Text 9 Mechandise Inventory

　　Account for inventory by the perpetual and periodic systems. Accounting for inventory plays an important part in merchandisers' accounting systems because selling inventory is the heart of their business. Inventory is generally the largest current asset on their balance sheet， and inventory expense——called cost of goods sold——is usually the largest expense on the income statement.

　　Merchandisers with high-price-tag items generally use the perpetual inventory system， which features a running inventory balance. In the past， most merchandisers handling low-price-tag items used the periodic system. Recent advances in information technology have led to replacement of periodic inventory systems with perpetual systems. A physical count of inventory is needed in both systems for control purposes.

　　Apply four inventory costing methods： specific unit cost， weighted-average cost， FIFO， and LIFO. Businesses multiply the quantity of inventory items by their unit cost to determine inventory cost. Inventory costing methods are specific unit cost ； weighted-average cost ； first-in， first-out （FIFO） cost ； and last-in， first-out （LIFO） cost. Only businesses that sell unique items， such as automobiles and jewels， use the specific identification method. Most other companies use the other methods. FIFO reports ending inventory at the most current cost. LIFO reports cost of goods sold at the most current cost.

　　Distinguish between the income effects and the tax effects of the inventory costing methods. When inventory costs increase， LIFO produces the highest cost of goods sold and the lowest income， thus minimizing income taxes. FIFO results in the highest income. The weighted-average cost method avoids the extremes of FIFO and LIFO.

　　Convert a company's net income from the LIFO basis to the FIFO basis. Companies that use LIFO also disclose FIFO inventory amounts that can be used to convert the company's income to the FIFO basis. LIFO liquidation creates a problem because it increases income taxes.

　　Prepare a perpetual inventory record. Some companies combine elements of the perpetual and periodic inventory systems at FIFO cost.

　　Some companies keep perpetual inventory records at weighted-average cost， but few keep such records at LIFO cost.

　　Apply to inventory the lower-of-cost-or-market rule. The consistency principle demands that a business stick with the inventory method it chooses. If a change in inventory method is warranted， the company must report the effect of the change on income. The lower-of-cost-or-market rule-an example of accounting conservatism——requires that businesses report inventory on the balance sheet at the lower of its cost or current replacement value.

　　Compute the effects of inventory errors on the cost of goods sold and on net income. Although inventory overstatements may be counterbalanced by inventory understatements in an adjacent period， effective decision making is aided by accurate inventory information.

　　Estimate inventory by the gross margin method. The gross margin method is a technique for estimating the cost of inventory. It comes in handy for preparing interim financial statements and for estimating the cost of inventory destroyed by fire or other casualties.

　　New Words

　　perpetual inventory system n. 永续盘存制

　　periodical inventory system n. 定期盘存制

　　merchandiser n. 交易者，买卖者

　　income statement n. 收益表，利润表

　　tag n. 标签

　　feature vt. 是……的特色，以……为特色

　　running inventory n. 永续盘存

　　replacement n. 取代

　　count n. 计算

　　specific adj. 具体的，明确的

　　weighted average cost n. 加权平均的成本

　　FIFO（first-in， first out ）n. 先进先出法

　　LIFO（last-in， first out）n. 后进先出法

　　unique adj. 唯一的，独一无二的

　　automobile n. 汽车，机动车

　　identification n. 识别，鉴定