Financial Accounting

(PGDM- 2015-16)

Session -13: Accounting for Inventory

Sriranga Vishnu
Faculty (F&A Area)

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 workin-progress kind of inventory. No finished
goods inventories
Supplies Supplies are tangibles that are
used up in normal course of operations

Inventory AccountingMerchandising 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 AccountingManufacturing 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