ending inventory

Examples of ending inventory in the following topics:

• Specific Identification Method

  • Specific identification is a method of finding out ending inventory cost that requires a detailed physical count.
  • The company computes the ending inventory as shown in.
  • Specific identification is a method of finding out ending inventory cost.
  • However, this method allows management to easily manipulate ending inventory cost, since they can choose to report that the cheaper goods were sold first, therefore increasing ending inventory cost and lowering cost of goods sold.
  • The company computes the ending inventory as shown in ; it subtracts the USD 181 ending inventory cost from the USD 690 cost of goods available for sale to obtain the USD 509 cost of goods sold.

• Methods in Retail Inventory

  • The physical inventory is valued at retail, and it is multiplied by the cost ratio (or percentage) to determine the estimated cost of the ending inventory.
  • The advantage of this method is that companies can estimate ending inventory (at cost) without taking a physical inventory.
  • The steps for finding the ending inventory by the retail inventory method are:
  • Deduct the retail sales from the retail price of the goods available for sale to determine ending inventory at retail.
  • Multiply the cost/retail price ratio or percentage by the ending inventory at retail prices to reduce it to the ending inventory at cost.

• Average Cost Method

  • The value of the ending inventory on the balance sheet is USD 3,750 (150 units * USD 25).
  • At the end of the year, the last Cost per Unit on Goods, along with a physical count, is used to determine ending inventory cost.
  • On 12/31/12, sales for the period were 50 units and ending inventory is 150 units.
  • The Weighted-Average Method of inventory costing is a means of costing ending inventory using a weighted-average unit cost.
  • The ending inventory is carried at this per unit cost.

• LIFO Method

  • Despite numerous purchases and sales during the year, the ending inventory still includes the units from beginning inventory.
  • Applying LIFO on a perpetual basis during the accounting period, results in different ending inventory and cost of goods sold figures than applying LIFO only at year-end using periodic inventory procedure.
  • On the balance sheet, incorrect inventory amounts affect both the reported ending inventory and retained earnings.
  • Despite numerous purchases and sales during the year, the ending inventory still includes the units from beginning inventory.
  • Applying LIFO on a perpetual basis during the accounting period, results in different ending inventory and cost of goods sold figures than applying LIFO only at year-end using periodic inventory procedure.

• Reporting Inventories

  • Inventory is an asset and its ending balance should be reported as a current asset on the balance sheet.
  • In the periodic inventory system, sales are recorded as they occur but the inventory is not updated.
  • A physical inventory must be taken at the end of the year to determine the cost of goods.
  • Inventory is an asset and its ending balance should be reported as a current asset on the balance sheet.
  • In that situation the beginning and ending inventory does appear on the income statement.

• Gross Profit Method

  • An inventory valuation allows a company to provide a monetary value for items that make up their inventory.
  • While the best way to value inventory is to perform a physical inventory, in certain business operations, taking a physical inventory is impossible or impractical.
  • Calculate the cost of ending inventory as the difference of cost of goods available for sale and estimated cost of goods sold.
  • The following is an example on how to calculate ending inventory using the gross profit method.
  • The ending inventory on the balance sheet is $$5000 - $250=$4750$.

• Perpetual vs. Periodic Counting

  • Perpetual inventory updates the quantities continuously and periodic inventory updates the amount only at specific times, such as year end.
  • A company using the perpetual inventory system would have a book inventory that is exactly (within a small margin of error) the same as the physical (real) inventory.
  • Physical inventories are conducted at set time intervals; both cost of goods sold and the inventory are adjusted at the time of the physical inventory.
  • Most companies who use periodic inventory perform this at year-end.
  • While the perpetual inventory method provides a close picture of the true inventory information, it is a good idea for companies using a perpetual inventory system to do a physical inventory periodically.

• Lower of Cost or Market

  • Ending inventory is normally stated at historical cost (what was paid to obtain it), but there are times when the original cost of the ending inventory is greater than the cost of replacement.
  • Thus, the inventory has lost value.
  • On the other hand, if ending inventory has a market value of USD 45,000 and a cost of USD 40,000, the company would not recognize this increase in value.
  • A company may apply LCM to each inventory item (such as Monopoly), each inventory class (such as games), or total inventory.
  • Explain how a would use the Lower of Cost or Market to value inventory

• Efficiency Metrics

  • Efficiency ratios for inventory measure how effectively a business uses its inventory resources.
  • In addition, excess inventory increases the risk of losses due to price declines or inventory obsolescence.
  • Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory (to calculate average inventory, add the balances of beginning and ending inventory and divide by 2)
  • The inventory turnover ratio is a measure of the number of times inventory is sold or used in a time period, such as a year.
  • The inventory conversion ratio is a measure of the number of days in a year it takes to sell inventory or convert it into cash.

• Conducting a Physical Inventory

  • Physical inventory is a process where a business physically counts its entire inventory.
  • In addition, inventory control system software can speed the physical inventory process .
  • A perpetual inventory system tracks the receipt and use of inventory, and calculates the quantity on hand.
  • The teams count the inventory items and record the results on an inventory-listing sheet.
  • An inventory control system ensures that the company's books reflect the actual inventory on hand.