Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

4. Merchandising Operations

Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory

Financial Accounting

4. Merchandising Operations

Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory

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Multiple Choice

Why do accountants typically calculate the cost per unit as an average under inventory systems?

To ensure that the highest cost items are always expensed first, maximizing cost of goods sold.

To match the most recent purchase costs with current sales, reflecting current market values.

To allocate total inventory costs evenly across all units, especially when units are indistinguishable or purchased at different prices.

To minimize the reported cost of goods sold and increase net income.

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Verified step by step guidance

Understand the concept of inventory costing methods: Accountants use inventory costing methods to allocate the cost of inventory to cost of goods sold (COGS) and ending inventory. Common methods include FIFO (First-In, First-Out), LIFO (Last-In, First-Out), and Average Cost.

Recognize the purpose of calculating cost per unit as an average: When inventory items are indistinguishable or purchased at varying prices, calculating an average cost per unit ensures that the total inventory cost is evenly distributed across all units.

Learn how the average cost method works: Under the average cost method, the total cost of inventory is divided by the total number of units available for sale. This provides a uniform cost per unit, which is then used to calculate both COGS and ending inventory.

Understand why this method is used: The average cost method simplifies accounting for inventory when individual items cannot be easily identified or when prices fluctuate. It avoids the complexity of tracking specific costs for each unit and provides a fair allocation of costs.

Recognize the implications: Using the average cost method does not prioritize expensing higher or lower cost items first. Instead, it ensures consistency and fairness in cost allocation, which is particularly useful for businesses with homogeneous inventory or frequent price changes.