BUSI 1101 Lecture Notes - Lecture 2: Inventory Turnover, Perpetual Inventory, Retained Earnings
3 Mar 2018
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Document Summary
Used when physical flow of inventory cannot specifically be measured. Under a perpetual inventory system, a new weighted (called moving) average is calculated after each purchase: used to record cost of goods sold and ending inventory. Choose a formula that best: represents as closely as possible physical flow of goods, reports ending inventory at recent cost. Use the same formula for inventories or similar nature and usage. Errors can occur in accounting for inventory: quantity or costs assigned to inventory are incorrect, errors made when recording goods in transit at the end of the accounting period. Errors affect both: statement of financial position, through merchandise inventory, income statement, through cost of goods sold. An error in ending inventory of the current period will have a reverse effect on net income in the next accounting period. An error in ending inventory affects retained earnings of the same period: but not the next period, as the error reverses.
