Introduction

Accounting for inventory is a critical function of management. Inventory accounting is significantly complicated by the fact that it is an ongoing process of constant change, in part because (1) most businesses offer a large variety of products for sale, (2) product purchases occur at irregular times, (3) products are acquired for differing prices, and (4) inventory acquisitions are based on sales projections, which are always uncertain and often sporadic. This chapter examines inventory accounting, focusing on how businesses record their inventory and how they determine the cost of the inventory that is sold (cost of goods sold). It also analyses the effects of inventory errors and examines how inventory can be estimated if required.

Chapter outline

After reading this chapter, you should be able to:

1. Describe inventory and how it is recorded, expensed, and reported
2. Calculate the cost of goods sold using the perpetual and periodic inventory recording systems
3. Analyse the effects of inventory errors
4. Demonstrate how inventory is estimated