statement does ending inventory go on?

Balance sheet.

FIFO assumes that inventory items are sold in the order acquired. When sales occur, the costs of the…

earliest units acquired are charged to cost of goods sold. This leaves the costs from the most recent purchases in ending inventory.

Review Specific Identification section under Inventory Costing Under a Perpetual System

What are the columns when using FIFO to determine inventory costs under the perpetual system?

Date, Goods Purchased, Cost of Goods Sold, and Inventory Balance.

Review FIFO section under Inventory Costing Under a Perpetual System

LIFO assumes that the most recent purchases are sold first. These more recent costs are…

charged to the goods sold, and the costs of the earliest purchases are assigned to inventory.

Review LIFO section under Inventory Costing Under a Perpetual System

What else is weighted average called?

average cost

Weighted average or WA (also called average cost) requires that we use the…

weighted average cost per unit of inventory at the time of each sale.

How is the weighted average calculated?

Cost of goods available for sale (at each sale) / Number of units available for sale (at each sale).

Review Weighted Average section under Inventory Costing Under a Perpetual System