Inventories and Work in Progress
Inventories can be a significant investment and asset for more entities. There is an opportunity cost between the expense of holding an excessive inventory and the prospect of lost sales when an inventory is not available.
Raw materials are the inputs in a productive process whilst work in progress are incomplete goods. Finished good are ready for immediate sale.
Raw Materials -> Work in Progress -> Finished Goods -> Sales
A periodic inventory method requires counting goods to determine ending inventory, thus by subtracting end inventory by start inventory plus puchases it is possible to calculate cost of goods solds. A perpetual inventory records changes to inventory levels and COGS after every sale.
Cost of Goods Sold = Opening Inventory + Purchases - Ending Inventory
The opening and closing inventory levels are vital in determining the cost of good sold. They have a dual ole; in the balance sheet in determining wealth and, through the cost of goods sold, in determing profit.
Australian standards require that inventory is valued at the lower of cost and net realisible value. Not-for-profits where inventory is held at no cost may measure at the lower of cost and current replacement cost.
First-in First Out (FIFO) assigns costs that occurred earlier to goods sold, whereas Last-in First Out (LIFO) assigns cost tyat have occured later in the period. Weighted average applies the average prices. Australian standards allow either weighted averrage or FIFO to assign costs to an inventory. In times of rising prices FIFO will generally be higher than profits determined by the weighted average.