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Relationship between Inventory and COGS: Beginning Inventory + Purchases = Goods Available for Sale. Goods...

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Accounting

Relationship between Inventory and COGS:

Beginning Inventory + Purchases = Goods Available for Sale.

Goods Available for Sale = COGS + Ending Inventory

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Inventory valuation methods are based on assumption of inventory flow. Complete the following exercise

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Compute ending inventory and cost of goods sold using FIFO, LIFO and Weighted Average inventory costing.

DISCUSS:

1. Which method yields higher net income? (Hint: Higher Ending Inventory means lower COGS. Lower COGS (COGS is an expense account) = Higher Net Income)

2. Which method would a business choose under the income statement approach?

3. Which method would a business choose under the Balance Sheet approach?

Illustration 6-3 Relationship between Inventory and Cost of Goods Sold Purchases During the Year (asset) 90,000 Beginning Inventory (asset) $20,000 Total Inventory Available for Sale $110,000 Inventory Not Sold Inventory Sold Ending Inventor Asset in the balance sheet S30,000 Cost of Goods Sold Expense in the income statement $80,000

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