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If white paper and coloured paper are considered a similar group, the calculations in Figure 6.4.1 above show they have a combined cost of $2,650 and a combined net realizable value of $2,700. The purpose of the adjusting entry is to ensure that inventory is not overstated on the balance sheet and that income is not overstated on the income statement. Extending the above example, we get (365 days / 10 times) 36.5 days in inventory to transform the inventory into. All we need to do is divide the number of days in a year by the inventory turnover ratio.
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To adjust inventory to reflect its LCNRV. If we consider that there are 365 days a year, we can see the days it takes for the firm to transform inventories into finished stocks. Because the LCNRV is lower than cost, an adjusting entry must be recorded as follows. Under the unit basis, the lower of cost and net realizable value is selected for each item: $1,200 for white paper and $1,400 for coloured paper, for a total LCNRV of $2,600. Each accounting cycle starts with an amount for the beginning work in process. The net purchases are the items you’ve bought and added to your inventory count. The ending Inventory formula calculates the value of goods available for sale at the end of the accounting period. Your beginning inventory is the last period’s ending inventory. The basic formula for calculating ending inventory is easy: Beginning Inventory + Net Purchases COGS Ending Inventory.
#Ending inventory formula how to
\( \newcommand\): LCNRV Calculationsĭepending on the calculation used, the valuation of ending inventory will be either $2,600 or $2,650. How to calculate ending inventory using the ending inventory formula.