300295 Flashcards
Trans Co. uses a periodic inventory system. The following are inventory transactions for the month of January.
1/1 Beginning inventory 10,000 units at $3
1/5 Purchase 5,000 units at $4
1/15 Purchase 5,000 units at $5
1/20 Sales at $10 per unit 10,000 units
Trans uses the average pricing method to determine the value of its inventory. What amount should Trans report as cost of goods sold on its income statement for the month of January?
$40,000
$100,000
$30,000
$37,500
The average cost method in a periodic inventory system is referred to as the weighted-average method. The weighted-average per unit equals cost of goods available for sale divided by units of goods available for sale. Ending inventory equals the weighted-average cost per unit times the units in ending inventory.
Cost of goods sold equals cost of goods available for sale less ending inventory.
In this question:
Units Unit Cost Total Beginning inventory 10,000 $3.00 $30,000 1/5 purchase 5,000 4.00 20,000 1/15 purchase 5,000 5.00 25,000 Total 20,000 $75,000 Weighted-average cost per unit = $75,000 ÷ 20,000 units = $3.75 per unit Units in ending inventory = 20,000 available for sale − 10,000 sold = 10,000 units Cost of ending inventory = $3.75 per unit × 10,000 units = $37,500 Cost of goods sold = $75,000 − $37,500 = $37,500 Of course, if one noticed that half of the units available for sale were sold, one could have determined that the cost of goods sold would be half of the cost of goods available for sale using the weighted-average method.
Inventory
The aggregate of items of tangible personal property owned by the business (to which the firm has legal title) intended either for internal consumption in the production of goods for sale or for sale is considered inventory. The balance of costs applicable to goods on hand, including raw materials (for use in the production process), intermediate products and parts still in the production process (work-in-process), and finished goods is also considered inventory.
The major objective of accounting for inventories is to facilitate the determination of income. This is achieved through the proper valuation of inventories—the measurement of the value of the current assets and inventories, and the measurement of the related expense and cost of goods sold.
The basis of inventory accounting is cost. Inventories are valued at acquisition or production cost, which is generally held to be the sum of the purchase price plus indirect acquisition costs (freight, insurance, and handling) for purchased goods and the sum of direct materials, direct labor, and allocated factory overhead (i.e., the appropriate general and administrative costs that are clearly related to production) for manufactured goods. Selling, general, and administrative costs not directly related to production should be expensed rather than included in the valuation of inventory, which involves the use of judgment.
Standard costs may be used for inventory pricing so long as they are adjusted at reasonable intervals to reflect current conditions.
Valuation (pricing) of inventories involves:
- determination of physical quantity (number of units) and
- unit cost (in dollars).
Unit cost depends on the choice from among various alternative pricing (cost flow) assumptions:
- last-in, first-out (LIFO),
- first-in, first-out (FIFO),
- weighted average, and
- specific identification.
Consideration must also be given to the cost principle (i.e., the lower-of-cost-or-market rule (LCM)).
Inventories must be compiled periodically (physical count) and valued and compared to the amounts recorded in the accounts. Accounting records can be maintained under a periodic or perpetual system.
FASB ASC 330-10
Inventory Cost Flow Assumptions
Inventory cost flow assumptions are conceptual methods of applying costs to inventories, alternative pricing methods, conceptual matching of inventory costs to sales, and methods for allocation of costs to inventory and cost of goods sold. The cost (cost of goods sold) to be matched against revenue from a sale will usually not be the identified cost of the specific item that was sold (except with the specific identification cost flow assumption), especially in cases in which similar goods are purchased at different times and at different prices.
There are four assumptions that are acceptable under GAAP:
- LIFO (last-in, first-out):
- Unit cost LIFO
- Dollar-value LIFO
- FIFO (first-in, first-out)
- Average cost:
* Weighted average
* Moving average - Specific identification
Cost flow assumptions are based on the cost principal with emphasis on the order in which the actual unit costs incurred are assigned to ending inventory and to cost of goods sold in conformity with the matching principle.
Periodic Inventory System
The periodic inventory system is a method of measuring the physical quantities in inventory under which the units (and costs) are determined at the end of the accounting period based on a physical count.
Items are:
- counted, weighed, or otherwise measured and
- multiplied by the unit cost (depending on the cost flow assumption utilized) to value the inventory.
Cost of goods sold is the residual amount and cannot be independently verified.
- Cost of goods sold = Beginning inventory + Purchases - Ending inventory
The units in inventory at any point in time during the accounting period are not exactly known—the beginning balance does not change until the end of the period.
The periodic inventory system is analogous to a “batch” processing system. (Contrast to perpetual inventory.)
Weighted-Average Method
The weighted-average method is the average cost flow assumption used with the periodic inventory system in which the unit cost is the average of beginning inventory and all purchases (sum of total cost of beginning inventory plus total cost of each purchase, divided by total units (beginning plus purchases)). It is applied to ending inventory and units sold and is used with the periodic inventory system because the average unit cost can only be determined at the end of the period. (See moving-average method.)
2231.01
Several cost flow assumptions are used for purposes of determining inventory cost. Among the most commonly used methods are the following:
a. First-in, first-out (FIFO)
b. Last-in, first-out (LIFO)
c. Average
d. Specific identification
2231.02
2231.03
