Inventory Recording

Periodic System : (Page-5.
5)
In a periodic inventory System, Companies do not keep detailed
inventory records of the goods on hand throughout the period.
Instead, they determine the cost of goods sold only at the end
of the accounting period- that is periodically. At that point, the
company takes a physical inventory count to determine the cost
of goods on hand.
Perpetual System: (Page-5.4)

In a perpetual inventory system, companies keep detailed
records of the cost of each inventory purchase and sale. These
records continuously- perpetually- show the inventory that
should be on hand for every item. Under a perpetual inventory
system, a company determines the cost of goods sold each time
a sale occurs.
Inventory Recording
Periodic Recording Perpetual Recording

For Purchases: For Purchases:
Purchases Inventory
A/P or Cash A/P or Cash
For Sales: For Sales:
A/R or Cash 1. A/R or Cash
Sales
Sales
2. Cost of Goods Sold
Inventory
Adjustment needed for
recording inventory No adjustment needed for recording Inventory
Periodic Inventory Recording Perpetual Inventory Recording
Purchases Inventory
A/P--- 20,000 COGS--- 14,000
A/P--- 20,000
Closing B-6,000
Sales (Cost=14,000) Sales (Cost=14,000)
A/R--- 19,000 A/R--- 19,000
Cost of Goods Sold (COGS)
Inventory- 14,000
No Adjustment needed for
Adjustment needed for recording Inventory
recording Inventory
Periodic Inventory Recording Perpetual Inventory Recording
Purchases
Inventory
Inventory- 6,000
A/P--- 20,000 COGS-- 14,000 COGS--- 14,000
A/P--- 20,000
Closing B-6,000
Sales (Cost=14,000)
A/R--- 19,000
Sales (Cost=14,000)
A/R--- 19,000
Inventory (by Physical Count)
Purchases—6,000 Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) Inventory- 14,000
Purchases– 14,000
To determine the cost of goods sold under a periodic inventory
system, the following steps are necessary: (page-5.5)
1.Determine the cost of goods on hand at the

beginning of the accounting period.
2. Add to it the cost of goods purchased.
3. Subtract the cost of goods on hand as

determined by the physical inventory count
at the end of the accounting period.
Inventory Costing
After a company has determined the quantity of units of inventory, it
applies unit costs to the quantities to compute the total cost of the
inventory and the cost of goods sold. This process can be complicated if a
company has purchased inventory items at different times and at different
prices.
For example, assume that Azam TV Company purchases three identical 46-
inch TVs on different dates at costs of $700, $750, and $800. During the year Azam
sold two sets at $1,200 each. These facts are summarized below.
Purchases Sales
February 3, 1 TV at $700 June 1, 2 TVs for $2,400 ($1,200 2)
March 5, 1 TV at $750
May 22, 1 TV at $800
Cost of goods sold will differ depending on which two TVs the company sold.
For example, it might be $1,450 ($700 + $750), or $1,500 ($700 + $800), or
$1,550 ($750 + $800). In this section we discuss alternative costing methods
available to Azam.
Specific Identification
If Azam sold the TVs it purchased on February 3 and May 22, then its cost of
goods sold is $1,500 ($700 + $800), and its ending inventory is $750. If Azam can
positively identify which particular units it sold and which are still in ending inventory,
it can use the specific identification method of inventory costing .
Using this method, companies can accurately determine ending inventory and cost of
goods sold.
Cost Flow Assumptions

Because specific identification is often impractical, other cost flow methods
are permitted. These differ from specific identification in that they
assume flows of costs that may be unrelated to the physical flow of goods.
There are three assumed cost flow methods:
1. First-in, first-out (FIFO)
2. Last-in, first-out (LIFO) X IFRS does not allow LIFO
3. Average-cost
There is no accounting requirement that the cost flow assumption be consistent

with the physical movement of the goods.
FIRST-IN, FIRST-OUT (FIFO)
The FIFO (first-in, first-out) method assumes that the earliest goods purchased are the
first to be sold. FIFO often parallels the actual physical flow of merchandise; it generally
is good business practice to sell the oldest units first. Under the FIFO method,
therefore, the costs of the earliest goods purchased are the first to be recognized in
determining cost of goods sold. (This does not necessarily mean that the oldest
units are sold first, but that the costs of the oldest units are recognized first.)
AVERAGE-COST
The average-cost method allocates the cost of goods available for sale on the basis
of the weighted average unit cost incurred. The average-cost method assumes that
goods are similar in nature.
Formula for weighted average unit cost

Cost of Goods Available for Sale ÷ Total Units available for Sale = Weighted Average Unit Cost
Note that this method does not use the average of the unit costs. That average is
$11.50 ($10 + $11 + $12+ $13 = $46; $46 ÷ 4). The average cost method instead
uses the average weighted by the quantities purchased at each unit cost.
Under a periodic inventory system and FIFO Method
Cost of Goods Sold = Cost of Goods Available for Sale – Ending Inventory
Calculation - Cost of Ending Inventory
Date Units Unit Cost Total Cost

Dec. 27 600 12.50 Tk. 7,500
Dec. 20 400 13.00 5,200
Total 1,000 12,700 (Ans.)
Calculation - Cost of Goods Available for Sale
Date Explanation Unit Unit Cost Total Cost
Dec. 01 Beginning Inven 400 10.00 Tk. 4,000

Dec. 05 Purchase 1,000 11.00 11,000
Dec. 12 Purchase 800 12.00 9,600
Dec. 20 Purchase 1,500 13.00 19,500
Dec. 27 Purchase 600 12.50 7,500
Total 4,300 51,600
= 51,600 – 12,700
= 38,900 ( Ans.)
Under a periodic inventory system and Average Cost
Formula for weighted average unit cost

Cost of Goods Available for Sale ÷ Total Units available for Sale = Weighted Average Unit Cost
51,600 ÷ 4,300 = Tk. 12
Cost of Ending Inventory = 1000 Units x 12 = Tk. 12,000 (Ans.)
= 51,600 – 12,000
= 39,600 (Ans)
Under a perpetual inventory system and FIFO Method
Date Purchases Cost of Goods Sold Balance
Dec. 01 ----------- --------- 400 @ Tk. 10.00
Dec. 05 1000 @ Tk. 11.00 --------- 400 @ Tk. 10.00
1000 @ Tk. 11.00
Dec. 08 400 @ Tk. 10 7,300
300@ Tk. 11 700 @ Tk. 11.00
Dec. 12 800 @ Tk. 12.00 --------- 700 @ Tk. 11.00
800 @ Tk. 12.00
Dec. 16 --------- 700 @ Tk. 11.00 13,700
500 @ Tk. 12.00 300 @ Tk. 12.00
Dec. 20 1500 @ Tk. 13.00 --------- 300 @ Tk. 12.00
1500 @ Tk. 13.00
Dec. 27 600 @ Tk. 12.50 --------- 300 @ Tk. 12.00
1500 @ Tk. 13.00
600 @ Tk. 12.50
Dec. 28 --------- 300 @ Tk. 12.00 17,900 400 @ Tk. 13.00
1100 @ Tk. 13.00 600 @ Tk. 12.50
Ending Inventory : 400 @ Tk. 13.00 + 600 @ Tk. 12.50 = Tk. 12,700 (Ans)
Cost of Goods Sold : Tk. 7,300 + Tk. 13,700 + Tk. 17,900 = 38,900 (Ans)
Under a perpetual inventory system and Moving-Average Cost Method
Date Purchases Cost of Goods Balance

Sold
Dec. 01 ----------- --------- 400 @ Tk. 10.00 = Tk. 4,000
Dec. 05 1000 @ Tk. 11.00 --------- 1400 @ Tk. 10.714=Tk.15000
= Tk. 11,000
Dec. 08 700 @ Tk. 10.714=7500 700 @ Tk. 10.714 = Tk. 7500
Dec. 12 800 @ Tk. 12.00 --------- 1500 @ Tk. 11.40=Tk. 17100
= Tk. 9600
Dec. 16 --------- 1200 @Tk. 11.40= 13680 300 @ Tk. 11.40 = Tk. 3420
Dec. 20 1500 @ Tk. 13.00 --------- 1800 @ Tk. 12.733=Tk.22920
=Tk. 19,500
Dec. 27 600 @ Tk. 12.50 --------- 2400@ Tk. 12.675=Tk.30420
= Tk. 7,500
Dec. 28 --------- 1400@Tk. 12.675=17745 1000 @ Tk. 12.675= 12675
Ending Inventory : 1000 @ Tk. 12.675 = Tk. 12,675 (Ans)
Cost of Goods Sold : Tk. 7,500 + Tk. 13,680 + Tk. 17,745 = 38,925 (Ans)

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Periodic System : (Page-5.

Perpetual System: (Page-5.4)

Periodic Recording Perpetual Recording

Cost of Goods Sold (COGS)

Purchases—6,000 Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) Inventory- 14,000

1.Determine the cost of goods on hand at the

2. Add to it the cost of goods purchased.

3. Subtract the cost of goods on hand as

Cost Flow Assumptions

There is no accounting requirement that the cost flow assumption be consistent

Formula for weighted average unit cost

Calculation - Cost of Ending Inventory

Date Units Unit Cost Total Cost

Calculation - Cost of Goods Available for Sale

Date Explanation Unit Unit Cost Total Cost

Dec. 01 Beginning Inven 400 10.00 Tk. 4,000

Under a periodic inventory system and Average Cost

Formula for weighted average unit cost

Cost of Ending Inventory = 1000 Units x 12 = Tk. 12,000 (Ans.)

Date Purchases Cost of Goods Balance

Ending Inventory : 1000 @ Tk. 12.675 = Tk. 12,675 (Ans)

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