Technical support memos


March 28, 1999
Inventory valuation method used in Advanced Accouting
Advanced Accounting (all)
Anthony J. Frates (Copyright 1999 Addsum Business Software, Inc.)

Advanced Accounting uses a perpetual inventory system in connection with goods for which unit counts are maintained. Adjustments to inventory are recorded directly to inventory as goods are sold or purchased. "Purchase" accounts are therefore not used normally because inventory is "debited" directly for purchases and cost of goods sold accounts are used to reflect inventory sales. (It is possible however to set-up non-asset inventory or "off balance sheet" purchase type accounts that serve as a funnel for the processing of inventory accounts for use in a modified perpetual inventory system approach.)

Valuation is accomplished in Advanced Accounting using the "moving" (since it is a perpetual inventory system) average cost method. A new average unit cost is computed each time a purchase, sale or adjustment is made to inventoriable items.

The average cost method is appealing because of its simplicity and objectivity since it is not as easy to manipulate as some other inventory valuation methods. It is also the method of choice when a specific flow of inventory cannot always be determined or when the inventory involved is relatively homogeneous in nature.

Moving average cost will approximate the FIFO (first in first out) method of inventory valuation when inventory turnover is high and intervals between purchase and sale are of relatively short duration. If turnover is less frequent, elements of older costs may be carried forward however in an averaging costing approach.

Included in Advanced Accounting is the ability to "build" a finished item from a pre-defined list of other goods/products. When a finished goods type item is built, the option exists in Advanced Accounting to "roll-up" the average cost of the components into the built item. Subsequently, component inventory average cost values are updated as if the items had been sold and the value of the finished goods item reflects those costs (the net change in inventory value is of course zero; the build process simply reallocates existing average cost amounts).

Copyright ã 1999 ADDSUM BUSINESS SOFTWARE, INC. Salt Lake City, Utah
ADDSUM is a registered service mark of Addsum Business Software, Inc.
Advanced Accounting and TAS are trademarks of Business Tools, Inc.
Technical support phone number: 801-277-9240