Financial Accounting: Merchandise Inventory
The Professor begins this lecture with a brief overview of the topics she covered in the previous class session. Several basic calculations for ending inventory, cost of goods sold and cost per unit are also shown. Following this, the four primary inventory costing methods are covered in depth (Specific unit, FIFO, LIFO, and Average Cost). ------ The first and most basic method, specific-unit-cost, is self-explanatory ; the unit is recorded at the actual price it was sold at. This method is normally used for unique or expensive items (vehicles, jewelry, etc) as opposed to homogeneous items that are mass produced and sold. It is the least significant of the four for the purpose of this course. ------ The next method covered is First-in, First-out, denoted FIFO. Under this method, the cost of goods sold account records items that were purchased first (in other words, the oldest inventory). The actual / specific physical unit sold doesn't matter here since this method is normally used for generic, identical products. ------ The third method covered is Last-in, First-out, denoted LIFO. This method is the exact opposite of LIFO. The cost of goods sold account, in this case, is based on the items that were purchased last (in other words, the newest inventory). Like FIFO, the actual physical unit sold does not matter here. ------ The final method is the Average Cost method, which involves assigning a new average cost per unit after each purchase. In other word, the cost is somewhat dynamic. When a new batch of inventory is purchased, the cost of inventory is adjusted to take the newly purchased inventory into account. Examples and journal entries of each method are covered as well as how to properly apply each method.. Charts are displayed showing date of purchase, purchased, cost of goods sold, and inventory on hand are used to help further facilitate the understanding of the material. A lengthy, in-depth textbook exercise utilizing all the methods is also performed by the Professor. The Professor then closes the lecture by directly comparing the three significant costing methods (FIFO, LIFO, and Average-cost) and defines the benefits and advantages of using each, and why companies may choose one costing method over another.
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