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Need to keep track of registration, insurance, serial numbers, other types of identification Because of small quantity of cars sold by dealerships, record keeping costs are not high. Similarly, companies selling more expensive items, e.g. TV, fridge, jewellery, use perpetual method Companies with large amount of sales, particularly items with low value, use periodic inventory method because of lower costs. However, most organisations now use perpetual because of computer based inventory systems Retail companies have optical scanners scanning barcode Assist with inventory control and helps with planning for ordering additional inventory 8.2 Accounting Entries for Perpetual and Periodic Inventory Perpetual –includes costs of goods sold and inventory shortage expense Sales XXX Less cost of goods sold XXX Less inventory shortage XXXXXXGross profit XXXPeriodic –excludes costs of goods sold and inventory shortage expense Sales XXX Cost of goods sold: Opening Inventory XXX Purchases XXXCost of goods available for sale Less ending inventory XXXCosts of goods sold XXXGross profit XXX
Thinkswap DocumentACCT1501 Notes Cheryl Mew 8.3 Inventory Valuation and Cost of Goods Sold Inventory accounting uses a modified version of the standard historical cost valuation basis: lower of cost or market value Application of accounting conservatism: anticipate no gains but allow for losses Inventory accounting affects both the balance sheet (inventory valuation) and the income statement via the COGS Inventory cost flow assumptionsCost of inventory varies Actual cost is usually tracked only for high value items (houses, motor vehicles) that can be identified by serial numbers and other methods Method –“specific identification”As the cost of keeping records decreases, because of computerisation, more items will be able to be tracked this way. Impossible to keep track of individual items in inventory, so ASSUME flows of costs By using periodic method: first calculate COG available for sale Problem: how to allocate COG available for sale between COGS and ending inventory asset Three common inventory cost flow assumptions: -FIFO–First in first out –sell the oldest items first (BS –recent cost, COGS –old costs) -AVGE–weighted average assumption –assume mixture of old and new items (average unit cost = total cost / total units) -LIFO–Last in first out –sell newest items first (BS –old costs, COGS –new costs) 8.4 More about Inventory Cost Flow Assumptions Assumption Periodic Control Perpetual Control FIFO FIFO FIFO AVGE Weighted Average Moving weighted average LIFO Periodic LIFO Perpetual LIFO FIFO is not affected by inventory control method because it just assigns the most recent costs to whatever is on hand. Others depends on control method, as it depends on what happened to inventory levels during the period Thus there is 5 methods There is a six –specific identification and 2 others