ADMAS UNIVERSITY BISHOFTU CAMPUS

Course Title - Maintain Inventory Records

GROUP ASSIGNMENT 1
GROUP MEMBERS
S.No NAME ID SECTION YEAR DEPT.
1 Haymanot endaylalu 137/10 3 3 account
birknh ing
2 hana tasfaye alemu 297/10 3 3 account
ing
3 lelise tibebu lama 538/10 3 3 account
ing
4 gitu reta tola 0029/1 3 3 account
1 ing
 Submitted to Instructor: Tilahun G
June 03, 2020 G.C.

QUESTIONS
1. Define what does it mean by inventory

2. List and explain inventory cost flow assumption

3. Demonstrate the difference between periodic and perpetual inventory system

4. What are the Effects of Inventory Errors on the Financial Statements

5. Demonstrate clearly the retail and gross method of estimating inventory cost

1, Inventories are asset items held for sale in the ordinary course of business or goods that will be used
or in the production of goods to sold
∙ they are two major mainly
« invontories of merchandising business
« invontories of manufacturing business
∙ inventories of merchandising businesses are merchandise purchased for resale in the normal
course of business
∙ invontories of manufacturing businesses are businesses that produce physical output .
∙ they are three types
« raw material inventory
« work in process inventory
« finished goods inventory
2 , inventory cost is measured by the total cash equivalents outlay made to acquire the goods and to
prepare them for sale.
∙ these costs include the purchase cost and incidental costs incrred until the goods are ready for
sale to the customer such costs include transportation cost insurance cost during transit cost
and handling costs.
3, periodic inventory system
∙ under this system there is no continuous record of merchandise inventory account.
∙ in a periodic inventory system no effort is made to keep up to date records of either the inventory
or the cost of goods sold.
∙ in periodic inventory system when merchandise is purchased , its cost is dedited to an account
 entitled purchases.
∙ the periodic inventory system is less costly to maintain the perpetual inventory system but it
gives management less information about the current status of merchandise
∙ this system is often used by retail enterprises that sell many kinds of low unit cost merchandise
such as groceries ,hardwere etc..
v perpetual inventory system
∙ in a perpetual inventory system merchandising transaction are recorded as they occur
∙ under this system the accounting record continuously disclose the amount of inventory
∙ companies that sell items of high unit value such as appliance or automobiles tended to use the
perpetual inventory
∙ no adjusting entry or closing entry for merchandise inventory is needed at the end
4, the most important assets in the balance sheet of most companies are cash, account
receivable, and inventory .
∙ it also is the only current asset for which alternative valuation methods are considered
acceptable
∙ the relatively large size of inventory , and the fact products stored in different locations an
error in inventory valuation not readily apparent.
∙ a small error in the vaution of inventory may have material effect upon net income.
∙ an error in the valuation of ending inventory affects not only the financial statements of
current year, but also the income statement
∙ income statement owners equtiy

∙ balnce sheet
5, in practice an inventory amount is estimated for some purposes
∙ taking a physical inventory every month would be very expensive and time consuming.
∙ a periodic inventory system is to prepare monthly or quarterly financial statements estimates the
inventory and cost of goods sold.
∙ the estimate cost of inventory , two methods are used. These are retail method and gross profit
method .
o retail method is mostly used by retail business.the estimate is made basde on the relationship
between the cost and retail price of merchandise for sale .
∙ the gross profit method is simple technique for estimatimg the cost of goods sold and the
amount of inventory on hand.
∙ the gross profit rate is know the ending inventory can be estimated .