Accounting: Memo on Inventory Methods

Running Head: ACCOUNTING
ACCOUNTING
NAME OF STUDENT
NAME OF UNIVERSITY

2
ACCOUNTING
1. Memo on inventory methods
DATE 09/05/2019 Ref 10/1
From; Accountant Ltd.
To; Mr. & Mrs. Spottie
RE; BRIEF SUMMARY OF INVENTORY METHODS
The cost of sales is used to determine the gross profit of company during a period. However,
determining this cost is subject to interpretation as the stock sold and in hand must be valued
appropriately. The stock could have been acquired at different prices. Each purchase batch may have
incurred some costs which another similar batch in the same period did not incur. For example, one
bath may have a higher handling cost if it was delivered when there were some disruptions form
normal business.
We have two methods of tracking the quantity or stock of goods that are in stock, which are the
perpetual and periodic.
In perpetual method, there is a continuous update of the flow of stock in the company while the
periodic one requires that we do a physical count of what is in stock. The perpetual method requires a
lot of work in the form of continuously updating the records anytime a transaction is made.
For the periodic method one, physical stock state is done on a scheduled basis. The stock in hand is
then used to determine the cost of goods sold during the period. This is the most common method as it
is easier to perform periodic counts that perpetual stock counts (Bragg 2019).
The First in fist out (FIFO) inventory method of determining cost of sales where we assume the first
cost of goods purchased are those that are charged to the cost of sales when goods are sold (Valuing
Inventory | Boundless Accounting 2019). This is mainly used for fresh produce that may get spoilt
easily.
The weighted average method is used to determine the cost of ending inventory by using the weighted
average unit cost. This is mainly used for units which are the same.
Yours faithfully
Accountancy Ltd.

3
ACCOUNTING
1, ii Calculation of both FIFO and weighted average
1.ii FIFO
Date Purchased
toys
Purchase Price Sales (toys) Sales Price Cost of
sales
(sales *
purchase
price)
Balance of
toys
Purchase
price
03-Jan 400 6
06-Jan - 160,00 - 10,00 960,00 240,00 6
09-Jan 300 7 300,00 7
20-Jan - 200,00 - 10,00 1 200,00 40,00 6
22-Jan 150 7 450,00 7
25-Jan - 200,00 - 12,00 240,00
-
160,00
1 120,00 290
Balance
brought
forward 290,00 7
Cost of goods sold(total) 3 520,00
Journal entries for cost of sales
Date
Dr
Account Cr Account Amount Narration
31-
Jan Purchases 5 550,00
Being cost of
purchases
Inventory 2 030,00
Being cost of
ending inventory
Cost of sales
Purchases less
inventory 3 520,00
Control ok
1.ii Weighted Average method