Chapter 17: Merchandise Inventory

periodic inventory

- this system is based upon a periodic physical count of inventory on hand. -Requires a physical inventory count

first in, first out method

-A method of inventory costing that assumes the oldest merchandise is sold first -often used when a company's inventory is composed of many similar items. -The cost of ending inventory is computed by referring to the most recently purchased item -many accountants, owners, and managers believe this method is less conservative and less realistic than the last if first out method.

Merchandise Inventory

-Found on the balance sheet and on the income statement -Represents the largest current asset on the balance sheet -Affects the net income or net loss reported on the income statement

specific identification method

-Inventory valuation is based on the actual cost of each item of merchandise. -often used by companies that have a low volume of highly priced inventory - for example automobile dealers.

What are the two main types of inventory systems

-Perpetual Inventory -Periodic Iventory

perpetual inventory

-based on a running total of the number of units purchased and sold. -uses point - of - sale cash registers and scanners.

What are the four methods are commonly used to value inventory?

-specific identification method - average cost method (a.k.a. weighted average method -first in, first out method (FIFO) -last in, first out (LIFO)

Average Cost Method

1. add the total number of inventory units purchased to the beginning inventory units to get the total number of units available for sale. 2. the total cost of inventory units purchased is added to the total cost of beginning inventory to get the total cost of units available for sale. 3. the total cost of units available for sale is divided by the total units available for sale to get an average cost per unit. -Whatever direction prices take, the average cost method results in a reported net income somewhere between the amounts obtained with FIFO and LIFO

physical inventory

An actual count of the number of units of each type of good on hand

Last In, First Out Method (LIFO)

Assumes that merchants sell the items that were most recently purchased. -The value assigned to the ending inventory is the cost of the oldest merchandise on hand during the period. -during times of rising prices a company's net income will be lower using this method. -considered the most conservative costing method during periods of rising prices.