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Flashcards in Chapter 3: Inventories Deck (13)
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Inventories part of what balance sheet section

Current assets


Inventory formula (balance sheet)

Inventory (balance sheet) = Units of inventory on hand * costs per unit of inventory


Cost of goods sold (income statement)

Cost of goods sold = Units of sold inventory * costs per unit of inventory


When will inventories be recognised as assets

If sold to another party in the foreseeable future


Perpetual inventory management system

Continuously keep track of inventory.


Periodic inventory management system

Only uses periodic counting - less up to date. Does not provide an overview with all purchased and sold products


Inventories managed by perpetual inventory systems, 4 cost flow assumptions:

1. Specific identification method
2. FIFO First-in First-out
3. LIFO (Last-in First-out)
4. Average cost method


Specific identification method (Inventory valuation)

Specific unit cost method, used by companies with special inventory. Inventory value determined per unit


FIFO (Inventory valuation)

Oldest products sold first. Cost of oldest product in inventory is cost used for COGS. Cost of ending inventory based on newest products


LIFO (Inventory valuation)

Assumes newest products sold first. Cost of newest product is COGS. Cost of ending inventory based on oldest product


Average cost method (Inventory valuation)

Allocates cost of goods available for sale on basis of weighted average unit cost incurred. Assumes all goods are similar in nature


Comparability principle

Assumes same bookkeeping method every year


Net Realisable Value NRV

Estimated cost price minus estimated complementary cost and estimated selling cost.
Results in decrease in ending inventory and increase in COGS