ACCT 1209 Chapter Notes - Chapter 7: Perpetual Inventory, Financial Statement, Income Statement
16 Dec 2016
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Chapter 7: Reporting and interpreting cost of goods sold and inventory
Cost principle: requires that inventory be recorded at the price paid or the consideration given.
• Invoice price + Inspection costs + Freight in + Preparation costs
Beginning inventory + Purchases = Goods Available for Sale
Goods Available for Sale – Ending inventory (inventory remaining) = Cost of goods sold (inventory sold)
Inventory systems
Perpetual
Periodic (end of accounting period)
• Purchase transactions are recorded directly in an
inventory account.
• No up-to-date record of inventory is maintained during
the year.
• Sales require two entries to record: (1) the retail sale
and (2) the cost of goods sold.
• Sales require one entry to record the retail sale. Cost of
goods sold is calculated.
Beginning Inventory + Net Profit = Ending inventory +
COGS
Beginning inventory + Net Profit – Ending inventory =
COGS
Perpetual inventory systems and cost flow assumptions in practice
• FIFO inventory and cost of goods sold are the same whether computed on a perpetual or periodic basis.
• Accounting systems that keep track of the costs of individual items normally do so on a FIFO or average cost
basis.
• As a consequence, companies that wish to report under LIFO convert the outputs of their perpetual inventory
system to LIFO with an adjusting entry at the end of each period.
Valuation at Lower of Cost or Market
• Ending inventory is reported at the lower of cost or market (LCM).
• Replacement Cost: The current purchase price for identical goods.
• Conservative practice: The company will recognize a “holding” loss in the current period rather than the period in
which the item is sold.
(Beginning Inventory + Ending Inventory) ÷ 2
This ratio reflects how many times average inventory was produced and sold during the period. A higher ratio indicates
that inventory moves more quickly thus reducing storage and obsolescence costs.
This ratio reflects the average time in days it takes a company to produce and deliver inventory to its customers.
Cost Flow Assumptions: The choice of an inventory costing method is not based on the physical flow of goods on and
off the shelves
Flow of inventory cost
find more resources at oneclass.com
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Document Summary
Chapter 7: reporting and interpreting cost of goods sold and inventory. Cost principle: requires that inventory be recorded at the price paid or the consideration given. Invoice price + inspection costs + freight in + preparation costs. Beginning inventory + purchases = goods available for sale. Goods available for sale ending inventory (inventory remaining) = cost of goods sold (inventory sold) Inventory systems: purchase transactions are recorded directly in an, no up-to-date record of inventory is maintained during. Periodic (end of accounting period) inventory account. the year: sales require two entries to record: (1) the retail sale, sales require one entry to record the retail sale. Cost of and (2) the cost of goods sold. Beginning inventory + net profit = ending inventory + Perpetual inventory systems and cost flow assumptions in practice goods sold is calculated. Beginning inventory + net profit ending inventory = This ratio reflects how many times average inventory was produced and sold during the period.
