Chapter 6 Accounting
Weighted average cost flow assumption: Weighted average assumes that cost flow at an average of the costs available.
Costs of goods sold and Ending inventory:
-Cost of goods sold + ending inventory = the total goods available for sale.
-Cost of goods available for sale must be allocated between cost of goods sold and ending inventory.
FIFO cost flow assumption: The cost of items purchased earliest are the costs that will be transferred first to cost of goods sold on the income statement.
LIFO cost flow assumption: The cost of items purchased latest are the costs that will be transferred first to cost of goods sold on the income statement.
4 methods used to assign costs to inventory and cost of goods sold
1. Specific Identification
2. First-in, first-out
3. Last-in, first-out
4. Weighted average
Goods in Transit: If goods are shipped FOB shipping point, then the purchaser is responsible for paying freight charges and the seller will not include the merchandise in their inventory.
Steps to apply LCM to individual items of inventory:
1. List the number of units of each product
2. List the cost of each item
3. List the market price of each item
4. Compute total cost and total market value for each item
5. Compare recorded cost of each inventory item with its replacement cost. List lower of cost or market.
6. Adjust inventory downward when market is less than cost.
Physical flow and Cost flow of goods
-Perishable items must have an actual physical flow of FIFO
-Physical flow is focused on the actual movement of goods
-Cost flow is an assumption about which goods/items are sold.
-A business may adopt any cost flow assumption when accounting for perishable items.
Determine cost of goods sold for X-mart, assuming that beginning inventory was $5,000. Net purchases were $20,000 and ending inventory was $9,000.
*Beginning inventory + Net purchases – Ending inventory = Cost of goods sold
5000 + 20000 - 9000= 16000
Sparky’s incorrectly included inventory that was on
Costs of goods sold and Ending inventory:
-Cost of goods sold + ending inventory = the total goods available for sale.
-Cost of goods available for sale must be allocated between cost of goods sold and ending inventory.
FIFO cost flow assumption: The cost of items purchased earliest are the costs that will be transferred first to cost of goods sold on the income statement.
LIFO cost flow assumption: The cost of items purchased latest are the costs that will be transferred first to cost of goods sold on the income statement.
4 methods used to assign costs to inventory and cost of goods sold
1. Specific Identification
2. First-in, first-out
3. Last-in, first-out
4. Weighted average
Goods in Transit: If goods are shipped FOB shipping point, then the purchaser is responsible for paying freight charges and the seller will not include the merchandise in their inventory.
Steps to apply LCM to individual items of inventory:
1. List the number of units of each product
2. List the cost of each item
3. List the market price of each item
4. Compute total cost and total market value for each item
5. Compare recorded cost of each inventory item with its replacement cost. List lower of cost or market.
6. Adjust inventory downward when market is less than cost.
Physical flow and Cost flow of goods
-Perishable items must have an actual physical flow of FIFO
-Physical flow is focused on the actual movement of goods
-Cost flow is an assumption about which goods/items are sold.
-A business may adopt any cost flow assumption when accounting for perishable items.
Determine cost of goods sold for X-mart, assuming that beginning inventory was $5,000. Net purchases were $20,000 and ending inventory was $9,000.
*Beginning inventory + Net purchases – Ending inventory = Cost of goods sold
5000 + 20000 - 9000= 16000
Sparky’s incorrectly included inventory that was on