Gaap's Cap Company Case Study

Inventory Costing Methods

Simplified Cost of Goods Sold Formula
Cost of goods sold:

Beginning inventory + Net Purchases = Cost of goods available for sale - Ending inventory
= Cost of goods sold

$ 20 100 120 (30)
$ 90

What Value Do You Assign Inventory & COGS If You Bought Inventory at Different Prices?
Beg. Inventory Purchase #1 Purchase #2 Goods Available
Cost of Goods Sold Ending Inventory

10 units 20 units 24 units 54 units
50 units 4 units

@ $10 /unit @ $13 /unit @ $17 /unit

= $100 = $260 = $408 $768
= ? = ?

@ @

? /unit ? /unit

Value depends upon cost flow method!!

Cost Flow Methods Allowed per GAAP
(and Frequency of Usage)
•Specific identification •Weighted-average •First-in, first-out (FIFO)
Inventory Purchase Sale Purchase Sale Units 10 x 20 x 22 x 24 x 28 x $/Unit $10 = $13 = $20 = $17 = $25 = Total $100 $260 $440 $408 $700

Assume ending inventory includes 2 units from March 4th purchase and 2 units from the March 18th purchase.

Weighted-Average (Average Cost) Method
• • COGS & inventory values based on weighted average Smooths out the price changes

cost of goods available for sale number of units available for sale

Weighted Average
Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory Purchase Sale Purchase Sale Units 10 20 22 24 18 $/Unit x $10 x $13 x $20 x $17 x $25 Total = $100 = $260 = $440 = $408 = $700

Goods Purchased Cost of Goods Sold Beg. Inventory 20 x $13 = $260

22 x $12
Inventory Purchase Sale Purchase Sale Units 10 20 22 24 18 $/Unit x $10 x $13 x $20 x $17 x $25 Total = $100 = $260 = $440 = $408 = $700

3/1 3/4 3/18

Goods Available for Sale Beg. Inventory 10 x $10 = Purchase 20 x $13 = Purchase 24 x $17 = 54 Less: Sales -40 End. Inventory 14

$100 $260 $408 $768

$768 / 54 = $14.22

COGA Less End. Inv. Cost of Goods Sold

14 x $14.22 =

$768.00 - 199.08 $568.92

First In First Out (FIFO) - Periodic
Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory Purchase Sale Purchase Sale Units 10 20 22 24 18 $/Unit x $10 x $13 x $20 x $17 x $25 Total = $100 = $260 = $440 = $408 = $700

3/1 3/4 3/18

Goods Available for Sale Beg. Inventory 10 x $10 = Purchase 20 x $13 = Purchase 24 x $17 = 54 Less: Sales -40 End. Inventory 14

$100 $260 $408 $768

COGA Less End. Inv. Cost of Goods Sold

14

x

$17

=

$768 - 238 $530

Last In First Out (LIFO) - Periodic
Date 3/1 3/4 3/8 3/18 3/25 Activity Beg. Inventory Purchase Sale Purchase Sale Units 10 20 22 24 18 $/Unit x $10 x $13 x $20 x $17 x $25 Total = $100 = $260 = $440 = $408 = $700

3/1 3/4 3/18

Goods Available for Sale Beg. Inventory 10 x $10 = Purchase 20 x $13 = Purchase 24 x $17 = 54 Less: Sales -40 End. Inventory