INVENTORY

A company's inventory is all of its merchandise intended for sale to its customers in the normal course of business. Inventories are considered current assets in that they usually are sold within a year or within a company's operating cycle. Proper inventory accounting enables companies to represent their net income accurately. These are the types of inventories
·         Raw material
·         Work-in-process
·         Finished goods

Cost of goods sold

A starting point for inventory accounting is determining the cost of merchandise that has been sold within a given accounting period, which is referred to as the "cost of goods sold." The cost of goods sold is the net acquisition cost of merchandise obtained and sold to customers during an operating period and is calculated by adding the value of the beginning inventory, the cost of new inventory items, and transportation costs, and then by subtracting the ending inventory amount
Example

Beginning Inventory$20,000
Add Net Cost of Purchases$62,000
Add Transportation1,00063,000$83,000
Less:Ending Inventory18,000
Cost of Goods Sold$65,000

Methods to determine the value of inventory
LIFO METHOD.
Under LIFO, it is assumed that the most recent purchase is always sold first. Therefore, the inventory that remains is always the oldest inventory

FIFO METHOD.


Under FIFO, it is assumed that the oldest inventory—i.e., the inventory first purchased—is always sold first. Therefore, the inventory that remains is from the most recent purchases.

WEIGHTED AVERAGE METHOD.

Under the Weighted Average Method, a company would determine the weighted average cost of the inventory.

Effects of these methods
LIFO
LIFO Method is preferred by many companies because it has the effect of reducing a company's taxes, thus increasing cash flow. it gives net profit low and cost of goods sold higher.

FIFO
LIFO Method is preferred by many companies because it has the effect of increasing a company's taxes, thus decreasing cash flow. it gives net profit high and cost of goods sold low.
AVERAGE COST
It has normal effect on assets and income.
EXAMPLE
Differences in Gross Profit on Sales
for Each Pricing Method
Specific Identification
Avg.
FIFO
LIFO
Sales250/$15
$3,750
$3,750
$3,750
$3,750
Beginning Inventory 500 500
500
500
500
500
Purchases 3,150 3,150
3,150
3,150
3,150
3,150
Goods for Sale*
3,650 3,650
3,650
3,650
3,650
Ending Inv. 837.50 840
837.50
840
860
820
Cost of Goods 2,812.50 2,810
2,812.50
2,810
2,790
2,830
Gross Profit
$ 937.50
$ 940
$ 960
$ 920
* Goods available for sale include the beginning inventory aswell as additional purchases within the accounting period.