Inventory formulas

Question 1

COGS formula (Cost of good sold)

Answer 1

COGS = Beginning Inventory + Purchases – Ending Inventory

Cost of goods sold (income statement) = Number of units of inventory sold × Cost per unit of inventory

Question 2

Average Cost Method

Answer 2

Weighted Avg. Cost per Unit (Periodic inventory management) = Total Cost of Inventory ÷ Total Units Available for Sale

Weighted Avg. Cost per Unit (Perpetual inventory management) = Total Cost of Inventory ÷ Total Units Available for Sale
—> This avg cost MUST be updated every time a sale is made or new inven is purchased after a new sale is made:

Question 3

FIFO

Answer 3

• Assigns the oldest inventory costs to COGS first (“first-in, first-out”).
  
  • Results in higher net income during inflation, as older, lower-cost inventory is expensed first.
  • Shows most current cost of ending inventory
• Maximizes reported income when costs are rising

Question 4

LIFO

Answer 4

• Assigns the most recent inventory costs to COGS first (“last-in, first-out”).
  
  • Results in lower net income during inflation, as newer, higher-cost inventory is expensed first, reducing taxable income.
  • Prohibited under IAS 2 (International Accounting Standards) but still allowed under US GAAP
  • Shows most current measure of cost of goods sold and net income
• Minimizes income tax when costs are rising

Question 5

GAFS

Answer 5

Goods available for sale (GAFS) = beginning inventory + purchases

Question 6

FOB Destination

Answer 6

Ownership changes from seller to buyer when the goods reach the final destination

Question 7

FOB Shipping Point

Answer 7

Ownership changes from seller to buyer when the goods leave the shipping point

Question 8

Ending Inventory

Answer 8

Ending Inventory = Beginning Inventory + Purchases – Cost of Goods Sold (COGS)

OR

Ending Inventory = Weighted Average Cost × Number of Units in Ending Inventory