Inventory Valuation and Cost of Goods Sold: FIFO, LIFO, and Weighted Average

Vocabulary terms and key calculation concepts covering inventory accounting, journal entries, FIFO, LIFO, and weighted average methods.

Matching Principle

The accounting principle stating that revenues are recognized in the period they are earned, and expenses are recognized only when the benefit of what was purchased has been received.

Cost of Goods Sold (COGS)

The expense account recognized at the time inventory is sold to a customer, reflecting the cost incurred to acquire that inventory rather than its selling price.

Inventory Purchase Journal Entry

The initial accounting entry when inventory is acquired, which debits inventory by the purchase cost and credits either cash (for cash purchases) or accounts payable (for purchases on account).

Inventory Sale Journal Entries

The two entries recorded upon sale: one debiting Cash or Accounts Receivable and crediting Revenue at the selling price, and a second debiting Cost of Goods Sold and crediting Inventory at purchase cost.

Gross Margin

The difference between total revenue earned from product sales and the cost of goods sold ($\text{Gross Margin} = \text{Revenue} - \text{COGS}$).

FIFO (First-In, First-Out)

An inventory valuation method that assumes the very first or oldest units of inventory purchased are the first ones sold.

LIFO (Last-In, First-Out)

An inventory valuation method that assumes the most recent or last units of inventory purchased are the first ones sold.

Weighted Average Method

An inventory costing method that determines a single average cost per unit by dividing total cost by total available units, applying that uniform cost across all units sold and remaining.

Ending Inventory

The dollar value of remaining unsold inventory units on hand at the end of a period, calculated either from the remaining specific cost batches or by subtracting Cost of Goods Sold from total inventory value.

FIFO Cost of Goods Sold (Lecture Example)

The total Cost of Goods Sold of $\$554$, calculated by selling $100$ beginning units at $\$3.00$, $50$ first-purchase units at $\$3.10$, and $30$ second-purchase units at $\$3.30$.

FIFO Ending Inventory (Lecture Example)

The ending inventory value of $\$396$, calculated from the remaining $120$ unsold units from the second purchase valued at $\$3.30$ per unit.

LIFO Cost of Goods Sold (Lecture Example)

The total Cost of Goods Sold of $\$588$, calculated by selling $150$ units from the most recent purchase at $\$3.30$ and $30$ units from the earlier purchase at $\$3.10$.

LIFO Ending Inventory (Lecture Example)

The ending inventory value of $\$362$, consisting of $20$ remaining units from the first purchase at $\$3.10$ ($\$62$) plus all $100$ untouched beginning units at $\$3.00$ ($\$300$).

Weighted Average Unit Cost (Lecture Example)

The average cost of approximately $\$3.17$ per unit, determined by dividing the overall inventory cost of $\$950$ by the $300$ total available units.

Weighted Average Cost of Goods Sold (Lecture Example)

The total Cost of Goods Sold of $\$570.6$, calculated by multiplying $180$ sold units by the average unit cost of approximately $\$3.17$.