Chapter 7 Notes
- historical cost
- market value
- replacement cost
- net realizable value
- the cost value that is originally assigned to inventory should contain all laid-
- however, often impractical to assign costs to many different items that arrive
together in one shipment
- therefore, companies treat these costs as period costs
beginning inventory + purchases of inventory made during the year = total cost of
goods available for sale during the year
once you have te cost for the total goods available for sale during the year, you can
deduct the cost of the goods that remain unsold at the end of the year (ending
beginning inventory + purchase = cost of goods available for sale. – ending inventory
Lower of Cost and Net Realizable Value
- at the end of every accounting period, most companies therefore compare
the cost of the inventory with its market value and apply the lower of cost and
net realizable value rule.
- the ending inventory is reduced to the lower NTV, which causes the COGS
amount to rise in the statement of earnings.
- IFRS Indicates that inventory should be recognized at Lower of Cost or NRV
- In line with principle of being conservative
- Reduces the amount of bias or estimates that are included in the inventory
- two types of info needed about inventory
o the number of units sold during a period
o the number that remain
perpetual inventory systems
keep track of units and/or their associated costs on a continuous basis. when a unit it sold, it is immediately removed from the inventory account.
credit to the account at the time of sale
periodic inventory system
there is no entry to record the reduction in inventory at the time of sale.
company must do inventory counts periodically and physically
the COGS is then determined by subtracting the ending inventory value from the
sum of the beginning inventory value and the purchases made in that period.
this process assumes that al the items were indeed sold, which may not always be
the case. Does not give room for theft, damage, etc.
costs and benefits of system choice
perpetual = most expensive, but more advantageous to managrs
losses of inventory due to theft, damage, and spoilage
periodic system unable to identify shrinkage b/c shrinkage is a part of COGS when
perpetual system identifies shrinkage b/c the system tells the company what the
ending inventory should be – the compa