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Inventory Classification
Inventory consists of: 1. Finished goods held for sale in the ordinary course of business. 1. Goods held or consumed in the production of finished goods.
Inventory Control
Inventory control is important for:
1. Ensuring availability of inventory items 2. Preventing excessive accumulation of inventory items
The perpetual system maintains a continuous record of inventory changes The periodic system updates inventory records only periodically
Inventory Systems
Perpetual Method
Purchases are debited to Inventory account Freight-in, Purch. R & A and Purch. Disc. are recorded in Inventory account. Debit COGS and credit Inventory account for each sale.
Periodic Method
Purchases are debited to Purchases account. Freight-in, Purch. R & A and Purch. Disc. are recorded in their respective accounts. COGS is computed only periodically: COGAS - Ending Inventory COGS
Goods in transit (FOB Destination) Goods on consignment with consignee Goods, sold under buy back agreements Goods, sold with high rates of return Installment sales (if bad debts can not be estimated)
Overstated
Specific identification Average cost First-in, first-out (FIFO) and Last-in, first-out (LIFO)
$5,000
$5,000
LIFO Reserve
LIFO Reserve (Allowance) account is used, when:
LIFO is used for external reporting and a non-LIFO basis is used for internal reporting.
An Allowance to Reduce Inventory to LIFO is used to reduce the cost to a LIFO basis.
Adjust the cost of ending inventory to the LIFO basis Cost of goods sold Dr. $30,000 Allowance to Reduce Inventory to LIFO Cr. $30,000 Balance Sheet (Assets): Inventory (FIFO) less: Allowance to Reduce Inventory Inventory (LIFO) basis $50,000 ($30,000) $20,000
LIFO Layers
Under the LIFO approach, a business may build up layers of inventory from prior periods. A layer liquidation occurs, when:
Earlier costs are matched against current sales. Such matching results in distorted income.
At base $: $22,000
$26,400 / 1.20
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