Chapter 8
Inventory Valuation
245
In Summary
Determine the value of inventory using the specific identification method under the perpetual
inventory system
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The specific identification method tracks the cost of each item in inventory separately and is
used for unique or custom products such as vehicles and houses.
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A schedule is used to track the different costs of purchased inventory and the costs of
specific items sold.The value of inventory is made up of the costs of the actual physical items
remaining in inventory.
Determine the value of inventory using the first-in, first-out (FIFO) method under the
perpetual inventory system
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The FIFO method assumes that the first items purchased are also the first items sold, even
if this is not the actual flow of inventory. This method is used for many types of inventory,
especially perishable goods.
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A schedule is used to track the different costs of purchased inventory.The cost of goods sold
is calculated using the costs of the earliest purchased inventory. The value of inventory is
made up of the costs of the most recently purchased inventory.
Determine the value of inventory using the weighted-average cost method under the
perpetual inventory system
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The weighted-average cost uses an average unit cost to calculate the value of inventory and
the cost of goods sold. It is used when inventory items are identical and when the order in
which they are sold is irrelevant.
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A schedule is used to track the weighted-average cost of purchased inventory. The unit cost
is updated after every purchase and is calculated by dividing the total value of the inventory
by the total number of units on hand.The value of inventory is calculated using the unit cost
at the end of the period.
Explain the impact of inventory errors
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An overstatement of ending inventory results in an understatement of COGS and an
overstatement of net income.
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An understatement of ending inventory results in an overstatement of COGS and an
understatement of net income.
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