Chapter 3: Inventories Flashcards
Inventories part of what balance sheet section
Current assets
Inventory formula (balance sheet)
Inventory (balance sheet) = Units of inventory on hand * costs per unit of inventory
Cost of goods sold (income statement)
Cost of goods sold = Units of sold inventory * costs per unit of inventory
When will inventories be recognised as assets
If sold to another party in the foreseeable future
Perpetual inventory management system
Continuously keep track of inventory.
Periodic inventory management system
Only uses periodic counting - less up to date. Does not provide an overview with all purchased and sold products
Inventories managed by perpetual inventory systems, 4 cost flow assumptions:
- Specific identification method
- FIFO First-in First-out
- LIFO (Last-in First-out)
- Average cost method
Specific identification method (Inventory valuation)
Specific unit cost method, used by companies with special inventory. Inventory value determined per unit
FIFO (Inventory valuation)
Oldest products sold first. Cost of oldest product in inventory is cost used for COGS. Cost of ending inventory based on newest products
LIFO (Inventory valuation)
Assumes newest products sold first. Cost of newest product is COGS. Cost of ending inventory based on oldest product
Average cost method (Inventory valuation)
Allocates cost of goods available for sale on basis of weighted average unit cost incurred. Assumes all goods are similar in nature
Comparability principle
Assumes same bookkeeping method every year
Net Realisable Value NRV
Estimated cost price minus estimated complementary cost and estimated selling cost.
Results in decrease in ending inventory and increase in COGS
