6 2: Calculate the Cost of Goods Sold and Ending Inventory Using the Perpetual Method Business LibreTexts

When perpetual methodology is utilized, the cost of goods sold and ending inventory are calculated at the time of each sale rather than at the end of the month. For example, in this case, when the first sale of 150 units is made, inventory will be removed and cost computed as of that date from the beginning inventory. The differences in timing as to when cost of goods sold is calculated can alter the order that costs are sequenced. Petersen and Knapp allegedly participated in channel stuffing,
which is the process of recognizing and recording revenue in a
current period that actually will be legally earned in one or more
future fiscal periods.

• The cost of goods sold,
  inventory, and gross margin shown in
  Figure 10.15 were determined from the previously-stated data,
  particular to perpetual FIFO costing.
• The following cost of goods sold, inventory, and gross margin were determined from the previously-stated data, particular to LIFO costing.
• The outcomes for gross margin, under each of these different cost assumptions, is summarized in Figure 10.21.
• For a merchandising company, the cost of goods sold can be relatively large.
• Once those units were sold, there remained 30 more units of the beginning inventory.

Beginning merchandise inventory had a balance of $3,150 before adjustment. The inventory at period end should be $8,955, requiring an entry to increase merchandise inventory by $5,895. Cost of goods sold was calculated to be $7,200, which should be recorded as an expense.

Which inventory method assigns the most recent costs to ending inventory?

Since total Sales would the same as we calculated above Jan 8 Sales ( 300 units x $30) $9,000 + Jan 11 Sales (250 units x $40) $10,000 or $19,000. The gross profit (or margin) would be $11,800 ($19,000 Sales – 7,200 cost of goods sold). The journal entries for these transactions would be would be the same as show above the only thing changing would be the AMOUNT of cost of goods sold used in the Jan 8 and Jan 15 entries. Notice that the goods available for sale are “allocated” to ending inventory and cost of goods sold. But, in a company’s accounting records, this flow must be translated into units of money. It is important to note that these answers can differ when calculated using the perpetual method.

Raw materials are those used in the primary production process or materials that are ready to be manufactured into completed goods. The second, called work-in-process, refers to materials that are in the process of being converted into final goods. These goods have gone through the production process and are ready to be sold to consumers.

• The cost of goods sold, inventory, and
  gross margin shown in
  Figure 10.19 were determined from the previously-stated data,
  particular to perpetual, AVG costing.
• These UPC codes identify specific products but
  are not specific to the particular batch of goods that were
  produced.
• This is why LIFO creates higher costs and lowers net income in times of inflation.
• Regardless of which cost assumption is chosen, recording inventory sales using the perpetual method involves recording both the revenue and the cost from the transaction for each individual sale.

Now, let’s look at each inventory method, the pros and cons of each, and discuss how it can impact your business. Those using a periodic inventory system will do so periodically (maybe once a month or once a year). Specific identification https://accounting-services.net/first-in-first-out-method/ will tell you exactly which purchase to use when determining cost. You will now learn how to calculate the Cost of Goods Sold using 4 different methods. These calculations support the following financial statement components.

Most computer systems will show you the Inventory Record form so you need to understand how to read it. However, it can be time consuming and not practical for homework and test situations so you learn the alternative method as well. We will be using the perpetual inventory system in these examples which constantly updates the inventory account balance to reflect inventory on hand.

What if I want to change my inventory method? Can I do that?

Specific
identification inventory methods also commonly use a manual form of
the perpetual system. As you’ve learned, the perpetual inventory system is updated continuously to reflect the current status of inventory on an ongoing basis. Modern sales activity commonly uses electronic identifiers—such as bar codes and RFID technology—to account for inventory as it is purchased, monitored, and sold.

Calculations of Costs of Goods Sold, Ending Inventory, and

With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. There are four main methods to compute COGS and ending inventory for a period. I’ll say it again, knowing how to manage inventory is a vital activity for companies. But it can be intimidating, especially as businesses grow and processes become more complex.

Understanding Ending Inventory

Thus, after two sales, there
remained 75 units of inventory that had cost the company $27 each. The last transaction was an additional purchase of 210 units for
$33 per unit. Ending inventory was made up of 75 units at $27 each,
and 210 units at $33 each, for a total FIFO perpetual ending
inventory value of $8,955. Journal entries are not shown, but the following discussion provides the information that would be used in recording the necessary journal entries.

If the perpetual inventory system is used, the account entitled Merchandise Inventory is debited for purchases of merchandise. Most companies use the first in, first out (FIFO) method of accounting to record their sales. The last in, first out (LIFO) method is suited to particular businesses in particular times. That is, it is used primarily by businesses that must maintain large and costly inventories, and it is useful only when inflation is rapidly pushing up their costs. It allows them to record lower taxable income at times when higher prices are putting stress on their operations.

Information Relating to All Cost Allocation Methods, but Specific to Perpetual Inventory Updating

The second sale of 180 units consisted of 20 units at $21 per unit and 160 units at $27 per unit for a total second-sale cost of $4,740. Thus, after two sales, there remained 10 units of inventory that had cost the company $21, and 65 units that had cost the company $27 each. Ending inventory was made up of 10 units at $21 each, 65 units at $27 each, and 210 units at $33 each, for a total specific identification perpetual ending inventory value of $8,895.