Weighted average ending inventory is priced using a

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Applied Calculus for the Managerial, Life, and Social Sciences
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Chapter 6 / Exercise 41
Applied Calculus for the Managerial, Life, and Social Sciences
Tan
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Weighted-average: Ending inventory is priced using a weighted-average unit cost. Underperpetual inventory procedure, a new weighted-average is determined after each purchase. Under periodic procedure, the average is determined at the end of the accounting period by dividing the total number of units purchased plus those in beginning inventory into total cost of goods available for sale. In determining cost of goods sold, this average unit cost is applied to each item. Under the weighted-average method, in a period of rising prices net income is usually higher than income under LIFO and lower than income under FIFO. Specific identification: Advantages: (1) States cost of goods sold and ending inventory at the actual cost of specific units sold and on hand, and (2) provides the most precise matching of costs and revenues. Disadvantage: Income manipulation is possible. FIFO: Advantages: (1) FIFO is easy to apply, (2) the assumed flow of costs often corresponds with the normal physical flow of goods, (3) no manipulation of income is possible, and (4) the balance sheet amount for inventory is likely to approximate the current market value. Disadvantages: (1) Recognizes paper profits, and (2) tax burden is heavier if used for tax purposes when prices are rising. LIFO: Advantages: (1) LIFO reports both sales revenue and cost of goods sold in current dollars, and (2) lower income taxes result if used for tax purposes when prices are rising. Disadvantages: (1) Often matches the cost of goods not sold against revenues, (2) grosslyunderstates inventory, and (3) permits income manipulation.
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Applied Calculus for the Managerial, Life, and Social Sciences
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Chapter 6 / Exercise 41
Applied Calculus for the Managerial, Life, and Social Sciences
Tan
Expert Verified
Weighted-average: Advantages: Due to the averaging process, the effects of year-end buying or not buying are lessened. Disadvantage: Manipulation of income is possible. Perpetual inventory procedure requires an entry to Merchandise Inventory whenever goods are purchased, returned, sold, or otherwise adjusted, so that inventory records reflect actual units on hand at all times. Thus, an entry is required to record cost of goods sold for each sale. Companies should not carry goods in inventory at more than their net realizable value. Net realizable value is the estimated selling price of an item less the estimated costs incurred in preparing the item for sale and selling it. Inventory items are written down tomarket value when the market value is less than the cost of the items. If market value is greater than cost, the increase in value is not recognized. LCM may be applied to each inventory item, each inventory class, or total inventory. The steps in calculating ending inventory under the gross margin method are:oEstimate gross margin (based on net sales) using the same gross margin rate experienced in prior accounting periods.

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