The company has choose the moving average method of inventory policy because it computes the weighted average cost after each purchase. Is more current than the weighted average.  A perpetual inventory system is necessary to use the moving weighted average. Inventory valuation is dependent on the cost flow assumption underlying the computation. The different classes of inventory methods are as follow:

  • Moving average method (explain before)
  • Specific Identification Method - the cost of each item in inventory is uniquely identified to that item. The cost follows the physical flow of the item in and out of inventory to cost of good sold. Is usually used for physically large or high volume items and allows for greater opportunity for manipulation of income.
  • FIFO (First in first out) Method - the first cost inventoried are the first cost transferred to cost of good sold. Ending inventory includes the most recently incurred cost; thus, the ending balance approximates replacement cost. Ending inventory and cost of good sold are the same whether a periodic or perpetual inventory system is used. In periods of rising prices, income may be overstated because the FIFO method results in the highest ending inventory, the lowest cost of good sold, and the highest income (ex. current cost are not matched with current revenues)
  • Weighted Average Method – at the end of the period, the average cost of each item in inventory would be the weighted average of the costs of all items in inventory. It is determined by dividing the total costs of inventory available by the total number of units of inventory available, remembering that the beginning inventory is included in both totals. This method id particularly suitable for homogeneous products and a periodic inventory system.
  • LIFO (Last in first out) – the last costs inventoried are the first costs transferred to cost of good sold. Ending inventory, thus, includes the oldest costs. The ending balance of inventory will typically not approximate replacement cost. LIFO does not generally relate to actual flow of goods in a company because most companies sell or use their oldest goods first to prevent holding old or obsolete items. If LIFO is used for tax purposes, it must also be used in the GAAP financial statements.

The capitalized items (Fixed assets)  in a company have three characteristics: Fixed assets are acquired for use in operations and not for resale, they are long term in nature and subject to depreciation, they possess physical substance. There are classification of fixed assets and should be shown separately on the balance sheet at original cost (historical cost).  

  1. Land (Property)
  2. Building (Plant)
  3. Equipment (Machinery, tools, furniture & fixtures)

Cost of Land: Land cost are NOT DEPRECIATED ASSETS. But land improvements are depreciable such as: Fences, water system, sidewalks, paving, landscaping, and lighting. 

Cost of Buildings: The cost of building includes: Purchase price, all repairs charges neglected by previous owner, alteration and improvements, architect’s fees.

Cost of Equipment: Includes price, transportation cost, installation, taxes and interest during construction. Improvements (betterments) improve the quality of fixed assets and are charge to cost of fixed asset account. Additions improve the quantity of fixed assets and are charge to cost of fixed asset account. Repairs are expenses but the one’s that improve the efficiency or extend the life of the fixed asset are capitalized.