ACCTG102 · Accounting Concepts
Reporting & Analysing Inventory: Cost-Flow Methods
Week 5 of ACCTG 102 Accounting Concepts at the University of Auckland asks the question recording alone cannot answer: when identical units were bought at different prices, which cost goes to cost of sales and which stays in ending inventory? This chapter works the periodic cost-of-sales chain, FIFO and weighted-average cost flows (periodic and perpetual moving average), their financial-statement effects, inventory errors and the lower-of-cost-and-NRV rule, then closes with inventory turnover, days in inventory and the merchandiser's closing entries. It completes the Chapters 1–5 syllabus of the 20% mid-semester Inspera test — where an inventory cost-flow computation closed the S1 2026 paper.
What this chapter covers
- 01The periodic system: Purchases, Purchase returns & allowances and Freight-in as temporary accounts, with cost of sales computed from the stocktake
- 02The cost-of-sales chain: beginning inventory + cost of goods purchased = cost of goods available for sale − ending inventory = cost of sales
- 03Stocktake ownership rules: FOB shipping point vs FOB destination goods in transit, and consigned goods excluded from the holder's count
- 04FIFO and weighted average (periodic): earliest costs to cost of sales vs one blended unit cost — LIFO for contrast only, not permitted in NZ/Australia under NZ IAS 2 / AASB 102
- 05Perpetual application: FIFO matches its periodic result, but the average becomes a moving weighted average re-computed after every purchase
- 06Financial-statement effects of the method choice under rising vs falling prices, and the consistency principle
- 07Lower of cost and net realisable value (LCNRV): NRV = estimated proceeds of sale − costs of completion and selling; write down, never up
- 08Inventory errors: how a miscount flows through cost of sales to profit and equity, and why it counterbalances over two periods
- 09Inventory turnover (cost of sales ÷ average inventory) and days in inventory (365 ÷ turnover)
- 10Closing entries for a merchandiser: Sales returns & allowances and Cost of sales join the Profit or loss summary routine; dividends close directly to Retained earnings
FIFO vs weighted average, periodic — Kauri Trail Supplies Ltd
- +1Build the pool first. Units available = 120 + 200 + 80 = 400; cost of goods available for sale = 960 + 1,800 + 760 = $3,520; units sold = 400 − 150 on hand = 250.
- +1FIFO ending inventory = the latest costs: 80 × $9.50 + 70 × $9.00 = 760 + 630 = $1,390.
- +1FIFO cost of sales = 3,520 − 1,390 = $2,130. Cross-check from the earliest costs: 120 × $8.00 + 130 × $9.00 = 960 + 1,170 = 2,130 ✓.
- +1Weighted-average unit cost = cost of goods available ÷ units available = 3,520 ÷ 400 = $8.80.
- +1WAC ending inventory = 150 × 8.80 = $1,320; WAC cost of sales = 250 × 8.80 = $2,200 (add-back check: 1,320 + 2,200 = 3,520 ✓).
- +1Gross profit: sales revenue = 250 × $16 = $4,000, so FIFO gives 4,000 − 2,130 = $1,870 and weighted average gives 4,000 − 2,200 = $1,800 — FIFO shows the higher profit because purchase costs were rising.
Key terms
- Cost of goods available for sale
- Beginning inventory plus cost of goods purchased — the one pool of dollars that every cost-flow method splits between cost of sales and ending inventory.
- FIFO (first-in, first-out)
- The cost-flow assumption that sends the earliest costs to cost of sales and leaves the latest costs in ending inventory; under a perpetual system it gives the same result as periodic FIFO.
- Weighted-average cost (WAC)
- Periodic: one blended unit cost = cost of goods available for sale ÷ units available. Perpetual: a moving average, re-computed after every purchase and applied to the next sale.
- LIFO (last-in, first-out)
- The contrast method — latest costs to cost of sales. Taught so you can compare statement effects, but not permitted in NZ or Australia for accounting or tax under the inventories standard (NZ IAS 2 / AASB 102).
- Lower of cost and NRV (LCNRV)
- Inventory is written down when net realisable value (estimated proceeds of sale minus costs of completion and selling) falls below cost, in the period of the decline — and is never written up above cost.
- Inventory turnover
- Cost of sales ÷ average inventory, where average inventory = (beginning + ending) ÷ 2. Days in inventory = 365 ÷ turnover; higher turnover and fewer days are generally preferred.
- Counterbalancing error
- An uncorrected ending-inventory error that reverses in the next period (this year's ending inventory is next year's beginning inventory), so two-year combined profit is correct even though each year's statements are wrong.
- Profit or loss summary
- The temporary account used in closing entries: revenues and expenses (including Cost of sales and Sales returns & allowances for a merchandiser) close into it, and its balance — the profit — closes to Retained earnings.
Reporting & Analysing Inventory: Cost-Flow Methods FAQ
How is this chapter examined in ACCTG 102?
It closes the Chapters 1–5 syllabus of the mid-semester test (20%, 50 marks, 90 minutes on Inspera, open book with your own notes but no AI tools, and no formula sheet). In the S1 2026 sitting the test finished with a ~9-mark cost-flow question asking FIFO on a periodic basis and then weighted average on a perpetual basis from one data set. The 2-hour final exam is comprehensive, so cost flows stay fair game there too — confirm the current semester's assessment details on Canvas.
What is the difference between the periodic and moving weighted average?
Periodic computes one blended unit cost for the whole period (cost of goods available ÷ units available) and applies it once at period end. The perpetual moving average re-computes the unit cost after every purchase — never after a sale, which changes units but not the unit cost — and applies the current average to each sale's cost of sales. Carry unit costs to two decimal places in your workings.
Can AI help me with inventory cost-flow methods in ACCTG 102?
Yes — used the right way. Sia can explain FIFO and weighted-average logic step by step, walk a moving-average schedule with you purchase by purchase, and quiz you on statement effects and error directions until they stick. It teaches the method rather than doing graded work for you: the mid-semester test explicitly prohibits AI tools during the sitting, so the value is in arriving with the method already automatic.
Exam move
Train the pool discipline until it is automatic: for any data set, first build the goods-available-for-sale table (units and dollars), because every method answer reads off it and the add-back check (ending inventory + cost of sales = the pool) catches slips instantly. Then drill the two examinable methods against each other on the same numbers — FIFO periodic, then moving weighted average with the running schedule, re-averaging after each purchase and carrying unit costs to two decimals. Rebuild the error tables from COS = beginning inventory + purchases − ending inventory instead of memorising cells, and memorise the two ratios exactly (cost of sales ÷ average inventory; 365 ÷ turnover) because no formula sheet is provided in the test. At the test's ~1.8 minutes per mark, a 9-mark cost-flow question deserves about 16 minutes — spend the first two of them on the goods-available reconciliation and label every working, since marks are awarded for workings.
Working through Reporting & Analysing Inventory: Cost-Flow Methods in ACCTG 102? Sia is AskSia’s AI Accounting tutor — ask any ACCTG 102 Reporting & Analysing Inventory: Cost-Flow Methods question and get a clear, step-by-step explanation grounded in how ACCTG 102 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
