THE COSTS
INVENTORY VALUATION

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           Inventories are considered by many companies as a very significant asset. The inventory accounting involves two major aspects: 1) the cost of inventory purchased or manufactured needs to be determined and 2) the cost is retained in the inventory accounts of the company until the product is sold.

    INVENTORY VALUATION METHODS. DETERMINE COST OF SALES


    Specific identification Each item sold and each unit remaining in the inventory are individually identified
    FIFO (First-in, first-out)
    The actual physical flow is irrelevant, the important thing is that the flow of costs assumes that the first articles in entering the inventory are the first to be sold (cost of sales) or consumed (cost of production). The final inventory is made up of the last articles that became part of inventories.
    LIFO (Last-in, first-out)
    The actual physical flow is irrelevant, the important thing is that the flow of costs assumes that the last articles that became part of the inventory are the first to be sold (cost of sales) or consumed (cost of production). The final inventory is comprised of the first articles that became part of inventories.
    Weighted Average This method requires calculating the average unit cost of the goods in the beggining inventory including the purchases made in the accounting period. Based on this average cost per unit is determined both the cost of sales (production) and the ending inventory of the period.


    EXAMPLES OF INVENTORY VALUATION AND COST OF SALES


    METALS, INC.
    COST FLOWS
    FIFO
    W. AVG.
    LIFO
    Brooches, Beggining Inventory 1-Jan-1999
    29 @ $5.00
    $145
    $145
    $145
    Purchases, 1999
                                       
    2,075
    2,075
    2,075
    Goods available for sale, 1999

    $2,220
    $2,220
    $2,220
    Brooches, Ending Inventory 31-Dec-1999





    50 @ $10.50 = $525
    4 @ 9.00 = 36
    $ 561



    54 @ $7.96

    $ 430


    29 @ $5.00 = $145
    25 @ 6.00 = 150


    $ 295
    Brooches,
    Cost of the Sales, 1999

    $1,659 
    $1.790
    $1,925







    ACCOUNTING FORUM

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