What is cost of goods available for sale?

Beginning inventory + net purchases. It's split between ending inventory (an asset) and cost of goods sold (an expense).

The fundamental inventory split?

Cost of goods available for sale = Ending inventory + Cost of goods sold. Value one and the other falls out.

Goods in transit — FOB shipping point?

The BUYER owns them once shipped, so they belong in the buyer's ending inventory even while in transit.

Goods in transit — FOB destination?

The SELLER owns them until delivery, so they stay in the seller's inventory until they arrive.

Who owns consigned goods?

The consignor (the owner). The consignee holding them to sell does NOT include them in its inventory.

What is specific identification?

Tracking the actual cost of each specific unit sold. Precise, but only practical for low-volume, high-value, distinguishable goods.

What is a cost-flow assumption?

An assumption about which costs flow to COGS (FIFO, LIFO, or average). It need not match the physical flow of goods.

FIFO — first-in, first-out?

The oldest costs go to cost of goods sold first, so ending inventory holds the MOST RECENT (last) purchase costs.

LIFO — last-in, first-out?

The newest costs go to cost of goods sold first, so ending inventory holds the OLDEST (first) costs.

Weighted-average unit cost = cost of goods available ÷ units available. Apply that one average to both ending inventory and COGS.

FIFO periodic — how do you find ending inventory?

Cost the ending units using the most recent purchases, working backward from the last purchase.

LIFO periodic — how do you find ending inventory?

Cost the ending units using the oldest costs, working forward from beginning inventory.

Anchor example — 800 units for $10,600, 200 left. FIFO?

FIFO ending = last 200 @ $15 = $3,000; COGS = 10,600 − 3,000 = $7,600.

Anchor example — 800 units for $10,600, 200 left. LIFO?

LIFO ending = first 200 (100 @ $10 + 100 @ $12) = $2,200; COGS = 10,600 − 2,200 = $8,400.

Anchor example — 800 units for $10,600, 200 left. Average?

Average = 10,600 ÷ 800 = $13.25; ending = 200 × 13.25 = $2,650; COGS = 600 × 13.25 = $7,950.

What is moving-average (perpetual)?

Recompute the weighted-average unit cost after EVERY purchase; each sale is costed at the current running average.

Why can LIFO differ under periodic vs. perpetual?

Perpetual locks in the 'last' cost available at each sale; periodic waits until period end to decide the last-in costs.

Rising prices — which method gives the highest net income?

FIFO — it charges the oldest (lowest) costs to COGS, so COGS is lowest and net income highest.

Rising prices — which method gives the lowest income taxes?

LIFO — highest COGS, lowest taxable income. That tax saving is LIFO's main appeal.

Rising prices — which method gives the highest ending inventory?

FIFO — ending inventory is priced at the most recent (highest) costs.

Which method best approximates current cost on the balance sheet?

FIFO — its ending inventory carries the most recent costs.

Which method best matches current cost on the income statement?

LIFO — its cost of goods sold carries the most recent costs.

What is the consistency principle?

Use the same inventory method period to period so results are comparable; disclose any change and its effect.

What is the lower-of-cost-or-market (LCM) rule?

Carry inventory at the lower of its cost or market (net realizable value). Write DOWN when market is below cost; never write up.

LCM write-down entry?

Debit Cost of Goods Sold (or a loss account); Credit Inventory for the amount of the write-down.

LCM example — cost $11,000, LCM total $10,500. Entry?

Write down $500: debit Cost of Goods Sold $500; credit Inventory $500.

Overstating ending inventory does what to net income?

Understates COGS and OVERSTATES net income for the period.

Understating ending inventory does what to net income?

Overstates COGS and UNDERSTATES net income for the period.

Why are inventory errors self-correcting?

This period's ending inventory is next period's beginning inventory, so the error reverses; over two periods the effects cancel.

Error example — ending inventory understated $10,000. Year 1 net income?

COGS overstated $10,000 → net income UNDERSTATED $10,000 in year 1 (and overstated $10,000 in year 2).

The gross profit method — estimated COGS?

Estimated cost of goods sold = Net sales × (1 − gross profit rate).

The gross profit method — estimated ending inventory?

Estimated ending inventory = Cost of goods available for sale − estimated cost of goods sold.

Gross profit example — available 200,000, sales 250,000, GP rate 30%?

Est COGS = 250,000 × 70% = 175,000; est ending inventory = 200,000 − 175,000 = 25,000.

When is the gross profit method used?

To estimate inventory without a physical count — for interim statements or when inventory is destroyed (e.g., a fire).

The retail method — cost-to-retail ratio?

Goods available at COST ÷ goods available at RETAIL.

The retail method — ending inventory at retail?

Goods available at retail − net sales.

The retail method — ending inventory at cost?

Ending inventory at retail × cost-to-retail ratio.

Retail example — cost 120,000 / retail 200,000, sales 160,000?

Ratio = 60%; ending @ retail = 200,000 − 160,000 = 40,000; ending @ cost = 40,000 × 60% = 24,000.

What is inventory turnover?

Cost of goods sold ÷ average inventory — how many times inventory is sold and replaced in the period.

What is days in inventory?

365 ÷ inventory turnover — the average number of days a unit sits before it is sold.

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Accounting 1 · Chapter 6 · Free

Chapter 6 — Inventory Costing: FIFO, LIFO & Average

Inventory costing methods — FIFO, LIFO, and average cost — under both perpetual and periodic systems, plus inventory estimation.

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Apply FIFO, LIFO, and average-cost methods
Compute cost of goods sold and ending inventory under each method
Compare methods under periodic vs perpetual systems and estimate inventory

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Part 3 — How Accountants Count Inventory Without Counting It — Gross Profit & Retail

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Chapter 6 — Inventory Costing: FIFO, LIFO & Average

Full lecture (multi-part)

Short recaps for fast review

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Quick Quiz

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