Accounting Chapter 7

refer to goods a company is holding on behalf of the goods' owner

inventory items being transported

COGS = beginning inventories + purchases - ending inventories

ending inventories = beginning inventories + purchases - COGS

Goods available for sale = beginning inventories + purchases

• COGS (income statement) - Oldest cost
• Inventory (Balance sheet) - Newest cost

• COGS (income statement) - average cost
• Inventory (Balance sheet) - average cost

formula = cost of goods available for sale/ # of units available for sale = $410/50 units = $8.20 per unit

• 1. does not fairly represent the actual flow of costs
• 2. reported on the balance sheet is not a fair representation of the most recent costs of inventories on hand
• 3. can result in large distortions of reported income when older inventory costs, which are typically lower, are expenses to cost of goods sold

formula = COGS / Average inventory

• - # of times inventory turns over during the period
• - higher ratio means faster turnover
• - lower gross profit % has a faster inventory turnover

formula = 365/inventory turnover ratio

• - average # of days from purchase to sale
• - higher # means a longer time to sell

method of calculation are the same

Add only sold unit prices and divide by only units sold to figure out cost of goods sold. Then use the goods available for sale - cost of goods sold = goods available for sale + purchase = ending inventory

Add all the unit prices and divide by the all the unit to obtain the average unit prices. Then use the average unit prices to figure out cost of goods sold and ending inventory or goods available for sales - ending inventory = cost of goods sold