Determining inventories quantities:/Perpetual inventory system: purchase and sale of goods are recorded directly in the inventory account as

they occur . /Periodic inventory system:/Cost of goods sold = beginning inventory + net purchases ending inventory
Entries under Periodic system: Entries under Perpetual system:
Purchase merchandise for resale: Inventory (900 at $6): 5,400.
AP: 5,400
Record sale:
AR: 7,200.
Sales (600 at $12): 7,200
COGS:
(600 at $6) 3,600.
Inventory: 3,600
Closing entries: no entry necessary
Purchase merchandise for resale: Purchase (900 at $6): 5,400.
AP: 5,400
Record sale:
AR: 7,200.
Sales (600 at $12): 7,200
COGS: no entry necessary
Closing entries:/Inventory (ending): 2,400. COGS: 3,600. Inventory (beginning): 600

Cost flow methods of inventory valuation:/FIFO: the cost of the first good purchased is assumed to be the cost of the first sold/Advantage:
approximate the physical flow of goods, the enterprise is not free to pick a certain cost to be charged, ending inventory amount is close to its
current costs/Disadvantage: current costs are likely not matched against current revenue, higher tax income /Cost flow methods of inventory
valuation:/LIFO: the cost of the most recent purchase is assumed the first cost of goods sold/Advantage: more realistic measure of current
earnings, more recent costs are matched against revenues /Disadvantage: inventory valuation is outdated since the older costs remain in the
inventory/Not acceptable for Tax purposes /Cost flow methods of inventory valuation:/Weighted average: average cost (for balance sheet)
against current revenue, is computed at the end of the period (periodic inventory system)/Advantage: simple to apply, objective and can not be
manipulated/Moving average cost: prices items in the inventory on the basis of the average cost of the goods available for sale during the
period (perpetual system)
Comparative results: Periodic system
FIFO

Weighted Average

LIFO

Partial Income Statement:

Sale:

40,000

40,000

40,000

Purchase

43,400

43,400

43,400

Ending I

26,600 >

26,040

>

25,600

COGS

16,800 <

17,360

<

17,800

>

22,640

>

22,200

26,600 >

26,040

>

25,600

Beginning I

Gross Profit 23,200

Balance sheet:
Inventory

Cost flow methods of inventory valuation:/Specific identification: identifying each item sold & each item in inventory. Appealing but not always
practical

Date purchased

Units

Unit cost

Total

Oct 1st

1,000

4.0

4,000

Oct 15th

3,000

4.4

13,200

Oct 30th

2,000

4.5

9,000

Ending Inventory

6,000

26,200

Goods available for sale (total of beginning inventory and purchases):

Cost of goods sold

43,400

17,200

Supply & Inventory Management

Lesson 4
BASIC ISSUES IN INVENTORY & WHAT TO INCLUDE, WHAT NOT TO INCLUDE
When is inventory to be included:/Inventories are: asset items held for sale in the ordinary course of business or goods that will be used or
consumed in the production of goods to be sold/A merchandising business ordinarily purchases its merchandise in a form ready for sale./It
reports the cost assigned to unsold units at the end of the period as merchandise inventory and this account appears in the financial statement
/PHYSICAL GOODS TO BE INCLUDED IN INVENTORY:/Purchases should be recorded when legal title to the goods passes to the buyer. General
practice, is to record acquisitions when the goods are received. /Goods in transit:/If the goods are shipped FOB shipping point (free on board),
risk and rewards of ownership pass to the buyer when the seller delivers the goods to the common carrier (transporter) who acts as an agent for
the buyer. Similar if the goods are shipped CIF (cost+insurance+freight)/If the goods are shipped FOB destination, risk and rewards do not pass
until the goods reach the destination/Consigned goods:/Goods out on consignment remain the property of the consignor and must be included
in the consignors inventory /Sales on instalment:/The goods should be excluded from the sellers inventory if the percentage of bad debts can
be reasonably estimated. /Sales with high rates of return:/If a reasonable prediction of the returns can be established, then the goods should be
considered sold./If returns are unpredictable, removal of these goods from the inventory is inappropriate.