Sriranga Vishnu Faculty (F&A Area) Inventory Accounting-Types of Companies
• Merchandising Firms – They sell goods in similar forms
as that in which it was acquired by them. • For such firms, cost of sales will be the acquisition cost of the goods
• Manufacturing Firms – Manufacturing firms enter into
the production process and change the form of the goods acquired • For such firms, the relevant cost are cost of raw materials plus the conversion costs Inventory Accounting-Types of Companies
• Service Organizations– In contrast to Merchandising
and Manufacturing firms, these organizations provide intangible services. • Such firms may have some amount of materials inventory. No finished goods inventories
• Supplies– Supplies are tangibles that are used up in
normal course of operations Inventory Accounting- Merchandising Firms
• Acquisition Cost– It includes the invoice cost of the
purchase made along with the related costs
• In the costs related with purchase of goods, adjustments
should be made for return of certain goods, allowances and discounts, etc.
• Purchase would refer to actual amount of goods received
by the buyer Methods of Inventory Costing
• Periodic Inventory Method– The ending inventory is
physically counted and then the cost of goods sold is derived by deducting it from the goods available for sale • A physical count of the merchandise in the year end is done and the cost of this inventory is determined • The opening inventory is the amount found by the physical inventory taken at the end of the preceding period Methods of Inventory Costing
• Perpetual Inventory Method– In this kind of inventory
costing, the ending inventory (closing stock) can be derived by subtracting cost of goods sold from the goods available for sale. • In this method, a regular record of the inventory materials is maintained • A record is maintained for each item entered in the inventory Methods of Inventory Costing • Merits of Perpetual Inventory Method– – As compared to Periodic Inventory method, no separate recordkeeping is required in Perpetual Method – This method is better equipped to tell when and how much to reorder – In Periodic Inventory system, loss or pilferages are consumed in CoGS. In Perpetual Inventory system, inventory shrinkage is identified separately – Income statement can be prepared without taking a physical inventory • Retail Method – Purchase is recorded at Cost and at Retail Selling Price. Gross Percentage Margin is calculated. The complementary is the approx. CoGS Methods of Inventory Costing
• Specific Identification Method– Ascertaining the
individual cost of each item
• Average Cost Method– Average cost of goods available