# Ch6 - Chapter 6 Retail inventory CHAPTER OVERVIEW In...

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Chapter 6 - Retail inventory CHAPTER OVERVIEW In Chapter 5 you learned about retailing operations – the purchase and resale of goods. When acquired, inventory (the goods) is a current asset that becomes an expense once the goods are sold. In this chapter the principles of internal control are applied to this very important asset. Specifically you will learn the techniques businesses use to determine the cost (i.e., value) of their ending inventory and the corresponding cost of goods sold. The learning objectives for this chapter are to: 1. Calculate perpetual inventory amounts under FIFO, LIFO and average cost. 2. Record perpetual inventory transactions. 3. Compare the effects of FIFO, LIFO and average cost. 4. Calculate periodic inventory amounts under FIFO, LIFO and average cost. 5. Apply the lower-of-cost-and-net-realisable-value rule to inventory. 6. Measure the effects of inventory errors. 7. Estimate ending inventory by the gross profit and retail inventory methods. CHAPTER REVIEW The perpetual inventory system is used to keep a continuous record of each inventory item. With the perpetual system, the inventory item record shows quantities received, quantities sold, and the balance remaining on hand. With the periodic inventory system , inventory purchases are debited to the Purchases account, the quantity of ending inventory is counted and valued, and the cost of goods sold equation is used on the income statement. Objective 1 – Calculate perpetual inventory amounts under FIFO, LIFO and average cost. Inventories are initially recorded at historical cost. Inventory cost is what the business pays to acquire the inventory. Inventory cost includes the invoice cost of the goods, plus taxes, tariffs, freight in, and insurance while in transit, less purchase discounts. Determining unit costs is easy when costs remain constant. But prices frequently change. GAAP allows four different methods of assigning costs to each inventory item that is sold: 1) specific unit cost , 2) average cost , and 3) first-in, first-out and 4) last-in, first-out (not allowed by Australian Accounting Standard AASB 102). Specific unit costing (also called the specific identification method ) is used by businesses whose inventory items are expensive or have ‘one-of-a-kind’ characteristics - such as cars, high priced jewellery, and works of art. Using specific unit cost to determine ending inventory is not practical for many businesses. When this is the case, the accountant has to make an assumption concerning the flow of costs through the inventory. Why is an assumption necessary? Because the actual (i.e., specific) unit cost of each item cannot be determined. The three cost flow assumptions are average cost, FIFO, and LIFO . The

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## This note was uploaded on 10/10/2010 for the course ECON 7300 at University of Sydney.

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Ch6 - Chapter 6 Retail inventory CHAPTER OVERVIEW In...

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