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Summary

  • Objectives of inventory valuation are determination of income & ascertainment of financial position
  • Inventories should be generally valued at cost or net realizable value, whichever is less
  • Periodic inventory system & perpetual inventory system are two principle systems of determining the physical quantities and monetary value of inventories sold and in hand
  • Specific identification method is usually used for physically large or high value items
  • When FIFO is used, in periods of falling prices, lower income is reported since old costs (which are higher than the current costs) are matched with current revenue
  • When LIFO is used, in periods of rising prices, lower income is reported since current costs (which are higher than the old costs) are matched with current revenues
  • Average price method averages out the effect of price fluctuations
  • Adjusted selling price method is also called as "retail inventory method” and is widely used in the retail business sector in which individual costs of all the items are not readily available




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