Summarize the movement logic and preview Lesson 3 as the introduction of FIFO and LIFO
Great work today! You've built the foundation for understanding inventory valuation. You now know why the ending inventory number isn't always obvious — and why businesses need consistent rules to assign costs.
🎯 Key Formulas:
- ✓ GAFS = Beginning Inventory + Purchases
- ✓ Ending Inventory = GAFS - COGS
- ✓ COGS + Ending Inventory = GAFS (always!)
💡 Key Insights:
- ✓ Physical flow ≠ Cost flow
- ✓ Layers form when costs change
- ✓ Same sale → different possible COGS
- ✓ Investors care which method you use
1. The Formula
Ending Inventory = Beginning Inventory + Purchases - COGS. This formula is the spine of the whole unit.
2. The Puzzle
When costs vary, the same sale can produce different COGS values. That's why we need formal methods.
3. The Stakes
Investors and lenders need to trust your ending inventory number. Method choice affects profit and taxes.
Remember Sarah from Lesson 1? She couldn't defend her ending inventory number to an investor. Now you understand why that's such a problem.
Sarah's Problem:
She bought kits at different prices throughout the month. When she sold them, she couldn't explain which costs went to COGS.
What You Now Know:
Without a consistent method (FIFO, LIFO, etc.), Sarah is basically guessing. No wonder investors don't trust her numbers!
In the next lesson, you'll learn the formal rules that solve the COGS puzzle:
FIFO and LIFO
- • Learn the step-by-step rules for each method
- • Practice calculating COGS and Ending Inventory
- • See how rising costs change the results
Business Impact
- • When does FIFO make sense for a business?
- • When might LIFO be strategically better?
- • How do these choices affect investors?
🎯 Building Toward the Unit Goal
Every lesson brings you closer to being able to defend an ending inventory number to a real investor. By the end of Unit 7, you'll recommend the best inventory method for Sarah's business — with evidence to back it up.
You've built a solid foundation in inventory cost flow!
Ready for Lesson 3: FIFO and LIFO