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Big ticket items o first in first out fifo record

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Unformatted text preview: approaches 2 • • • • • • • • • Prepared by: Sara Toynbee 1. Close temporary accounts such as purchases, purchase returns, freight in to purchases (write these balances down to zero in their ledger) to the inventory account. (e.g. Dr: Inventory; Cr: Freight in). Then calculate COGS = Beginning Inventory + Net Purchases – Ending Inventory 2. Journal entry to close these accounts directly (see solutions for section 8) Cost of goods available for sale = Beginning Inventory + Net Purchases à༎ will then be split between cost of goods sold and ending inventory (see exhibit 7.3 on page 332) Difference in calculating COGS and inventory under perpetual and periodic under the different cost flow methods (recall the method we covered in class to track purchases and sales of inventory) o Perpetual – need to account for outflow of goods after each transaction. o Periodic – record the total goods available for sale (beginning inventory + purchases) and then account for outflow at the end (after recording all the goods available for sale) When doing inventory valuation methods under cost flow assumptions, remember to be careful with your working and read the question carefully to note whether the firm in the problem is using a periodic or perpetual inventory system, and which cost flow method is being used… Cost flow assumption methods: o Specific identification – track specific items of inventory (“big- ticket” items) o First- in, first- out (FIFO) – record the cost of the first units of inventory that were purchased when recording the cost of inventory outflows (will be the same for periodic and perpetual system) o Last- in, last- out (LIFO) – record the cost of the last units of inventory that were purchased when recording the cost of inventory outflows (not allowed under IFRS) o Average cost – record the average cost of all units of inventory as the cost of inventory outflows (we did not look at average cost under a perpetua...
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