Detailed Instructor Answer Key — FIFO, LIFO, weighted average, adjustments, and shrinkage.
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Inventory: Goods held for sale or use in production; recorded as an asset.
COGS: Cost of inventory that has been sold; reported as an expense on the income statement.
Shrinkage: Loss of inventory due to theft, damage, errors, or unknown causes.
Perpetual: Inventory records updated continuously; each sale records both revenue and COGS.
Periodic: Inventory adjusted at period-end; COGS calculated with Beginning Inventory + Purchases − Ending Inventory = COGS.
Students should recognize that the timing of COGS recognition differs between the two systems.
Given purchases:
| Batch | Units | Cost per Unit |
|---|---|---|
| 1 | 50 | 10 |
| 2 | 30 | 12 |
| 3 | 20 | 14 |
Total units: 100, total cost: 1,140. If 60 units are sold:
In all cases, COGS + Ending Inventory equals total cost of 1,140.
Scenario: Buy 80 units at 10 each on account; later sell 25 units at 18 on credit.
Inventory ............................... Dr 800
Accounts Payable ........................ 800
Accounts Receivable ..................... Dr 450
Sales Revenue ............................ 450
COGS .................................... Dr 250
Inventory ................................ 250
Students should show both the sales and COGS entries for a perpetual system.
Scenario:
Shrinkage: 4,200 − 3,900 = 300
Adjusting entry:
COGS (or Inventory Shrinkage Expense) ... Dr 300
Inventory ................................ 300
This entry reduces Inventory to the physical count and recognizes the cost of shrinkage as an expense.
Common causes:
Suggested controls:
Expected explanation from students:
Students may show this as a diagram: Purchase → Inventory → Sale → COGS.
Costing Worksheet: Correct FIFO/LIFO/Weighted Average calculations with clear steps.
Reconciliation Worksheet: Proper use of the formula and correct identification of shrinkage or overage.
Adjustment Entries: Correct debits to expense accounts and credits to Inventory.
Controls Essay: At least three relevant inventory controls tied to specific risks (e.g., theft, errors).
Different inventory costing methods can significantly change reported profit and inventory values. In periods of rising prices, FIFO tends to show lower COGS and higher profits, while LIFO shows higher COGS and lower profits but may reduce taxes. Weighted average smooths price changes and is simpler to apply.
A strong answer explains that managers might prefer FIFO for a more current inventory value or weighted average for simplicity and stability, while LIFO may be attractive in some tax environments (where allowed).
By the end of Week 9, students should be able to compute COGS and ending inventory under different costing methods, record inventory transactions and adjustments, and explain how inventory impacts both the balance sheet and income statement. This answer key supports grading and deeper classroom discussion.
Use this as a guide when reviewing student work on costing problems, reconciliations, and conceptual questions.