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Chapter

# Inventory Cost Flow Methods in Perpetual Inventory Systems

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Department
Financial Accounting
Course Code
MGAB01H3
Professor
Liang Chen

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Inventory Cost Flow Methods in Perpetual Inventory Systems
Â¾ All methods of cost flow can be used in the perpetual inventory system
FIFO
Â¾ The results under FIFO in a perpetual system are the same as in a periodic system.
Regardless of the system, the first costs in are the ones assigned to cost of goods sold
Average Cost
Â¾ This is called moving average cost method in perpetual inventory system
Â¾ The average cost is calculated in the same method, however it is calculated for every
purchase or sale of merchandise, thus, constantly changing the average
LIFO
Â¾ The results under LIFO in a perpetual system differ to the periodic system. Because
the perpetual system constantly updates the inventory after each transaction, the cost
of LIFO would be based at the exact moment when the inventory was sold, whereas
the periodic system would use the cost of LIFO at the very end of the accounting
period.
Estimating Inventories
Â¾ To save time from physically counting inventory, the gross profit method and the retail
inventory method can be used to estimate
Gross Profit method
Â¾ Net sales Â± estimated gross profit = estimated cost of goods sold
Â¾ Cost of goods available for sale Â± estimated cost of goods sold = estimated cost of
ending inventory
Â¾ The gross profit method is based on the assumption that the gross profit margin will
remain the same
Retail Inventory Method
Â¾ Goods available for sale at retail Â± net sales = ending inventory at retail
Â¾ Goods available for sale at cost/goods available for sale at retail = cost to retail ratio
Â¾ Ending inventory at retail X cost to retail ratio = estimated cost of ending inventory
Â¾ The disadvantage of this method is that it is an averaging technique
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Description
Inventory Cost Flow Methods in Perpetual Inventory Systems All methods of cost flow can be used in the perpetual inventory system FIFO The results under FIFO in a perpetual system are the same as in a periodic system. Regardless of the system, the first costs in are the ones assigned to cost of goods sold Average Cost This is called moving average cost method in perpetual inventory system The average cost is calculated in the same method, however it is calculated for every purchase or sale of merchandise, thus, constantly changing the average LIFO The results under LIFO in a perpetual system differ to the periodic system. Because the perpetual system constantly updates the inventory after each transaction, the cost of LIFO would be based at the exact moment when the inventory was sold, whereas the periodic system would use the cost of LIFO at the very end of the ac
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