Financial Accounting

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Previous Lessons
Open Chapter Ch. 1: Basics of Financial Accounting
Lesson #1 Introduction to Financial Accounting
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Lesson #2 Structures of a Business
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Lesson #3 Comparing Internal vs. External Users
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Lesson #4 Business Activities
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Lesson #5 Financial Statements
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Lesson #6 Elements of Financial Accounting
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Open Chapter Ch. 2: Assets, Liability, and Equity
Lesson #7 Assets
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Lesson #8 Liabilities
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Lesson #9 Equity
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Open Chapter Ch. 3: The Double-Entry System and Conceptual Framework
Lesson #10 Accounting Equation
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Lesson #11 Conceptual Framework
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Lesson #12 Double Entry Accounting System
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Lesson #13 Debits and Credits
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Lesson #14 Normal Balances and RED Accounts
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Exam Exam 1
Open Chapter Ch. 4: The Accounting Cycle
Lesson #15 Journalizing and the Accounting Cycle
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Lesson #16 Posting to the General Ledger
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Lesson #17 Trial Balance
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Lesson #18 Adjusting Entries for Accrued Expenses
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Lesson #19 Adjusting Entries for Prepaid Expenses
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Lesson #20 Adjusting Entries for Unearned Revenue
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Lesson #21 Adjusting Entries for Accrued Revenue
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Lesson #22 Adjusting Entries for Amortization and Depreciation
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Lesson #23 Adjusted Trial Balance
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Lesson #24 Preparing the Financial Statements
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Lesson #25 Permanent vs. Temporary Accounts
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Lesson #26 Closing Entries
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Open Chapter Ch. 5: Merchandise Inventory
Lesson #27 Introduction to Merchandise Inventory
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Lesson #28 Periodic vs. Perpetual Inventory Systems
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Lesson #29 Journalizing Purchase Entries
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Lesson #30 Journalizing Sales Transactions
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Lesson #31 Preparing a Multiple-Step Income Statement
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Lesson #32 Periodic Inventory System Purchases
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Lesson #33 Periodic System and the Multiple-Step Accounting System
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Exam Midterm Exam
Open Chapter Ch. 6: Cost Flow Assumptions: FIFO, LIFO, and Average Cost Methods
Lesson #34 Specific Identification Method and Inventory Costing
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Lesson #35 FIFO Method and Inventory Costing
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Lesson #36 Average Cost Method and Inventory Costing
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Lesson #37 The LIFO Method
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Lesson #38 Average Cost Method for the Perpetual System
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Lesson #39 Comparing Inventory Costing Methods
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Open Chapter Ch. 7: Receivables and Bad Debts
Lesson #40 Allowance Method and Uncollectibles
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Lesson #41 The Allowance Method
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Lesson #42 Percentage of Sales Method
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Lesson #43 Percentage of Receivables Method
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Lesson #44 Receivables Method and the Aging Table
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Lesson #45 Write Off Receivables Using the Allowance Method
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Lesson #46 Direct Write-Off Method
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Open Chapter Ch. 8: Revenue Recognition
Lesson #47 Revenue Recognition
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Lesson #48 Revenue Recognition Examples
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Lesson #49 Revenue Recognition and Long Term Contracts
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Lesson #50 Percentage of Completion Method
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Lesson #51 Percentage of Completion Method Journal Entries
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Lesson #52 Percentage of Completion Method and Journalizing Losses
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Lesson #53 Cost Recovery Method
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Lesson #54 Completed Contract Method and Journal Entries
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Lesson #55 Completed Contract Method and Losses
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Exam Exam 3
Open Chapter Ch. 9: Depreciation of Fixed Assets and Gains and Losses
Lesson #56 Depreciation, Amortization and Depletion
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Lesson #57 Straight Line and Declining Balance Methods
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Lesson #58 Straight Line and Double Declining Balance Depreciation Examples
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Lesson #59 Gains and Losses on Disposals of Property, Plant & Equipment
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Open Chapter Ch. 10: Intangible Assets
Lesson #60 Intangible Assets
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Lesson #61 Amortizing Intangible Assets
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Lesson #62 Impairment of Intangible Assets
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Lesson #63 Recording Goodwill, Amortization and Impairment
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Open Chapter Ch. 11: The Indirect Cash Flow Statement
Lesson #64 Preparing a Cash Flow Statement Using the Indirect Method Part 1
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Lesson #65 Cash Flow Statement Using Indirect Method Part 2, Receivables
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Lesson #66 Cash Flow Statement Using Indirect Method Part 3, Inventory
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Lesson #67 Cash Flow Statement Using Indirect Method Part 4, Payables
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Lesson #68 Cash Flow Statement Using Indirect Method Part 5, Non Cash Expenses
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Lesson #69 Cash Flow Statement- Investing and Financing Activities
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Exam Final Exam

Assignments:

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Lesson Objectives:

- The three types of inventory costing methods
- Importance of calculating cost of goods sold
- Definition of specific identification
- How COGS is calculated using this method.



We've looked at how to journalize different types of transactions for both the perpetual and periodic inventory systems. Now we will dig into how to calculate the cost of goods sold figure that is listed on the income statement.
 
In some of the previous examples, I've just provided the figure for the cost of goods sold. In the real world, this is not a number that is pre-defined or magically calculated. Companies are actually required to figure out how to calculate the cost of goods sold based on cost flow assumptions or other accounting methods

In the next few lessons we will be covering the four different ways to find inventory costing including specific identification, FIFO (first in, first out), LIFO (last in, first out) and average cost. 
 

 
We will first discuss why the cost of goods is important and then we will cover the first method of specific identification.



Whether a company using a periodic or perpetual inventory system, they will need to come up with the final value for the expense of the inventory sold. This is referred to as the cost of goods sold, which is often referred to using the acronym COGS. In order to calculate the cost of goods sold, they must have a way to assign cost to each inventory item.

The ending inventory is what is left at the end of the accounting period and recorded on the balance sheet. Without a way to calculate COGS and ending inventory, the company would end up with inaccurate values on both the income statement and balance sheet.



With specific identification, the company marks every inventory item in order to easily identify the cost of inventory items and come up with inventory. The identification is in the form of a tag or barcode that specifies the cost of the item.

Normally this system is used for big ticket items with higher sales prices such as vehicles, rare artwork or large smart TV's. It is not feasible for the company to individually tag thousands and thousands of small unit-cost items, hence the use for high value items that are sold in a limited variety.



Let's take a look at a simple example of how specific identification is used for inventory costing. For example, let's say a car dealership has sold three vehicles out of inventory: one with a cost of $20,000, one with a cost of $17,000 and one with a cost of $12,000. Each vehicle on a car lot is tagged with the cost identified to that particular vehicle.

The total cost of goods sold for the inventory would be $49,000 which would be reported as a journal entry. This figure would ultimately be recorded on the income statement.
 
Every company will double check the cost of goods sold by performing an ending inventory count. This applies to both the perpetual and periodic inventory systems.
 
In the next lesson, we will be reviewing the FIFO method which is the most complex of the three inventory costing methods.