Bookeeping part 2.5

the other half of my bookkeeping notes

Cost of Goods Sold

Direct expense associated with producing or manufacturing the goods that a business sells during a specific period

What are the common examples of direct expenses included in COGS?

Items for resale, raw materials/parts, direct labor costs, supplies/factory overhead, and shipping/freight expenses

What does COGS help a business determine?

The gross profit of a business

what is the accounting formula for gross profit?

total revenue- COGS= gross profit

what are common expenses NOT included in COGS?

Rent, marketing/ advertising and utilities

What does tracking COGS help a bookkeeper accurately do?

track the expense associated with manufacturing and selling goods

why track COGS for each indiviual item sold?

it helps calculate profitability of each item sold

How does COGS analysis benefit a business’s expense management?

It helps identify areas where costs can be optimized

inventory valuation

The process of assigning cost to inventory items listed on a balance sheet, including adjusting for errors like miscounting or loss.

what is FIFO

First items purchased are first sold

How does FIFO impact financial statements during a period of rising prices?

It increases ending inventory value, lowers COGS, and reports higher net income

LIFO

most recent purchased are the first one sold

How does LIFO impact financial statements during a period of rising prices?

It decreases ending inventory value, raises COGS, and reports lower net income

How does AVCO (Weighted Average Cost) determine item cost?

By dividing the total cost of all items bought by the total number of items

why do small businesses prefer AVCO?

because it is simple and easy to calculate

What must a business do once an inventory valuation method is chosen?

Apply it consistently to accurately reflect the true value of inventory and COGS.

How would you record a purchase of raw materials?

Debit: Raw materials (inventory) | Credit: Accounts payable (on credit) or Cash (if immediate)

What is the average cost formula for AVCO?

Total cost of goods available for sale ÷ Total number of units available for sale

What 3 factors determine best inventory valuation method for a business?

Industry operations, business goals, tax rules

What 2 financial outcomes are achieved by using the same inventory method consistently

Accurate financial reports and the ability to compare financial statements over time

During a period of rising prices which inventory method makes a business appear more profitable?

FIFO

Why would FIFO help a business appear more profitable during a period of rising prices?

It records older, cheaper costs as COGS, which increases net income

what 3 areas are improved by keeping track of inventory?

Valuing it correctly, figuring out COGS, and making smart decisions about inventory management

What 3 benefits does choosing the right tracking method provide?

Control inventory properly, Ensure accurate finances, Make the best use or resources

Perpetual inventory system

An inventory system that is continuously updated in real time as products are bought and sold

What are 2 benefits of a perpetual inventory system?

Immediate insight into stock levels, Efficient inventory management

How do you record a sale under the perpetual system?

Debit: Cash/AR, Credit: Sales Revenue | Debit: COGS, Credit: Inventory

periodic inventory system

An inventory system updated only at specific intervals typically at the end of the accounting period

How is COGS determined under a periodic inventory system?

Beginning inventory + Purchases - Ending inventory

Inventory

raw materials a business uses in production or finished goods ready to sell

why is having the right amount of inventory in stock important?

too much can tie up resources and increase costs, too little can lead to stock outs and lost sales

which parts of a business rely on inventory at a key part of their operations?

manufacturing, retail, distribution

why is inventory considered a vital factor for shareholder profitability?

its a primary source of revenue generation