Inventory determining and counting generally becomes more accurate if goods are neither sold nor received during the period of inventory counting. Inventory quantities can be determined following the under noted two steps; Taking a physical inventory of goods on hand, and Determining the ownership of goods.
Periodical Inventory System determines cost of goods sold by adding merchandise purchase cost, beginning stock cost and deducting end-stock cost.
Perpetual inventory system is named so because; from this system daily quantity of merchandise inventory can be known any time.
The cost of ending inventory and the cost of goods sold are determined using various methods of them, the commonly used methods are: First in first out (FIFO), Last in first out (LIFO), and Weighted average.
Under the first-in-first-out method, the earliest costs (first costs) are assigned to the cost of goods sold, and the remaining costs (the more recent costs) are assigned to the ending inventory. The FIFO method assumes that the earliest goods purchased are sold first. But in practice, it is not followed strictly, i.e., the earliest goods…
The LIFO reserve is the difference between the accounting cost of an inventory that is calculated using the FIFO method and one using the LIFO method. In the typical inflationary environment, the value of a FIFO inventory is higher than the value of a LIFO inventory, so the calculation of the LIFO reserve is: LIFO…
The last in, first out method (LIFO) is the reverse of the FIFO method. Under the LIFO method, the earliest costs are assigned to ending inventory, and the costs of the most recent purchases are assigned to the cost of goods sold. The LIFO method assumes that the latest goods purchased are to be sold…
LIFO liquidation means “liquidity” old inventory, which was bought at a price lesser than the current replacement price and valued using the LIFO inventory valuation method either by selling or consuming. When a company using the LIFO (Last In, First Out) method of inventory costing liquidates their older LIFO inventory. A LIFO liquidation will occur…
The weighted average method is suitably applicable to that firm, which deals with goods of equal importance. According to the weighted average method, each unit of inventory of a particular type is similar and can be sold for the same price. Units of equal economic importance are assigned equal costs. The weighted average method differing…
Merchandise inventories are finished goods acquired for sale by retail or wholesale traders. Finished goods possessed for sale by manufactures are usually called finished goods inventory.
Mechanized accounting system is bookkeeping system that is implemented without human intervention, a machine which is more powerful, capable and complex in comparison to bookkeeping machine is used for data processing in a computer.
We apply the conservatism principle and use Lower of Cost or Market Rule(LCM) to reduce inventory to a more realistic value and, at the same time, recognize the loss in value that has incurred. The basic assumption of the LCM method is that if the purchase price of an item falls, its selling price also falls or will fall. The LCM has long been accepted in accounting globally Under LCM, inventory items are written down to market value when the market value, is less than the cost of the items.
3 types of discount are trade discount, quantity discount, and cash discount that are used in business, trade, and sales of all kinds.