Overview
This lecture discusses inventory cost flow techniques, covering how to compute ending inventory, cost of goods sold, and gross profit using the specific identification, FIFO, weighted average, and moving average methods.
Inventory Cost Flow Techniques
- Inventory cost flow methods determine how inventory costs are assigned to goods sold and those remaining at period-end.
- The main methods discussed are: Specific Identification, FIFO (First-In, First-Out), Weighted Average, and Moving Average.
- LIFO (Last-In, First-Out) is not permitted under IAS 2.
- Entities should use the same cost formula for inventories with similar nature.
Specific Identification Method
- Used when inventory items are not interchangeable or segregated for specific projects.
- Assigns actual cost to each specific item sold and remaining, based on batches or labels.
- Ending inventory and cost of goods sold are computed by tracking the cost and units of each batch.
- Gross profit is calculated as total sales minus cost of goods sold.
First-In, First-Out (FIFO) Method
- Assumes earliest goods purchased are sold first; ending inventory consists of most recently purchased items.
- Inventory transactions are tracked using a stock card.
- Cost of goods sold is computed by applying the cost of oldest inventory to units sold.
- Gross profit is calculated as total sales revenue minus cost of goods sold.
- Works the same under both periodic and perpetual systems.
Weighted Average Method
- The cost per unit is calculated by dividing total cost of goods available for sale by total units available.
- Each unit sold or remaining is assigned the weighted average cost.
- Used for inventories with similar items.
- Gross profit equals sales revenue minus cost of goods sold at the weighted average rate.
Moving Average Method
- Applies the weighted average method continuously as new inventory is purchased.
- After each purchase, a new average cost per unit is calculated.
- Cost of goods sold and ending inventory are determined using this updated average cost.
- Typically used with the perpetual inventory system.
Key Terms & Definitions
- Cost of Goods Sold (COGS) — Total cost assigned to inventory items that have been sold during a period.
- Ending Inventory — Cost of inventory still on hand at the end of the period.
- Gross Profit — Sales revenue minus cost of goods sold.
- Specific Identification — Inventory costing method that tracks the exact cost of each specific item.
- FIFO (First-In, First-Out) — Oldest inventory costs are assigned to goods sold; newest costs remain in inventory.
- Weighted Average — Cost per unit is the average cost of all items available during the period.
- Moving Average — Continuous recalculation of average cost per unit with each purchase.
Action Items / Next Steps
- Prepare for next lesson: Measurement of inventories at lower of cost and net realizable value (LCNRV).
- Review sample problems and practice computing ending inventory, cost of goods sold, and gross profit using all discussed methods.