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Home Valuation of Inventories Basic Issues in Inventory Valuation
 
 

Basic Issues in Inventory Valuation:

Goods sold or used during an accounting period seldom correspond exactly to the goods bought or produced during that period, the physical inventory either increases or decreases. The cost of all the goods available for sale or use should be allocated between the goods that were sold or used and those that are still on hand. The cost of goods available for sale or use is the sum of the cost of the goods in the hand at the beginning of the period and the cost of the goods acquired or produced during the period. The cost of goods sold is the difference between the cost of goods available for sale during the period and the cost of goods on hand at the end of the period.

Example:

Computation of Cost of Goods Sold

Beginning inventory. Jan1. $100,000
Cost of goods acquired or produced during the year 800,000
 
Total cost of goods available for sale 9,00,000
Ending inventory, Dec. 31 2,00,000
 
Cost of goods sold during the year $700,000
 

The valuation of inventories can be a complex process that requires determination of the following:

  1. The physical goods to be included to inventory (who owns the goods? - goods in transit, consigned goods, special sales agreements).
  2. The cost to be included in inventory (product vs. period costs, treatment of purchase discount).
  3. The cost flow assumption to be adopted (specific identification, average cost, FIFO, LIFO, retail, etc.).

Relevant Articles:

Classification of Inventory

Difference between Perpetual and Periodic Inventory System
Basic Issues in Inventory Valuation
Average Cost Method
First In First Out (FIFO) Method
Last In First Out (LIFO) Method
LIFO Reserve
LIFO Liquidation
Basis for Selection of Inventory Method

 

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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