Chapter six

In chapter six of ‘Fundamental Accounting Principles’, John Wild (2012) discusses the topic on inventories and cost of sales. In most cases, a company’s goods or services are sold by a consignee or a consignor. While the consignee receives the products from the company and sells them on its behalf, a consignor on the other hand is responsible for shipping goods to other parties who sell them on the company’s behalf. In both cases, the company often has to wait for a given period of time before getting cash for the goods delivered. Because of this, keeping a day’s sales in inventory is essential because it helps the company to evaluate the amount of cash it will receive after the goods in the inventory have been converted into cash and after what duration of time.

When it comes to keeping an inventory, various methods are used. The first in first out method sees to it that goods are sold in relation to the time in which they were acquired. Under this method the items that were purchased first are also the ones to be sold first. In the last in first out method, assigning cost to the inventory is done in the basis where the newest products to be purchased are the ones sold first and then charged to the cost of products that were sold. In most cases, when addressing the issue of inventories and cost sales, a company has to use the specific identification method which identifies the cost of purchase for every item and then computes it as the cost of the inventory during the assignment of the cost to inventory (Wild, 2012).

 

 

 

References

Wild J, (2012) “Fundamental accounting principles” McGraw Hill