Accounting

Costs of beginning inventory plus purchases equals

Goods available for sale

Goods available for sale minus cost of goods sold equals

cost of ending inventory

What is a current asset?

An asset the company expects to convert into cash in the near term

Weighted-average cost method

Both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale Each unit of inventory has a cost equal to the weighted-average unit cost of all inventory items

Cost of goods sold

Cost of the inventory that is sold during the period

Goods available for sale minus costs of ending inventory equals

Costs of goods sold

Periodic Inventory system

Does not continually record inventory amounts. Instead, it calculates the balance of inventory once per period, at the end, based on a physical count of inventory on hand. Because the periodic system does not provide a useful, continuing record of inventory, very few companies actually use the periodic inventory system in practice to record inventory transactions

Why Choose FIFO

If a company wants to choose an inventory method that most closely approximates its actual physical flow of inventory, then for most companies FIFO makes the most sense. During periods of rising costs, which is the case for most companies (including our example for Mario's Game Shop), FIFO results in a (1) higher ending inventory, (2) lower cost of goods sold, and (3) higher reported profit than does LIFO. Managers may want to report higher assets and profitability to increase their bonus compensation, decrease unemployment risk, satisfy shareholders, meet lending agreements, or increase stock price

Inventory:

Includes items a company intends for sale to customers(ex: shoes at Payless or clothes at Walmart) Also includes items that are not yet finished products(lumber at a cabinet manufacturer) Reported as a current asset

LIFO reserve

The difference in reported inventory when using LIFO instead of FIFO

Perpetual Inventory System

The perpetual inventory system maintains a continual—or perpetual—record of inventory purchased and sold

Why Choose LIFO

The primary benefit of choosing LIFO is tax savings. LIFO results in the lowest amount of reported profits (when inventory costs are rising). While that might not look so good in the income statement, it's a welcome outcome in the tax return. When taxable income is lower, the company owes less in taxes to the Internal Revenue Service (IRS).

Weighted-average cost Formula

The total cost of goods available for salE divided by total number of units available for sale

FIRST-IN, FIRST-OUT (FIFO)

the first units purchased (the first in) are the first ones sold (the first out). We assume that beginning inventory sells first, followed by the inventory from the first purchase during the year, followed by the inventory from the second purchase during the year, and so on.

LAST-IN, FIRST-OUT(LIFO)

the last units purchased (the last in) are the first ones sold (the first out)