Week 9 — Inventory & Cost Tracking

Overview

Week Overview

Week 9 introduces students to inventory and cost tracking. They learn how inventory moves through the accounting system, how different cost flow assumptions (FIFO, LIFO, weighted average) affect cost of goods sold (COGS) and ending inventory, and how to reconcile book inventory to physical counts, including shrinkage adjustments.

Objectives

Weekly Learning Objectives

By the end of this week, students will be able to:

Explain why inventory tracking is important for both the balance sheet and income statement.
Distinguish between perpetual and periodic inventory systems.
Calculate cost of goods sold (COGS) and ending inventory using FIFO, LIFO, and weighted average methods.
Record basic inventory transactions, including purchases, returns, and usage.
Prepare and record inventory adjustments for shrinkage or corrections.
Perform a simple inventory reconciliation using beginning balance, purchases, and ending counts.
Identify common causes of inventory shrinkage and suggest internal control measures.
Connect inventory activity to COGS on the income statement.

Concept 1

Inventory Basics & the Bookkeeper’s Role

Inventory consists of goods held for sale or for use in producing goods or services. It is reported as an asset on the balance sheet and becomes an expense (COGS) when sold.

Bookkeeper responsibilities include:

Recording inventory purchases and returns.
Tracking item receipts, vendor bills, and stock movements.
Reconciling inventory balances to the general ledger.
Assisting with physical counts and investigating discrepancies.

Concept 2

Perpetual vs. Periodic Inventory Systems

Perpetual Inventory System

Inventory records are updated continuously as purchases and sales occur.
Each sale triggers a COGS entry and reduces inventory.
Requires an inventory subledger or software system.

Periodic Inventory System

Inventory is not updated with each sale; instead, balances are adjusted at period-end.
COGS is calculated using a formula:
Beginning Inventory + Purchases − Ending Inventory = COGS
Simpler but less real-time visibility.

Students compare how bookkeepers record transactions in each system and when businesses might choose one approach over the other.

Concept 3

Inventory Purchases & Source Documents

Students work with the key documents used in inventory purchasing:

Purchase Orders (POs) — internal authorization sent to vendors.
Item Receipts — evidence that goods were received.
Vendor Bills — invoices requesting payment.

Bookkeepers must match POs, item receipts, and vendor bills to ensure quantities, prices, and terms are correct before recording inventory and accounts payable.

Students also learn that freight and handling costs may be added to inventory cost (landed cost) rather than treated as a separate expense.

Concept 4

Inventory Costing Methods: FIFO, LIFO & Weighted Average

Students explore three common cost flow assumptions:

FIFO (First-In, First-Out)

Assumes the oldest units purchased are sold first.
Ending inventory consists of the most recent purchase layers.
In periods of rising prices, FIFO usually yields lower COGS and higher net income.

LIFO (Last-In, First-Out)

Assumes the newest units are sold first.
Ending inventory consists of older layers.
In periods of rising prices, LIFO usually yields higher COGS and lower net income.
Allowed under U.S. GAAP; not permitted under IFRS.

Weighted Average Cost

Calculates an average cost per unit for all units available for sale.
COGS and ending inventory are based on this average cost.
Smooths out price fluctuations.

Concept 5

Example: COGS & Ending Inventory Under Different Methods

Assume the following purchases of a single item:

Batch	Units	Cost per Unit
Batch 1	50	10
Batch 2	30	12
Batch 3	20	14

If 60 units are sold during the period, students will:

Use FIFO to assign cost to the 60 units sold and compute ending inventory.
Use LIFO to assign cost from the most recent batches first.
Calculate a weighted average cost per unit and apply it to COGS and ending inventory.

This exercise helps students see how different methods change both COGS and the value of remaining inventory.

Concept 6

Inventory Adjustments & Shrinkage

Inventory shrinkage occurs when the physical count is less than the book balance. Causes include:

Theft or pilferage.
Damage, spoilage, or obsolescence.
Receiving or counting errors.
Data entry mistakes or miscodings.

Basic shrinkage adjusting entry:

COGS (or Inventory Shrinkage Expense) .... Dr
    Inventory .................................. Cr

The amount of the adjustment equals the difference between the book inventory and the physical count, multiplied by the cost per unit.

Concept 7

Reconciling Inventory Balances

Students learn to reconcile the inventory balance by starting with beginning inventory, adding purchases, removing cost of items sold or used, and comparing the result to physical counts.

Basic steps:

Start with beginning inventory.
Add inventory purchases (and related freight where applicable).
Subtract cost of goods sold or usage for the period.
Compare the computed ending inventory to the physical count.
Investigate differences and record necessary adjustments.

Concept 8

Inventory & COGS Flow on the Financial Statements

Students connect inventory activity to the financial statements using a simple flow:

Inventory purchases increase the Inventory asset account.
When goods are sold, their cost is transferred from Inventory to COGS.
Ending inventory remains on the balance sheet; COGS appears on the income statement.

Students may be asked to draw a simple diagram showing how inventory moves from purchase to sale to expense.

Activities

In-Class Activities

1. Costing Methods Lab

Students compute FIFO, LIFO, and weighted average COGS and ending inventory using multi-layer purchase data and a specified number of units sold.

2. PO, Receipt & Vendor Bill Matching

Students match purchase orders, item receipts, and vendor bills, and identify missing documents or quantity/price discrepancies that must be resolved before posting.

3. Physical Inventory Count Simulation

Using a list of items and provided “shelf” quantities, students complete an inventory count sheet and compare it to book quantities to identify overages and shortages.

4. Shrinkage Adjustment Lab

Based on count differences, students calculate the value of shrinkage and prepare the proper adjusting journal entry, then discuss possible causes and controls.

Homework

Homework Assignments

Assignment 1: Costing worksheet — compute COGS and ending inventory under FIFO, LIFO, and weighted average.
Assignment 2: Inventory reconciliation — prepare a reconciliation schedule using beginning inventory, purchases, and ending counts.
Assignment 3: Adjustment entries — journalize shrinkage, damage write-offs, and corrections to inventory records.
Assignment 4: Inventory controls essay — describe at least three internal controls to reduce shrinkage.

Discussion

Discussion Board Prompt

How do different inventory costing methods (FIFO, LIFO, weighted average) influence reported profit and decision-making? Which method do you think is most useful for managers, and why?

Quiz

Quiz Topics for Week 9

Definitions of inventory, COGS, and shrinkage.
Differences between perpetual and periodic inventory systems.
FIFO, LIFO, and weighted average cost methods.
Recording inventory purchases and returns.
Inventory reconciliation steps.
Journal entries for inventory adjustments and shrinkage.
Impact of inventory methods on the financial statements.

Summary

Week 9 Summary

Week 9 gives students a practical understanding of how inventory is tracked, valued, and reconciled. By working with FIFO, LIFO, and weighted average, and by practicing reconciliations and shrinkage entries, students build the skills needed to support accurate inventory reporting and informed decision-making.

In future weeks, inventory concepts can be extended to manufacturing, job costing, and more advanced cost accounting topics.