Week 6 - Inventory Flashcards
Periodic Inventory System
The cost of inventory purchased during the period is recorded in the Purchases account.
.stocktake is necessary at end of period
Periodic - how to know the cost of inventory on hand?
Inventory account
Periodic - how to determine cost of sales?
Ending inventory is deducted from cost of goods sold available for sale in P&L
Perpetual inventory system
The inventory on hand and the cost of sales balances are available in the accounts at all times.
.a physical stock take is still done at least once a year to verify the balances recorded in the accounting records.
Cost of purchase of inventories =
he purchase price + import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities) + transport + handling + other costs directly attributable to the acquisition of finished goods, materials and services - Trade discounts - rebates - other similar items
Perpetual system - Methods for measuring cost:
.Specific identification
.First‐in, first‐out (FIFO)
.Last‐in, first‐out (LIFO)
.Moving average method (perpetual system)
Periodic system - method for measuring cost:
.Weighted average method (periodic system)
First‐in, first‐out (FIFO)
This method of calculating the cost of inventory and the cost of goods sold is based on the assumption that the first merchandise acquired is the first merchandise sold, and that the ending inventory consists of the most recently acquired goods.
Last‐in, first‐out (LIFO)
The cost of the last units purchased is assumed to be the cost of the first units sold. Consequently, the costs of the most recent purchases are transferred to cost of sales. The cost of the ending inventory is determined by the cost of the earliest purchases.
Why a stocktake in periodic?
To count stock and determine the amount of stock on hand at end of period
Why stocktake in perpetual?
To check if the stock balances recorded match the physical stock.
The stock counts taken at the end of the accounting period will confirm the balance recorded in the records of the business and there might be errors.
Perhaps some stock that was damaged wasn’t accounted for, and errors in the business records where what’s on hand in the business records might be less than from the stock count.
Net Realizable Value (NRV) =
Net Realizable Value (NRV) = Expected Sale Price – Total Sale or Disposal Costs
Weighted-average Method (periodic system)
The cost is calculated by dividing the total cost of goods available for sale by the number of identical units available for sale.
total cost of units / no. of units
$16,200 + $16,150 /
900 tvs + 850 tvs
Why should stock be valued at its lower cost?
The lower of cost and net realisable value rule is used in order to ensure that inventory is not overvalued. Based on the qualitative characteristic of faithful representation, it is considered suitable that if inventory cost is below net realisable value, the most faithfully
representative valuation is cost, and if net realisable value is less than cost, the most faithfully representative valuation is net realisable value. Inventory cannot be valued at more than the entity would obtain from its sale.
