INVENTORY.....
Inventory consists of all goods owned and held for sale to customer.
inventory is expected ti be converted into cash within the company operating cycle.
FLOW OF INVENTORY COST.....
as incurred balance sheet as goods are sold
PURCHASE COST..........................ASSET INVENTORY.......................................................... ....................... INCOME STATEMENT
revenue
cost of goods sold
gross profit
expenses
net income
PERPETUAL INVENTORY SYSTEM
In perpetual inventory system entries in the accounting records .when merchandise is purchased its cost is added to the asset account inventory.
when it is sold its cost is removed from the inventory account and transferred to the cost of good sold account.
COST FLOW ASSUMPTIONS
we have three cost flow assumptions...
When average cost method is used the average cost of all units in inventiry is computed after every purchase.The average cost is computed by dividing the total cost available of sale by tota units of inventory.Identical items will have the same accounting values under the average cost method.
2.First in.first out method.
Fifo is based on the assumptions that first merchandise is to be purchased is the first merchandise sold.fifo uses actual cost price.
THE distinguishing characteristics of the fifo method is that the oldest purchase cost are transfered to the cost of goods sold while the most recent cost remain in inventory.An advantage of fifo method is that it is valued at recent purchase cost at balance sheet.
3.last in, first-out method.
Lifo is most widely used method of determining the cost of goods sold and valuing inventory.IN lifo the recently purchased merchandise is assumed to be sold first. The basic assumptions in the lifo is that the most recently purchased units are sold first and that older units remain in the inventory.The lifo method result in a lowest valuation of inventory and measurement of net income.Lifo is the most conservative of the inventory method.
PERIODIC INVENTORY SYSTEMS
In periodic inventory system the cost of units purchased during the year is debited to purchases account rather than the inventory account. in periodic inventory system the inventory on hand and the cost of goods sold for the year are not determined until year end.
RECORDING SHRINKAGE LOSSES
THE year end physical count of the inventory reveals some shortages or damaged merchandise .the costs of missing and damaged unitsare remover frim the inventory records using thesame flow assumption as it is used in recording the cose of goods sold.
EXAMPLE........
Assume that a companys inventory subsidiary ledger shows the following 158 products of a product in inventory at year end...
8 units purchased nov.2 @100 dollars...............................................................800 dollars.
150 units purchased dec.10@115 dollars..........................................................17250
total(158units).................................................................................................18,050 dollars......
Inventory consists of all goods owned and held for sale to customer.
inventory is expected ti be converted into cash within the company operating cycle.
FLOW OF INVENTORY COST.....
as incurred balance sheet as goods are sold
PURCHASE COST..........................ASSET INVENTORY.......................................................... ....................... INCOME STATEMENT
revenue
cost of goods sold
gross profit
expenses
net income
PERPETUAL INVENTORY SYSTEM
In perpetual inventory system entries in the accounting records .when merchandise is purchased its cost is added to the asset account inventory.
when it is sold its cost is removed from the inventory account and transferred to the cost of good sold account.
COST FLOW ASSUMPTIONS
we have three cost flow assumptions...
- Average-cost method.
- first-in,first-out method.
- last-in,first-out method.
When average cost method is used the average cost of all units in inventiry is computed after every purchase.The average cost is computed by dividing the total cost available of sale by tota units of inventory.Identical items will have the same accounting values under the average cost method.
2.First in.first out method.
Fifo is based on the assumptions that first merchandise is to be purchased is the first merchandise sold.fifo uses actual cost price.
THE distinguishing characteristics of the fifo method is that the oldest purchase cost are transfered to the cost of goods sold while the most recent cost remain in inventory.An advantage of fifo method is that it is valued at recent purchase cost at balance sheet.
3.last in, first-out method.
Lifo is most widely used method of determining the cost of goods sold and valuing inventory.IN lifo the recently purchased merchandise is assumed to be sold first. The basic assumptions in the lifo is that the most recently purchased units are sold first and that older units remain in the inventory.The lifo method result in a lowest valuation of inventory and measurement of net income.Lifo is the most conservative of the inventory method.
PERIODIC INVENTORY SYSTEMS
In periodic inventory system the cost of units purchased during the year is debited to purchases account rather than the inventory account. in periodic inventory system the inventory on hand and the cost of goods sold for the year are not determined until year end.
RECORDING SHRINKAGE LOSSES
THE year end physical count of the inventory reveals some shortages or damaged merchandise .the costs of missing and damaged unitsare remover frim the inventory records using thesame flow assumption as it is used in recording the cose of goods sold.
EXAMPLE........
Assume that a companys inventory subsidiary ledger shows the following 158 products of a product in inventory at year end...
8 units purchased nov.2 @100 dollars...............................................................800 dollars.
150 units purchased dec.10@115 dollars..........................................................17250
total(158units).................................................................................................18,050 dollars......
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