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Periodic Inventory Method
Cost of Goods Sold calculation
- Beginning inventory +
- Net Purchases(include freight-in) -
- Ending Inventory =
- Cost of goods sold
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Periodic Inventory Method
Steps in Determining Inventory
- 1. Count inventory
- 2. Summarize Inventory
- 3. Determine correct unit cost of inventory
- 4. Extend price times quantity and add totals
- 5. Record in journal and post to ledger
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Count inventory
Tags or count sheets can be used. One person verifies a count then a second person verifies a count. If the two counts match its good, if not then a recount.
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Summarize inventory
Same type of inventory in more than one place is combined. So the company needs to count and organize in a way to fit their reporting needs.
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Determine correct unit cost of inventory 4
- 1 costing method and type of inventory.
- 2.LIFO, FIFO, or weighted average.
- 3.Freight, handling, labor and overhead cost.
- 4.Lower of cost or market
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Extend price times quantity and add totals
- process is mechanical
- raw material, work-in-process, finished goods totaled seperatly
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Record in general journal and post to general ledger
Adjusting entries are made depending on the recording process of inventory
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Perpetual Inventory Method
Ending Inventory calculation
- Beginning Inventory +
- Purchases -
- Cost of goods sold =
- Ending Inventory
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Perpetual Inventory Method
Cost of goods sold calculation
calculated at each sale based on the inventory costing method
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Accounting entries for each sale transaction 2
- Record the sale-selling price
- Record the cost of goods sold- at cost
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Cons of perpetual inventory method
Higher cost to maintain record keeping
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Benefits of perpetual method 2
- 1. quantity and dollar value on hand at any time for any item can be determined
- 2. provides check on accuracy of cost of good sold and measure of losses by theft or spoilage
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Physical count when there are perpetual records
used to compare to perpetual record. Can reveal errors and theft. Frequency of count depends on past differences.
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Detailed perpetual inventory records
Record of unit and unit cost of each type of inventory, without dollar balance. Not the perpetual inventory method because cost of goods sold not calculated.
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Internal Controls
Perpetual records
helps control inventory stock levels and determine theft
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Internal Control
Safekeeping of inventroy
Prevents theft or misuse.
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Internal Controls
Independent checks on performance
- 1. Second count by independent team
- 2. Recalculation of unit and total costs
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