Reporting of Costs of Goods Sold Essay
Reporting and Interpreting Cost of Goods Sold and Inventory
ANSWERS TO QUESTIONS
1. Inventory often is one of the largest amounts listed under assets on the balance sheet which means that it represents a significant amount of the resources available to the business. The inventory may be excessive in amount, which is a needless waste of resources; alternatively it may be too low, which may result in lost sales. Therefore, for internal users inventory control is very important. On the income statement, inventory exerts a direct impact on the amount of income. Therefore, statement users are interested particularly in the amount of this effect and the way in which inventory is measured. Because of its impact on both the …show more content…
(b) FIFO–This inventory costing method views the first units purchased as the first units sold. Under this method cost of goods sold is costed at the oldest unit costs, and the ending inventory is costed at the newest unit costs.
(c) LIFO–This inventory costing method assumes that the last units purchased are the first units sold. Under this method cost of goods sold is costed at the newest unit costs and the ending inventory is costed at the oldest unit costs.
(d) Specific identification–This inventory costing method requires that each item in the beginning inventory and each item purchased during the period be identified specifically so that its unit cost can be determined by identifying the specific item sold. This method usually requires that each item be marked, often with a code that indicates its cost. When it is sold, that unit cost is the cost of goods sold amount. It often is characterized as a pick-and-choose method. When the ending inventory