Accounting 1 Chapter 6

How to determine cost of Goods sold

(Beginning inventory+purchases) - Ending inventory =cost of goods sold

Determining Ownership of Goods in Transit: FOB Shipping Point

(The buyer pays freight costs) Ownership of goods passes to the buyer when the public carrier accepts the goods from the seller. In other words, as soon as the person who is manufacturing it gives it to the public carrier (sends it out), the buyer owns it. *Freight cost is included in inventory price for the buyers books.

Determining Ownership of Goods in Transit: FOB Destination

(seller pays freight costs) Ownership of the goods remains with the seller until the goods reach the buyer. *freight cost in not included in the buyers invetory price. It is put in as a different expense (freight expense/freight out)

At what price is inventory accounted for and what does that include?

It is valued/accounted for at cost (how much you, the buyer, paid for it). The cost includes any extra fees that you need to expend to get your inventory ready for sale. (If you are using FOB destination then shipping isn't included)

Examples of common consigned Goods

Many car, boat and antique dealers are selling goods on consignment to avoid the risk of purchasing an item that they will not be able to sell. (keeps their inventory costs down)

Cost Flow Method: Last In First Out (LIFO)

Opposite of FIFO. The cost of last things that you purchased are the first ones to be recognised in determining cost of goods sold (last purchased, first marked sold). This method rarely coincides with the physical flow of merchandise.

Cost Flow Method: First in First Out (FIFA)

The earliest goods that you purchased are the first ones that are sold. This method often parallels the physical flow of merchandise. To determine the cost of ending inventory (so they can find cost of good sold) companies either a) take the unit prices of the most recent purchases, and work backward until they know the cost of the inventory that's left (ending inventory). Once they know the cost of ending inventory, you follow: Cost of goods available for sale - ending inventory = cost of goods sold b) Take the unit prices of the items they sold and determine cost of goods sold that way.

Inventory Errors: Balance Sheet Effects

They affect assets and owners equity. Not liabilities. *See chart on slide 43

Inventory Errors: Income Statement Effects

They effect cost of goods sold and net income for 2 periods. After 2 periods, the effects cancel each other out and it is back to normal (the combined totals of net income would be correct). *see chart on slide 39

Cost Flow Method: Average Cost

Uses the weighted-average unit cost to determine cost of goods sold. Cost of goods avail for sale / Total units available for sale =Weighted average unit cost If I find that my weighted-average unit cost is 12$ and I sold 550 units then: 12$ x 550 = 6600$ meaning, 6600$ is my cost of goods sold

Consigned Goods

when someone is holding the goods that are owned by another party, and trying to sell the goods for that other party for a fee/commission.