ACF5950 · Introduction to Financial Accounting
Accounting for Retailers and Inventory
Week 8 applies selected accounting standards to retail entities (learning outcome 5): recording purchases and sales, perpetual versus periodic inventory systems, cost of goods sold, the FIFO and weighted-average cost-flow assumptions, and the treatment of GST. A retailer's income statement introduces sales revenue, COGS and gross profit, contrasting with the service model built earlier. Inventory costing and the COGS identity are computational favourites in the Quiz/Test and the hurdle exam. The week shown is the unit's standard arc — confirm the exact teaching week on Moodle / the unit outline.
What this chapter covers
- 01Service vs retail entity: introducing Inventory, Sales revenue and Cost of Goods Sold
- 02The gross-profit model: gross profit = net sales − COGS; profit = gross profit − operating expenses
- 03The COGS identity (periodic): COGS = opening inventory + net purchases − closing inventory
- 04Perpetual vs periodic inventory systems and the two entries per sale under perpetual
- 05Cost-flow assumptions: FIFO and weighted-average (LIFO not permitted under AASB/IFRS)
- 06Lower of cost and net realisable value (NRV) for inventory measurement
- 07GST on sales (liability) and on purchases (recoverable), net GST remitted to the ATO
- 08Trade vs settlement discounts and credit-terms notation (for example 2/10, n/30)
FIFO vs weighted-average cost of goods sold and gross profit
- +1Goods available for sale = 100 × 20 + 300 × 26 = 2,000 + 7,800 = 9,800 (400 units). Units sold = 340, so closing inventory = 400 − 340 = 60 units.
- +1FIFO: the 60 unsold units are the newest, valued at 60 × 26 = 1,560; COGS = 9,800 − 1,560 = 8,240.
- +1Weighted-average: unit cost = 9,800 ÷ 400 = 24.50; COGS = 340 × 24.50 = 8,330 and closing inventory = 60 × 24.50 = 1,470 (check: 8,330 + 1,470 = 9,800).
- +1Sales = 340 × 45 = 15,300. Gross profit: FIFO = 15,300 − 8,240 = 7,060; weighted-average = 15,300 − 8,330 = 6,970. FIFO gives the lower COGS and higher profit because unit costs are rising (26 > 20), leaving the older cheaper cost in COGS.
Key terms
- Cost of goods sold (COGS)
- The cost of the inventory sold during the period. Periodic identity: COGS = opening inventory + net purchases − closing inventory.
- Perpetual inventory system
- A system updating inventory and COGS at every purchase and sale, so a sale needs two entries (record the sale, and Dr COGS / Cr Inventory).
- Periodic inventory system
- A system determining inventory by a period-end physical count, with COGS computed from the identity rather than at each sale.
- FIFO
- First-in, first-out cost flow: the earliest costs are assigned to COGS, leaving the most recent costs in closing inventory. In rising prices it gives lower COGS and higher profit.
- Weighted-average cost
- A cost flow assigning the average unit cost (total cost ÷ total units available) to both COGS and closing inventory, smoothing cost changes.
- Net realisable value (NRV)
- Estimated selling price less estimated costs to complete and sell. Inventory is carried at the lower of cost and NRV.
Accounting for Retailers and Inventory FAQ
What is the difference between perpetual and periodic inventory?
A perpetual system updates the Inventory and COGS accounts continuously — every sale records both the revenue and a Dr COGS / Cr Inventory entry, so the ledger always shows current inventory. A periodic system does not track COGS at each sale; instead a physical count at period end fixes closing inventory and COGS is derived from opening inventory + net purchases − closing inventory.
Why do FIFO and weighted-average give different profits?
Because they assign different costs to the units sold. When prices are rising, FIFO charges the older, cheaper costs to COGS, so COGS is lower and profit higher, while the newer, dearer costs sit in closing inventory. Weighted-average blends all costs, giving a COGS and profit between the extremes. The physical units are identical — only the cost assignment differs.
Is LIFO allowed in this unit?
No. LIFO (last-in, first-out) is not permitted under Australian Accounting Standards / IFRS, so ACF5950 works with FIFO and weighted-average (and, conceptually, specific identification). Answering an inventory question with LIFO would apply a prohibited method.
Can AI help me with inventory and COGS calculations in ACF5950?
Yes. Sia can set out the goods-available-for-sale schedule, compute COGS and closing inventory under FIFO and weighted-average, and check that the two reconcile. It is a study aid for understanding and rehearsal, not for completing graded assessment — confirm the AI policy on Moodle, as Monash academic-integrity rules apply.
Exam move
Always start an inventory problem with goods available for sale (opening inventory + net purchases) and remember that COGS and closing inventory must split that total between them — computing one gives the other. Practise FIFO and weighted-average on the same data so you feel why they diverge, and lock in the rule that FIFO gives lower COGS and higher profit when costs rise. Keep the gross-profit model clear (net sales − COGS = gross profit; then less operating expenses), and know the GST treatment (a liability on sales, recoverable on purchases). Note that LIFO is prohibited under AASB/IFRS. These are quick, high-value computational marks in the Quiz/Test and the hurdle exam, so rehearse the schedules until they are fast and accurate.
Working through Accounting for Retailers and Inventory in ACF5950? Sia is AskSia’s AI Business and Economics tutor — ask any ACF5950 Accounting for Retailers and Inventory question and get a clear, step-by-step explanation grounded in how ACF5950 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
