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Inventories: Measurement

the estimated amount of returned goods, the seller should continue to report the inventory on its books.

COST FLOW ASSUMPTIONS The physical flow of movement of goods and the cost flow assumptions used to maintain accounting records are not always the same.

Specific Identification This is the only cost flow assumption where the physical flow and the cost flows are identical. Under this method each item of inventory is accounted for separately and the actual cost of that item is recorded in the cost of goods sold account when the item is sold. This is only practical for high-ticket items and relatively low sales volume in terms of the number of units.

Average Cost Under this method ending inventory and cost of goods sold are priced based on the average cost of the goods available for sale during the accounting period.

  • Periodic inventory system

If the entity is using a periodic inventory system the calculation is based on the weighted- average of the number of units and their respective costs at the end of the accounting period. This is called the weighted-average method.

Example: The following inventory transactions took place in September 2000.

Spencer Company Inventory Transactions For the Month of September 2000

Periodic Inventory System, Weighted Average

2,000

$10.00

$20,000

500

11.00

5,500

1,000

12.50

12,500

Total

Price

Units

9/1/00

Beginning inventory

9/10/00

Purchase of merchandise

9/25/00

Purchase of merchandise

Date

Transaction

The company sold 2,800 units of merchandise inventory during the month. The following provides an analysis of the cost of goods sold and the ending inventory using the weight- average method of assigning costs.

F:\Teaching\3321\web\module4\c8\tnotes\c8a.doc

3/12/2007

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