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Chapter 8 - Inventories and the cost of goods sold. Upon completion of this lesson, the successful participant will be able to: Explain the need for taking a physical inventory, record shrinkage losses and other year-end adjustments to inventory, explain the effects on the income statement of errors in inventory valuation, estimate the cost of goods sold and ending inventory by the gross profit method and by the retail method,. | INVENTORIES AND THE COST OF GOODS SOLD Chapter 8 2 Inventory Goods owned and held for sale to customers Current asset Inventory Defined INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income As purchase costs (or manufacturing costs) are incurred as goods are sold BALANCE SHEET Current assets: Inventory $ $ $ The Flow of Inventory Costs In a perpetual inventory system, inventory entries parallel the flow of costs. The Flow of Inventory Costs 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? 4 A separate subsidiary account is maintained for each item in inventory. How can we determine the unit cost for the Sept. 10 sale? Inventory Subsidiary Ledger Specific identification LIFO Average cost FIFO We use one of these inventory valuation methods to determine cost of inventory sold. Inventory Cost Flows 4 The Bike Company (TBC) Information for the Following Inventory Examples Specific Identification When a unit is sold, the specific cost of the unit sold is added to cost of goods sold. On August 14, TBC sold 20 bikes for $130 each. Nine bikes originally cost $91 and 11 bikes originally cost $106. Continue Specific Identification – Example The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in inventory. Continue Let’s look at the entries for the Aug. 14 sale. Specific Identification – Example Continue Retail Cost A similar entry is made after each sale. Specific Identification – Example Additional purchases were made on August 17 and 28. Costs associated with sales on August 31 were as follows: 1 @ $91, 3 @ $106, 15 @ $115, & 4 @ $119. Continue Specific Identification – Example Cost of Goods Sold for August 31 = $2,610 Balance Sheet Inventory = $1,395 Income Statement COGS = $4,595 Specific Identification – Example Since specific identification is so easy, can’t we use it all the . | INVENTORIES AND THE COST OF GOODS SOLD Chapter 8 2 Inventory Goods owned and held for sale to customers Current asset Inventory Defined INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income As purchase costs (or manufacturing costs) are incurred as goods are sold BALANCE SHEET Current assets: Inventory $ $ $ The Flow of Inventory Costs In a perpetual inventory system, inventory entries parallel the flow of costs. The Flow of Inventory Costs 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? 4 A separate subsidiary account is maintained for each item in inventory. How can we determine the unit cost for the Sept. 10 sale? Inventory Subsidiary Ledger Specific identification LIFO Average cost FIFO We use one of these inventory valuation methods to determine cost of inventory sold. Inventory Cost Flows 4 The Bike Company (TBC) .