Basic Issues in Inventory Valuation:
Goods sold or used during an accounting period seldom correspond exactly to the goods bought or produced during that period, the physical inventory either increases or decreases. The cost of all the goods available for sale or use should be allocated between the goods that were sold or used and those that are still on hand. The cost of goods available for sale or use is the sum of the cost of the goods in the hand at the beginning of the period and the cost of the goods acquired or produced during the period. The cost of goods sold is the difference between the cost of goods available for sale during the period and the cost of goods on hand at the end of the period. Example: Computation of Cost of Goods Sold Beginning inventory. Jan1. $100,000 Cost of goods acquired or produced during the year 800,000 ------------------ Total cost of goods available for sale 9,00,000 Ending inventory, Dec. 31 2,00,000 ----------------------- Cost of goods sold during the year $700,000 ------------------------ The valuation of inventories can be a complex process that requires determination of the following:
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