Chapter 7 – Inventory
Inventory: Asset held for sales or assets used to produce goods that will be sold
as part of the entity’s normal business activities. Include materials and supplies
used to provide a service to customers.
Raw Materials: The inputs into the production process. For example, raw materials
inventory for a furniture manufacturer includes wood used to build the furniture.
Work-in-process (WIP): Inventory that partially completed on the financial
Finished Goods: Inventory that has been completed and is ready for sale. One
entity’s inventory is another’s equipment and one entity’s finished good is another’s
Perpetual Inventory Control System: Keeps an ongoing tally of purchases and
sales of inventory, and the inventory account is adjusted to reflect change as they
occur. It can determine cost of sales at any time. Dr. Inventory (Asset+) xxx
Cr. Accounts payable (Liability +) or cash (Asset -) xxx
When inventory is sold then record journal as:
Dr. Cash (asset +) or accounts receivable (asset +) xxx
Cr. Revenue (Revenue+, equity +) xxx
Dr. Cost of sales (Expense +, equity +)xxx
Cr. Inventory (asset -) xxx
Periodic inventory control system: Inventory account isn’t adjusted whenever a
transaction affects inventory. Adjustments in inventory are made only at the end of
period. Purchases are accounted for separately. Cost of sales is determined
Cost of Sales = beginning inventory + purchase – ending inventory
Dr. Purchases (expense+)xxx
Cr. Accounts payable (liability +) Cash (asset -) xxx
When inventory is sold: Dr. Cash (asset +)
Cr. Accounts payable (liability -), Cash (asset -)
*No entry records cost of sales until the end of the period after the inventory has
- The following adjusting entry would be: Dr. Cost of sales (expense +) , Dr.
Inventory (asset +) and Cr. Purchases (expense -)
The three cost formulas allowed by IFRS: First-in, first-out (FIFO), average cost and
- Cost formulas allocate cost between ending inventory and cost of sales. Also
ways to move costs from the balance sheet to the income statement, and
doesn’t mean it reflects or affect the flow of inventory.
- Cost associated with the inventory that was purchased or produced first is
the cost expensed first. Cost of inventory reported on balance sheet
represents the cost of inventory most recently purchased or produced.
- Costs of goods sold are from oldest purchase.