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Financial Accounting

(PGDM- 2015-16)

Session -13: Accounting for Inventory


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 work-in-progress
kind of 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

• 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.
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
– Due to in-built check in, cases of losses and pilferage will
be minimized
– 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
Inventory Accounting- Manufacturing and
Services Firms
• Inventory is sub-classified into:
– Materials Inventory
– Work-in-Progress Inventory
– Finished Goods

• Services Firms– Cost of labor, supplies and other


overheads are added to get the cost of sales
Methods of Inventory Costing

• Specific Identification Method– Ascertaining the


individual cost of each item

• Average Cost Method– Average cost of goods available


for sale are computed by weighted average

• FIFO Method

• LIFO Method

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