Question

Answer the following questions:

1. What is the average cost method and how do you use it?

2. What is the gross profit method and how do you use it?

3. What is the Inventory Turnover ratio and how do you calculate it? Provide examples.
4. How do you calculate the Inventory Turnover at cost and at retail? What is the difference?
5. (LIFO) costing method: What is it? When do I use it?
6. What is a perpetual inventory and a physical one? How do you manage to have both?

Answer 1

1.AVERAGE COST METHOD::-Average cost method, also called weighted average, is a way of assigning costs to inventory when it is sold.

A few organizations utilize the normal technique rather than other valuation strategies like FIFO or LIFO in light of the fact that the weighted normal strategy limits the radical impacts of relegating costs dependent on the buy date.

this method can also be used in both perpetual inventory system and periodic inventory system.

2.GROSS PROFIT METHOD::-

The gross profit method estimates the amount of ending inventory in a reporting period

The gross benefit strategy is an approach to gauge the expense of closure stock amid a period without completing a physical stock check. Toward the finish of each bookkeeping period a stock tally ought to be taken to precisely compute the expense of the stock that was sold alongside the measure of stock that is left over toward the finish of a period.

The gross benefit strategy utilizes your organization's present overall revenue. In the event that your organization works with an overall revenue of 25 percent on deals, for instance, it implies that for each $1 in deals, 75 pennies goes toward creating or acquiring the things you offer and 25 pennies is gross benefit. To decide your present edge, you should analyze your ongoing deals and expenses to decide precisely how much benefit you're making. The retail stock technique utilizes markup - the particular sum your organization adds to the discount cost of merchandise when estimating them for retail. In the event that you increase merchandise 25 percent, for instance, at that point a thing you purchase discount for $80 would offer for $100 - that is, $80 in addition to a 25 percent markup, or, in other words

3)INVENTORY TURNOVER RATIO::-

It is an activity ratio and is a tool to evaluate the liquidity of company’s inventory. It measures how many times a company has sold and replaced its inventory during a certain period of time.

inventory turnover ratio=sales/inventory

example::

or on the other hand the financial year finished Jan. 2017, Wal-Mart Stores (WMT) announced yearly offers of $485.14 billion, year-end stock of $43.04 billion, and a yearly expense of products sold (or cost of offers) of $361.25 billion.

Walmart's stock turnover for the year measures up to:

$361.25 billion ÷ $43.04 billion = 8.39

Its days stock equivalent:

(1 ÷ 8.39) x 365 = 43 days

This demonstrates Walmart offers its whole stock inside a 43-day time span, or, in other words for such an extensive, worldwide retailer

5)LIFO COSTING METHOD::-

This method assumes that inventory purchased last is sold first. Therefore, inventory cost under LIFO method will be the cost of earliest purchases

The LIFO stock technique expect that the latest buys are sold first. For instance, suppose you possess an office supply store and you get a request of 200 note pads each week. In all likelihood, when you get a shipment, you will put them on the rack before the current items

6)perpetual inventory system::

Unending stock frameworks cover nonstop admission of stock and forward budgetary records. It causes you monitor approaching and active materials, work-in-advance and the everyday offers of products. Check deals and stock records against one another regularly for exactness.

Never-ending stock frameworks are basic in numerous cutting edge organizations. They are regularly found in extensive organizations, organizations with different areas, or organizations that convey costly items, for example, a gem dealer or hardware store. While blunders in stock happen because of misfortune, breakage, burglary, inappropriate stock following, or checking mistakes, there are numerous points of interest to utilizing an interminable stock framework

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