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Inventory Costing Methods Explained

1. The document defines key vocabulary terms related to inventory systems, including periodic inventory, perpetual inventory, inventory record, stock record, stock ledger, FIFO, LIFO, and weighted average costing methods. 2. It also lists audit questions about inventory systems, including why businesses need effective inventory systems, issues with excess inventory, when periodic inventories are typically taken, and differences between FIFO, LIFO, and weighted average costing methods. 3. The final section discusses using the gross profit method to estimate ending inventory and the data needed to calculate cost of merchandise available for sale and cost of merchandise sold.

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Nathan Hogg
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25 views2 pages

Inventory Costing Methods Explained

1. The document defines key vocabulary terms related to inventory systems, including periodic inventory, perpetual inventory, inventory record, stock record, stock ledger, FIFO, LIFO, and weighted average costing methods. 2. It also lists audit questions about inventory systems, including why businesses need effective inventory systems, issues with excess inventory, when periodic inventories are typically taken, and differences between FIFO, LIFO, and weighted average costing methods. 3. The final section discusses using the gross profit method to estimate ending inventory and the data needed to calculate cost of merchandise available for sale and cost of merchandise sold.

Uploaded by

Nathan Hogg
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Nathan Hogg

November 25, 2019


Accounting 2
1st Period
Chapter 19

Vocabulary

1. Periodic inventory - A merchandise inventory determined by counting, weighing, or measuring


items of merchandise on hand
2. Perpetual inventory - A merchandise inventory determined by keeping a continuous record of
increases, decreases, and balance on hand
3. Inventory record - A form used during a periodic inventory to record information about each
item of merchandise on hand
4. Stock record - A form used to show the kind of merchandise, quantity received, quantity sold,
and balance on hand
5. Stock ledger - A file of stock records for all merchandise on hand
6. First-in, first-out inventory costing method - Using the price of merchandise purchased first to
calculate the cost of merchandise sold first
7. Last-in, first out inventory costing method - Using the price of merchandise purchased last to
calculate the cost of merchandise sold first
8. Weighted-average inventory costing method - Using the average cost of beginning inventory
plus merchandise purchased during a fiscal period to calculate the cost of merchandise sold
9. Gross profit method of estimating inventory - Estimating inventory by using the previous
year’s percentage of gross profit on operations

Audit Questions
19.1
1. Successful businesses need an effective inventory system because they must have
merchandise available for sale that customers want.
2. A merchandise inventory that is larger than needed may decrease the net income of a
business because excess inventory requires money spent for expensive store and warehouse
space, uses capital that could be invested in other assets to earn a profit for the business,
requires that a business spend money for expenses (such as taxes and insurance premiums),
or that excess inventory may become obsolete and unsalable.
3. Periodic inventories are normally taken at the end of a fiscal period.
4. Low inventory levels are usually the time businesses select as the end of the fiscal year
because it takes less time to count a smaller inventory.
5. The accuracy of a perpetual inventory is checked by comparing the records to the actual
quantity on hand as determined by the periodic inventory.

19.2
1. When the fifo method is used, the cost of each kind of ending merchandise inventory is
determined by using the earliest invoices for purchases.
2. The lifo method is based on the idea that the most recent costs of merchandise should be
charged against current revenue.
3. The lifo method gives the highest cost of merchandise sold.
4. A business should select one inventory costing method and use that same method
continuously for each fiscal period to provide financial statements that can be analyzed and
compared with statements of other fiscal periods.

19.3
1. Ending merchandise can be determined accurately by using the gross profit method of
estimating inventory.
2. The cost of merchandise available for sale and cost of merchandise sold amounts are
needed to estimate ending merchandise inventory.
3. The previous month’s ending inventory amount is used for beginning inventory for a month
that is not the first month of a fiscal period.

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