This gives a Weighted Average Cost per Unit. A physical count is then performed on the ending inventory to determine the amount of goods left. Finally, this amount is multiplied by Weighted Average Cost per Unit to give an estimate of ending inventory cost. Each business enterprise must choose between FIFO method or WAC method to record their business operation and transaction. Whereas we can not deny that many company almost use FIFO method compare with WAC method due to FIFO method show the transaction of business cleanly and easy to calculate. Cost s the original cost purchased price. Valuation in terms of money of effort, material, resources, time and utilities consumed, risks incurred, and opportunity forgone in production and delivery of a good or service. All expenses are costs, but not all costs (such as those incurred in acquisition of an income-generating asset) are expenses. Net Realizable Value The value of an asset that can be realized by a company or entity upon the sale of the asset, less a reasonable prediction of the costs associated with either the eventual sale or the disposal of the asset in question.
NRV is the expected market price less any cost to be incurred in getting the inventories for sale. In relation to inventory, net realizable value (NRV) is the estimated selling price in the ordinary course of business minus any cost to complete and to sell the goods. NRV is one of the amounts considered when determining the lower of cost or market for items in inventory and NRV also related with receivable accounts Lower of cost or market value
Inventory Valuation Essay Example
Conservative valuation rule of accounting which requires certain types of assets (such as inventory) to be valued either at their historical cost or at the current replacement cost whichever is less. Also called lower of cost and net realizable value, its application is mandated under the provisions of GAAP. An easy way to apply the lower of cost or market is to arrange the four relevant amounts (cost, replacement cost, NRV, and NRV minus normal profit) in descending order of amount. Perpetual method Perpetual method is also called continuous inventory method.
It is a method of inventory valuation for financial reporting purposes where a physical count of the inventory is performed at specific intervals. This accounting method for inventory valuation only keeps track of the inventory at the beginning of a period, the purchases made and the sales during the same period and is recorded under the asset section of the balance sheet. At the end of an accounting period, the ending-inventory is determined by an actual (physical) count of every item and its cost is computed by using a suitable method such as FIFO, weighted averages, etc.