Summary Financial Accounting: Inventory Cost Flow and LCNRV

Methods for inventory cost flow:

1. Specific Identification

- each item sold and each item remaining in the inventory is specifically identified.
- appropriate for inventories that are not ordinarily interchangeable or are segregated for
specific projects.

2. First-In, First-Out (FIFO)

- assumes the first units purchased are the first to be sold.
- ending inventory at most recent prices.
- cost if goods sold at old prices.
- can be used for both periodic and perpetual inventory system.

3. Weighted Average

- used to assign the average cost of production to a product.
- used for a periodic inventory system.
- Average unit cost = Amount of Cost of Goods Sold / Total units available for sale

4. Moving Average

- the average cost of each inventory item in stock is re-calculated after every inventory
purchase.
- used for a perpetual inventory system.

Lower of Cost and Net Realizable Value (LCNRV)

- present inventories in the Statement of Financial Position at the lower of its cost and net
realizable value.
- on an item-by-item basis.
- either Allowance Method or Direct Method.

Cost

1. Includes:
a. Purchase Price
b. Conversion Cost
c. Directly Attributable Cost
2. Excludes:
a. Abnormal Waste
b. Storage Cost (Unnecessary)
c. Finance Cost