Question

In the last scenario Joe mentioned that Cost of Goods Sold was $125,000 for the year. But you are not sure how he got that number. Please advise Joe and by selecting the method(s) he is allowed to use to determine the value of his Cost of Goods Sold as $125,000.

a. Last in First Out (LIFO)
b. Cost Method
c. Lower of Cost or Market
d. Retail method
e. Rolling Average
f. Weighted average

Answer 1

Joe can calculate COGS using LIFO, the Lower of Cost or Market, Retail method, and Weighted average. Some methods mentioned, such as the Cost Method and Rolling Average, are not standard for COGS calculation.

Step-by-step explanation:

Joe can determine the value of his Cost of Goods Sold (COGS) using several accounting methods. Among the methods mentioned, the ones permissible by accounting standards to calculate COGS are Last in First Out (LIFO), Lower of Cost or Market, the Retail method, and the Weighted average method. It is important that Joe chooses the method that accurately reflects his inventory consumption and complies with the accounting principles relevant to his business.

• Last in First Out (LIFO) considers the most recently purchased or produced goods as the first ones sold. This method can affect tax liability and net income during periods of inflation.
• The Lower of Cost or Market approach ensures that inventory is reported at the lower of either the historical cost or the market replacement cost as of the balance sheet date.
• The Retail method estimates inventory value by using a cost-to-retail percentage.
• Weighted average calculates COGS based on the average cost of all units available for sale during the period.

The Cost Method is typically not used for calculating COGS but for valuing investments. Rolling Average could refer to a method similar to weighted average but isn’t a standard term used in accounting for COGS calculations.