Task Team of FUNdaMENTAL aCCOUNtIng School of Business. Sun Yat-sen University Damaged, deteriorated, or obsolete goods should be omitted from inventory if not saleable If saleable at a reduced price and below cost, they should be included in inventory at their net realizable value(sales price less the cost of making the sale) Elements of inventory cost The cost of inventory includes all expenditures made in bringing the goods or assets to their existing condition and location for sale. Inventory cost therefore equals invoice price less discounts, plus transportation, storage, import duties, insurance, and other costs of preparing the inventory for sale. These additional or incidental costs add value to the inventory and should be included in the purchase cost. In certain cases, however, the materiality principle allows firms to charge incidental costs as expenses of the period, and not include them in inventory. Such a practice is justified if the effort of computing costs on a precise basis outweighs the benefit from the extra accuracy Four generally accepted methods of determining inventory costs Specific identification inventory costing method The specific identification inventory costing method identifies and uses the purchase invoice of each item sold to determine the cost assigned to cost of goods sold and to the ending inventory. Exact matching is possible when each item in inventory can be identified with a specific purchase. Specific identification will produce identical results under either a perpetual or a periodic inventory system First-in, first-out(FIFO) inventory costing method The first-in, first-out inventory costing method is based on the assumption that the first items received were the first items sold. In other words, items in the beginning inventory or the oldest items are assumed to be sold first. The most recent inventory purchased is assumed to remain in ending inventory. For many businesses, this is the actual flow of goods. FIFO will produce identical results under both the perpetual and periodic inventory systems Last-in, first-out(LIFo) inventory costing method The last-in, first-out inventory costing method is based on the assumption that the last items eceived were the first items sold. In other words, the most recent purchases are assumed to be sold first and the old goods remain in inventory. However, the assumed flow of goods can differ from the actual physical flow.(The results under LiFO periodic differ from LIFO perpetual. During inflationary times, recent costs are higher than old costs, resulting in higher cost of goods sold. lower net income and lower income taxes Weighted-average inventory costing method The weighted-average inventory costing method uses a weighted-average cost per inventory unit in assigning cost to units sold and to inventory. a weighted-average cost of goods available for sale is recalculated at the time of each purchase. Notice that the most current average cost is used to calculate the cost of each sale. Weighted-average will produce different results under a perpetual than under a periodic inventory system 2Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University 2 Damaged, deteriorated, or obsolete goods should be omitted from inventory if not saleable. If saleable at a reduced price and below cost, they should be included in inventory at their net realizable value (sales price less the cost of making the sale). Elements of inventory cost The cost of inventory includes all expenditures made in bringing the goods or assets to their existing condition and location for sale. Inventory cost therefore equals invoice price less discounts, plus transportation, storage, import duties, insurance, and other costs of preparing the inventory for sale. These additional or incidental costs add value to the inventory and should be included in the purchase cost. In certain cases, however, the materiality principle allows firms to charge incidental costs as expenses of the period, and not include them in inventory. Such a practice is justified if the effort of computing costs on a precise basis outweighs the benefit from the extra accuracy. Four generally accepted methods of determining inventory costs Specific identification inventory costing method The specific identification inventory costing method identifies and uses the purchase invoice of each item sold to determine the cost assigned to cost of goods sold and to the ending inventory. Exact matching is possible when each item in inventory can be identified with a specific purchase. Specific identification will produce identical results under either a perpetual or a periodic inventory system. First-in, first-out (FIFO) inventory costing method The first-in, first-out inventory costing method is based on the assumption that the first items received were the first items sold. In other words, items in the beginning inventory or the oldest items are assumed to be sold first. The most recent inventory purchased is assumed to remain in ending inventory. For many businesses, this is the actual flow of goods. FIFO will produce identical results under both the perpetual and periodoic inventory systems. Last-in, first-out (LIFO) inventory costing method The last-in, first-out inventory costing method is based on the assumption that the last items received were the first items sold. In other words, the most recent purchases are assumed to be sold first and the old goods remain in inventory. However, the assumed flow of goods can differ from the actual physical flow. (The results under LIFO periodic differ from LIFO perpetual.). During inflationary times, recent costs are higher than old costs, resulting in higher cost of goods sold, lower net income, and lower income taxes. Weighted-average inventory costing method The weighted-average inventory costing method uses a weighted-average cost per inventory unit in assigning cost to units sold and to inventory. A weighted-average cost of goods available for sale is recalculated at the time of each purchase. Notice that the most current average cost is used to calculate the cost of each sale. Weighted-average will produce different results under a perpetual than under a periodic inventory system