In this chapter, students will be able to understand: In a perpetual inventory system, determine the cost of goods sold using (a) specific identification, (b) average cost, (c) FIFO, and (d) LIFO. Discuss the advantages and shortcomings of each method; explain the need for taking a physical inventory; record shrinkage losses and other year-end adjustments to inventory;. | Inventories and the Cost of Goods Sold Chapter 8 Chapter 8: Inventories and the Cost of Goods Sold INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income as goods are sold BALANCE SHEET Asset Inventory Purchase costs (or manufacturing costs) The Flow of Inventory Costs Inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Inventory is reported as a current asset on the balance sheet. Companies that sell inventory report the value of the inventory they have in stock at the end of the period as a current asset on the balance sheet. Companies that sell inventory also have an additional expense item called Cost of Goods Sold on their income statements. The Cost of Goods Sold account represents the cost of the inventory sold during the period to help earn revenue. Cost of Goods Sold is presented as a separate expense item on the income statement. Net Sales minus Cost of Goods Sold equals Gross Profit. Gross Profit is the amount left, after subtracting the cost of inventory sold, to cover all other expenses and a profit. When identical units of inventory have different unit costs, a question naturally arises as to which of these costs should be used in recording a sale of inventory. Which Unit Did We Sell? On the sale date, a natural question arises: What is the unit cost of the inventory being sold? If all the inventory has the same unit cost, then this is not a difficult question to answer. However, in most cases, companies will have identical units of inventory in stock that have different unit costs. Let’s see how to determine the cost of a unit of inventory sold. The Bike Company (TBC) Data for an Illustration Take a minute and review this chart for The Bike Company. This data will be used throughout the perpetual inventory examples to compare results. On August 14, TBC sold 20 bikes for $130 each. Of the bikes sold 9 originally cost $91 and 11 . | Inventories and the Cost of Goods Sold Chapter 8 Chapter 8: Inventories and the Cost of Goods Sold INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income as goods are sold BALANCE SHEET Asset Inventory Purchase costs (or manufacturing costs) The Flow of Inventory Costs Inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Inventory is reported as a current asset on the balance sheet. Companies that sell inventory report the value of the inventory they have in stock at the end of the period as a current asset on the balance sheet. Companies that sell inventory also have an additional expense item called Cost of Goods Sold on their income statements. The Cost of Goods Sold account represents the cost of the inventory sold during the period to help earn revenue. Cost of Goods Sold is presented as a separate expense item on the income statement. Net Sales minus Cost of Goods Sold
