How do you determine the cost of inventory? First, you decide on an inventory system, i.e., either periodic or perpetual. Once that decision is made, the next thing that you do is decide whether you want to use specific identification, or a cost flow assumption. If the decision is to use a cost flow assumption, then your choices are FIFO, LIFO or average. All of this was covered in Chapter 8.
In this chapter, we turn our attention to additional issues related to inventories. One of the issues deals with valuation. Lower-of-cost-or-market is the method used for inventory valuation. Another of the issues deals with estimation of inventory values. Both the gross profit method and the retail inventory methods can be used for inventory estimation. Finally, what happens if a company wants to change inventory methods or cost flow assumptions or if an error occurs in one or more of the accounts related to inventory?
These are the areas of focus in Chapter 9. For more information, go here.