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Unformatted text preview: 1 RETAIL INVENTORY Developed by John Wiley Ltd Adapted by Abdul Razeed Chapter 6 Accounting 1A | ACCT 1001 2 Learning Objectives 1. Inventory Overview 2. Account for inventory by the Specific Identification, FIFO, LIFO and average cost methods using Periodic and Perpectual Inventory Systems. 3. Compare the effects of FIFO, LIFO and average cost. 4. Apply accounting principles to inventory measurement and disclosure. 5. Measure the effects of inventory errors. 3 LO1-Inventory Overview Inventory refers to assets held for the purpose of sale in the ordinary course of business. It may also be referred to as inventory, merchandise, stock or trading stock and does not include assets acquired to operate the business (eg equipment or supplies) Inventory is typically recorded as a current asset while in stock (ie when on hand) When sold, inventory becomes an expense called Cost of Goods Sold Perpetual inventory systems keep a record of changes in inventory (including both asset costs & COGS) Periodic inventory systems keep a record of purchases and use this to calculate Inventory & COGS at the end of the year 4 LO1-Inventory Overview The Income Statement shows the revenues and expenses that relate to the sale of inventory separately to all other revenues and expenses Terminology: - Revenue from selling inventory is referred to as Sales - Reductions in revenue due to customers bringing product back for credit (or refund) are called Sales returns - The amount of sales less the returns is called Net sales - The total cost of inventory sold during the period is an expense called Cost of goods sold (COGS) - The amount of profit made from buying and reselling inventory is called Gross Profit - The amount of profit after adding all other revenue 5 LO1-Inventory Overview Identifying the cost of an item of inventory purchased is relatively easy... - The cost is taken directly from the purchase invoice. Identifying the cost of an item of inventory sold can be more difficult- Do we know the exact original cost of the sold item? OR- Do we need to estimate an appropriate cost to assign to the item sold? 6 1.Specific unit cost (Specific Identification)- Mandated by AASB when inventory items differ (e.g. motor vehicles, jewellery) 2.Average cost 3. First-In, First-Out (FIFO)- Oldest units sold first 4. Last-In, First-Out (LIFO):- Newest units sold first - Not allowed in Australia under AIFRS- Commonly used in US, and by some Australian subsidiaries of US companies to report to head office. N.B. Firms must:- Disclose which inventory costing method they have chosen to use- Be consistent to ensure inventory information is comparable- Be conservativefollow the Lower of Cost or Market (LCM) Rule LO2-Methods for estimating inventory 2 7 LO2-Methods for estimating inventory The Lower of Cost or Market (LCM) When valuing inventory, an overriding rule is the LCM rule. This states that if the selling value of inventory falls lower than its cost, the inventory must...
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