Skip to main content

Chapter Summary

Section 10.1: Basic Inventory Valuation Methods​

  • Three methods: FIFO, Weighted Average, Specific Identification
  • FIFO: First items purchased are first sold
  • Weighted Average: All units have same average cost
  • Specific Identification: Track each item individually
  • LIFO not allowed in Luxembourg
  • Must use consistent method

Section 10.2: Periodic Method​

  • Inventory updated only at period end
  • COGS = Beginning + Purchases - Ending
  • Ending inventory from physical count
  • Cost assigned using FIFO or weighted average
  • Adjusting entries transfer to COGS

Section 10.3: Perpetual Method​

  • Inventory updated continuously
  • COGS recorded at each sale
  • Cost assigned using FIFO or weighted average
  • Always know current inventory
  • Better inventory control

Section 10.4: Impact of Inventory Errors​

  • Overstated ending inventory: Understated COGS, Overstated net income
  • Understated ending inventory: Overstated COGS, Understated net income
  • Errors self-correct over two periods
  • Each period's statements still incorrect

Section 10.5: Inventory Management Ratios​

  • Inventory Turnover = COGS ÷ Average Inventory
  • Days Sales in Inventory = 365 ÷ Turnover
  • Higher turnover = better
  • Lower days = better
  • Varies by industry

Section 10.6: Luxembourg Valuation Methods​

  • FIFO and weighted average allowed
  • LIFO not allowed
  • Must be consistent
  • Must be disclosed
  • Must comply with PCN

Section 10.7: Luxembourg PCN Class 3​

  • 300000: Raw Materials
  • 310000: Work in Progress
  • 320000: Finished Goods
  • 321000: Merchandise
  • 602000: Cost of Goods Sold
  • Must be properly classified