Tip:
Highlight text to annotate it
X
Inventory- now we are on to something totally different,What is inventory?
Inventory is the Cost of the items that we are going to sell.
You have probably worked in a store, or been in a store,
and when they sell something they have to cost out that inventory.
So it is sort of like supplies.
Supplies are bought first and used, but inventory is bought first and later on sold.
In this class, we are only buying
and selling inventory, we are not making any
like we do in another class, called Managerial Accounting.
In this class, we are just purchasing them, holding them and then selling them.
So the problem becomes: What do we cost them out as?
Well, if the price of inventory always stays the same, like
We buy a pencil for a penny
We keep it and all pencils always cost a penny
So we buy pencil after pencil and they are always a penny
Then everytime we sell a pencil , we cost out that pencil at the penny.
But that is not the real world, is it?
Prices go up and down
And sometimes we can't tell what we've sold.
So pencils are the type of item that we would have to determine
Which ones did we sell and
how can we tell what to cost them out at?
So, I have a little example I will do in a minute
to show you the different types of inventory valuations
but first let's talk
about the Inventory Equation.
What goes into Inventory.
So if you think about the T account for inventory
Where is it?
It's an asset
So it has a debit balance.
So something's
increase it and some things decrease it.
What would INCREASE inventory?
Buying something! So purchases
And what would decrease inventory?
Selling it!
If we have an equation for inventory:
Let me look at this T-account.
Inventory is the T-account.
Beginning balance
is what we had already
We buy some new things
We sell some things
We call that selling, Cost of Goods Sold.
Because it is the cost of things that we sell
We end up with an ending debit balance.
That seems pretty simple if we are just selling that one type of pencil
That always costs us a penny
But the problem changes
As prices change.
So the equation
Beginning Inventory (BI)
plus Purchases
minus Cost of Goods Sold (COGS)
= Ending inventory.
Or Beginning Inventory plus purchases
minus
Ending inventory is equal to Cost of Goods Sold.
These are the same equation.
One of them comes from backing into Cost of Goods Sold
That is called the Periodic Inventory method.
And the other, can calculate as it goes along
BI plus Purchases
Minus COGS
is the Ending inventory.
Either way they get to
the same answer in OUR problem.
In the real world, they don't always calculate the same
But I want to point out the equation again, Beginning Inventory plus
Purchases
(We call that Cost of Goods AVAILABLE for sale)
These two things right here
Beg. Balance of inventory plus new stuff
is the amount of goods or the Cost of Goods available for sale
They are also the number of units that we are ready to sell.
Let's remember: COG available for Sale
COGAS is what I call it in the classroom.
We are going to take that and do something with it
to determine how to cost out the ending inventory and cost of goods sold.
Hopefully that makes sense so far.
We are going to use four methods.
First of all, let me talk about what
is the cost of purchases.
So what does it take to put the purchases into place
Well, the cost of the items themselves.
So that penny for the pencil
Then if we have to pay any kind of shipping.
to get the pencil here
that will be in the cost of purchases as well
Then if we have to return some
That will subtract from purchases.
That will reduce the purchases
Remember those sales discounts we had in the other chapter?
If we get a discount for paying our purchase early
that will reduce the cost of purchases
So the cost of purchases is all that
The cost of the item,
the freight IN,
the amount that it takes to ship it in,
less any returns or allowances
or any discounts
Got that?