CHAPTER 5 Balance sheet 189The cost of the 685 units that have been sold is the 200 units purchased in month 1 for $44 ($8800),
plus the 210 units purchased in month 3 for $45 ($9450), plus the 175 units purchased in month 7 for
$48 ($8400), plus 100 of the 200 units purchased in month 12 for $46 ($4600). The total cost of sales is
therefore $31 250. This is summarised below.Inventory purchasesInventory
sales Cost of sales200 units @ $44 (month 1) = $8 800 685 units =200 units @ $44
(from month 1 purchases) = $8 800210 units @ $45 (month 3) = $9 450210 units @ $45
(from month 3 purchases) = $9 450175 units @ $48 (month 7) = $8 400175 units @ $48
(from month 7 purchases) = $8 400200 units @ $46 (month 12) = $9 200100 units @ $46
(from month 12 purchases) = $4 600
Total purchases 785 units ($35 850)
Closing inventory 100 units @ $46 = $4 600 Total cost of sales = $31 250Weighted-average method
The weighted-average method involves summing the total cost of purchases of a particular item of
inventory for the period plus any opening inventory, and dividing this by the number of units acquired
and on hand at the start of the period. During the reporting period, 785 units were purchased at a total
cost of $35 800, as calculated by 200 units purchased in month 1 for $44 ($8800), plus the 210 units
purchased in month 3 for $45 ($9450), plus the 175 units purchased in month 7 for $48 ($8400), plus
the 200 units purchased in month 12 for $46 ($9200). Dividing the total cost ($35 850) by the number of
units purchased (785) yields a weighted unit cost of $45.67. Using the weighted-average method, the
cost of the 100 units unsold is $4567 (100 units @ $45.67), and the cost of the units sold during the
period is $31 284 (685 units @ $45.67).Inventory purchases Weighted cost Cost of sales
200 units @ $44 (month 1) 8 800
210 units @ $45 (month 3) 9 450
175 units @ $48 (month 7) 8 400
200 units @ $46 (month 12) 9 200
Total 785 units at a cost of $35 850 $35 850/785 = $45.67 685 units @ $45.67 = $31 284The net realisable value is the expected selling price less the expected costs associated with get-
ting the inventory to a saleable state, plus the costs of marketing, selling and distribution. Consider
an entity that has inventory on hand at the end of the reporting period that cost $4600. The entity
has to ensure that recording the inventory at its cost price would not state the inventory at an amount
higher than its net realisable value. If the inventory’s net realisable value is assessed at $3500 due
to some of the inventory being obsolete, the carrying amount of the inventory on the balance sheet
would have to be $3500, as this is lower than the cost price. The asset, inventory, would have to
be reduced by $1100. The dual effect of reducing the inventory is to record an expense (inventory
write-down) that increases expenses, reduces profit and therefore reduces equity. Thus, assets have
decreased and equity has decreased. If the net realisable value is assessed at $6000, the inventory’s
carrying amount remains at its cost price given the rule that the carrying value is the lower of cost
price or net realisable value.