Check understanding of beginning inventory, purchases, goods available for sale, and ending inventory logic
Time to check your understanding! This quick assessment covers the key concepts from today's lesson: Goods Available for Sale, cost layers, and why COGS isn't always obvious when costs vary.
Formula Mastery
GAFS, COGS, and Ending Inventory relationships
Cost Layers
Why the same sale can produce different COGS
Real-World Impact
Why investors and lenders care about method choice
Ending Inventory = Beginning Inventory + Purchases - COGS
or simply:
Ending Inventory = GAFS - COGS
1. Sarah starts the month with 10 kits valued at $180 total. She buys 15 more kits for $300. What is her Goods Available for Sale (GAFS)?
2. What is the relationship between physical flow and cost flow?
3. Sarah has three layers: 10 units @ $18, 20 units @ $20, and 10 units @ $22. She sells 15 units. Why can't we immediately say exactly what COGS should be?
4. If GAFS equals $800 and COGS equals $320, what is Ending Inventory?
5. Why do inventory 'layers' form in the first place?
6. Sarah's GAFS is $736 and she sells 20 units. Her costs range from $18 to $22 per unit. What is the possible range for COGS?
7. What happens to the inventory formula when Sarah forgets to record a $250 purchase?
8. Why does this lesson avoid teaching FIFO and LIFO rules explicitly?
9. A business has 40 units available for sale worth $800 total. They sell 30 units. If COGS could be anywhere from $540 to $660, what does this mean for Ending Inventory?
10. Sarah shows her inventory records to a potential investor. Why might the investor ask which inventory valuation method she uses?
Today you learned why cost assignment matters when costs vary. In Lesson 3, you'll learn the formal rules that solve this puzzle:
FIFO (First-In, First-Out)
The oldest costs flow to COGS first. Like selling the boxes at the front of the shelf.
LIFO (Last-In, First-Out)
The newest costs flow to COGS first. Like selling the boxes at the back of the shelf.
Once you know these rules, you'll never have to guess which costs to assign — and you'll be able to defend your ending inventory number to any investor.