ACA1 – Task 4
There are several methods that a company can use to calculate the value of the goods in inventory. By reporting and analyzing such information, a company can help to predict financial performance and the best plan to achieve results. Such inventory valuation methods include: Average Cost Method; FIFO; and LIFO.
The inventory valuation methods use two different inventory systems – perpetual and periodic. The perpetual inventory system is used when a company reports the cost of goods sold as those goods are sold throughout the accounting period. The periodic inventory system is used when a company reports the cost of goods sold as a residual at the end of the accounting period.
Average Cost
Average Cost method is defined as “an inventory plan that prices items in the inventory on the basis of the average cost of all similar goods available during the accounting period.”
The benefits of Average Cost include:
· Simple to calculate and analyze results
· Not subject to income manipulation
· Useful when dealing with similar inventory items
Average Cost method will result in the gross profit and net income in the middle of the FIFO method and LIFO method results.
In cases where the Average Cost method is used, the inventory valuation and cost of goods sold will be have different results if the perpetual or periodic inventory system is used.
The “Inventory Template” computed the value of the Periodic Average Cost. The value of the inventory using the Periodic Average Cost method is $48,645.29. The Ending Inventory Purchases Cost Total ($631,037.50) is subtracted by the Ending Inventory Sales Cost Total ($582,392.21).
FIFO
FIFO method is First In, First Out. FIFO is defined as “an inventory plan that assumes that items purchased first will be sold first and that by valuing inventory items at the price of the most recent purchases, inventory