Inventory Flashcards
Define the Identified Cost method
A method of valuing inventory by physically marking each item in some way so that its individual cost price can be identified
Pro of IC method
Accurate, provides a faithful representation of the inventory
Cons of IC method
Not always possible to mark individual items of inventory (e.g. petrol)
Administration costs in labelling individual items, recording codes and cost prices
Define FIFO
A method of valuing inventory that assumes that, unless otherwise indicated, the first items purchased are the first sold, and therefore values inventory sold using the earliest cost price on hand
How are sales returns valued under FIFO
The last items out are the first to be returned (Most recent out come back in)
How are inventory losses valued under FIFO
The oldest inventory going out first
How are inventory gains valued under FIFO
The most recent ‘IN’ transaction, as it is logical that the gain comes from an oversupply from the most recent supplier
What happens to Cost of Sales when prices are rising under FIFO
When cost prices are rising, FIFO will lead to a lower Cost of Sales, meaning Net profit and Owners Equity will be higher than if Identified Cost is used
What happens to Cost of Sales when prices are falling under FIFO
When cost prices are falling, FIFO will lead to a higher Cost of Sales, meaning Net profit and Owners Equity will be lower than if Identified cost is used
Pros of FIFO
- This can be applied to all types of inventory, even if it can’t be separated (e.g. fuel)
- It cost less to administer than Identified cost (less administrative costs)
Con of FIFO
May be a less faithful representation of inventory
Define the perpetual system of inventory recording
Recording inventory transactions into inventory cards, conducting physical inventory counts at the end of each Period to verify balances, and detecting any inventory losses or gains
Benefits of perpetua inventory system x3
- Reordering of inventory is assisted (Timely information means inventory can be reordered before it runs out)
- Inventory losses and gains can be detected easier due to inventory card balances
- Fast and slow moving lines of inventory can be identified (info can be used to make better business decisions)
Limitations of perpetual inventory system x3
- Staffing (all transactions must be recorded, which someone has to do, which they have to get paid for)
- Training of staff is time consuming and may be costly
- Technology set up and maintenance can be costly
Define costs of inventory
All costs incurred in order to bring inventory into a condition and location ready for sale
