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Chapter 10: Inventory

Chapter Introduction​

Marie has been managing her restaurant's inventory—food ingredients, wine, and retail items. "I know I need to track what I have," she tells Monsieur Schneider, "but I'm buying the same items at different prices throughout the month. When I sell something, how do I know which cost to use? Do I use the price I paid first, or the price I paid most recently?"

Monsieur Schneider explains that this is a fundamental question in inventory accounting. "You need to choose a cost flow assumption—a method for determining which inventory costs are assigned to goods sold and which remain in inventory. In Luxembourg, you can use FIFO, weighted average, or specific identification, but you must be consistent."

Inventory is one of the most significant assets for merchandising businesses. Proper inventory accounting is essential because:

  • Inventory affects cost of goods sold
  • Inventory valuation affects profitability
  • Inventory management affects cash flow
  • Inventory errors affect financial statements
  • PCN has specific requirements for inventory (Class 3)

This chapter teaches you about inventory valuation methods, cost flow assumptions, and how to calculate cost of goods sold and ending inventory using both periodic and perpetual systems. You'll learn about the impact of inventory errors, how to measure inventory efficiency, and Luxembourg-specific requirements including FIFO and weighted average methods, and PCN Class 3 account classifications.

By the end of this chapter, you'll understand how to properly value inventory, calculate cost of goods sold, and manage inventory effectively—just like Marie will learn to do for her restaurant's inventory.

Why It Matters​

Inventory is a critical asset for merchandising businesses. How inventory is valued directly affects:

  • Cost of goods sold
  • Gross profit
  • Net income
  • Balance sheet assets
  • Taxable income

Why Inventory Accounting Matters:

  • Profitability: Inventory valuation affects gross profit and net income
  • Financial Statements: Inventory is a major asset and must be accurately valued
  • Tax Compliance: Inventory valuation affects taxable income
  • Business Decisions: Inventory management affects purchasing, pricing, and cash flow
  • Compliance: Must follow accounting standards and Luxembourg regulations

Luxembourg-Specific Importance:

  • Many SMEs have significant inventory
  • PCN requires proper classification (Class 3)
  • Must use consistent valuation methods
  • VAT must be handled correctly
  • Must support inventory values with documentation

Understanding inventory accounting helps you:

  • Choose appropriate valuation methods
  • Calculate accurate cost of goods sold
  • Value inventory correctly
  • Manage inventory efficiently
  • Comply with Luxembourg regulations

Learning Objectives​

By the end of this chapter, you should be able to:

  1. Describe and demonstrate the basic inventory valuation methods and their cost flow assumptions
  2. Calculate the cost of goods sold and ending inventory using the periodic method
  3. Calculate the cost of goods sold and ending inventory using the perpetual method
  4. Explain and demonstrate the impact of inventory valuation errors on the income statement and balance sheet
  5. Examine the efficiency of inventory management using financial ratios
  6. Understand Luxembourg inventory valuation methods (FIFO, weighted average)
  7. Explain Luxembourg PCN Class 3 inventory accounts