Chapter 6 Lecture 1 Inventory - Inventory Valuation Methods...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Inventory Valuation Methods Specific Identification Average Cost FIFO LIFO Merchandisers purchase assets (inventory) to resell for a profit. Under a periodic inventory system, inventory is counted at the end of the fiscal period to determine cost of goods sold and gross margin. Beginning Inventory + Net Cost of Purchases = Goods Available for Sale - Ending Inventory = Cost of Goods Sold If Ending Inventory is understated, cost of goods sold is overstated, and Gross Margin, and therefore Net Income, is understated. If Ending Inventory is overstated, cost of goods sold is understated, and Gross Margin, and therefore Net Income, is overstated. Under a periodic system , when inventory is purchased, that purchase is recorded at historical cost. But when inventory is sold, no transaction is recorded to recognize the outflow of assets. Instead, that expense is not recognize until the end of the fiscal period when inventory items are counted, and then costs are assigned to those items. Under generally accepted accounting principles, there are four acceptable methods to assign those cost to the ending units of inventory. The Specific Identification method isolates actual individual unit cost to units of ending inventory. For instance, an automobile dealer knows the cost of each vehicle on their lot. To calculate dollars of ending inventory then, the dealer simply totals those cost of each vehicle. The Average Cost method blends the costs of beginning inventory and purchases to determine the value of ending inventory. To apply the average cost method, divide Goods Available for Sale
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 5

Chapter 6 Lecture 1 Inventory - Inventory Valuation Methods...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online