Intermediate Accounting Chapter 8

Study Notes

Inventory Classifications and Systems

Inventories are assets held for sale in the ordinary course of business or goods to be used in the production of goods to be sold.
Merchandising companies have one inventory account, while manufacturing companies have three inventory accounts: Raw Materials, Work in Process, and Finished Goods.
There are two types of systems for maintaining inventory records: perpetual system and periodic system.

Perpetual and Periodic Systems

Perpetual system: purchases are debited to Inventory, and Cost of Goods Sold is debited and Inventory is credited for each sale.
Periodic system: purchases are debited to Purchases, and Ending Inventory is determined by physical count.
Perpetual system provides a continuous record of the balance in both the Inventory and Cost of Goods Sold accounts.

Inventory Cost Flow Methods

Specific Identification Method: identifies specific costs with specific inventory items.
Average-Cost Method: prices items in the inventory on the basis of the average cost of all similar goods available during the period.
Weighted-Average Method: calculates a weighted-average cost of goods available for sale.
Moving-Average Method: computes a new average unit cost each time a purchase is made.
First-In, First-Out (FIFO) Method: assumes goods are used in the order in which they are purchased, approximating the physical flow of goods, and ending inventory is close to current cost.

Description

This chapter covers the valuation of inventories using a cost-basis approach, including inventory classifications and different inventory systems. Learn about the principles and methods of inventory valuation.