Post on 12-Jan-2016
7-1
MEASURING AND
REPORTING INVENTORIES
CHAPTER 7CHAPTER 7
.
7-2
InventoryInventory
“Inventory is often the largest and most important asset owned by a merchandising company.”
What is the biggest expense on the income statement?
Cost of Goods Sold
What are the two major factors in determining Cost of Goods Sold?
(Beg. Inventory + Purchases - End. Inventory)
7-3
InventoryInventory
Inventory is where the action is! It’s a real can of worms.
7-4
Balance Sheet AmountBalance Sheet Amount
The inventory dollar amount on the balance sheet is the product of what two factors? (i.e., What? x What?)
Balance Sheet Amount = Quantity x Cost
“War stories” aboutinventory observations
7-5
Inventory Costs IncludeInventory Costs Include
Invoice price
Insurance while in transit
Transportation
Handling costs to get the inventory ready for salee.g., washing cars
(i.e., all costs to get the inventory into a position and condition for resale.)
251
7-6
Errors in inventory may cause misstatements in the following areas:
Income StatementCOGS, Gross Margin,
Net Income
Balance SheetInventory, Retained Earnings
Impact of Inventory ErrorsImpact of Inventory Errorson Financial Statementson Financial Statements
7-7
Impact of Inventory ErrorsImpact of Inventory Errorson Financial Statementson Financial Statements
Assume that the inventory at the end of 19A is misstated.
What is the impact of the error on the Income Statements and Balance Sheets for 19A and 19B?
19A 19B
Error
12-31 12-31
Income Statement: Impact of Error? Year Ended 12-31-19A Year Ended 12-31-19BBalance Sheet: 12-31-19A 12-31-19B
Wrong End Inv, COGS, GM, Net IncomeWrong Beg Inv, COGS, GM, Net Income
Wrong Inventory and Retained EarningsNothing wrong! The error "washes out" (i.e., counterbalances)
7-8
Impact of Inventory ErrorsImpact of Inventory Errorson Financial Statementson Financial Statements
O.K.O.K.
5k over
O.K.
5k over
5k over
5k over
5k over
5k under
O.K.
7-9
Impact of Inventory ErrorsImpact of Inventory Errorson Financial Statementson Financial Statements
O.K.
O.K.5k over
O.K.
5k over5k under
5k under
5k over
5k over
O.K.!!!
O.K.
5k under
7-10
Impact of Inventory ErrorsImpact of Inventory Errorson Financial Statementson Financial Statements
Additional proof that Retained Earnings at the end of Year 2 are O.K.
Retained Earnings
5,000 over5,000 underO.K.!!!
120,000 Balance 1-1-98 55,000 Net Income - 1998 86,500 Net Income - 1999261,500 Balance 12-31-99
As recordedAs recorded
Proof that sometimes, in fact, two wrongs do make a right!
7-11
Effects of Errors in InventoryEnding Inventory Beginning Inventory
Understated Overstated Understated OverstatedCost of Goods Sold Overstated Understated Understated OverstatedNet Income Understated Overstated Overstated Understated
Here is a summary of the the material we just finished.
250
Why
bother?
Impact of Inventory ErrorsImpact of Inventory Errorson Financial Statementson Financial Statements
7-12
Impact of Inventory ErrorsImpact of Inventory Errorson Financial Statementson Financial Statements
There is a much simpler way of getting the effect of an error on net income.
I call it the “sneaky way” because it uses the balance sheet equation.
As before in ILL. 7.1, if inventory at 12-31-98 is overstated by $5,000, determine the effect on 1998 net income as follows:
12-31-98A = L + S/E
OverstatedOverstated by 5K by 5K Overstated Overstated
by 5Kby 5K
7-13
Methods of DeterminingMethods of DeterminingInventory CostInventory Cost
Perpetual Method
vs.
Periodic Method
7-14
Perpetual Inventory ProcedurePerpetual Inventory Procedure
The inventory account is continuouslyupdated for . . .
Inventory purchases Purchase returns Inventory sales Sales returns
7-15
Comparing Journal EntriesComparing Journal Entries
For comparison, let’s make the journal entries for each of the following transactions using both the
periodic and perpetual methods. Keep in mind that sales under the perpetual method require sales under the perpetual method require
two journal entriestwo journal entries.
7-16
Comparing Journal EntriesComparing Journal Entries
On September 5, Worley Co. purchased 100 units of inventory for $30 per unit.
GENERAL JOURNAL Page 1Date Description PR Debit Credit
PERIODIC
PERPETUAL
7-17
Comparing Journal EntriesComparing Journal Entries
On September 5, Worley Co. purchased 100 units of inventory for $30 per unit.
GENERAL JOURNAL Page 1Date Description PR Debit Credit
9/5 Purchases 3,000 Accounts Payable 3,000
9/5 Merchandise Inventory 3,000 Accounts Payable 3,000
PERIODIC
PERPETUAL
7-18
Comparing Journal EntriesComparing Journal Entries
On September 7, Worley Co. sold 10 of the previously purchased units for $50 each.
GENERAL JOURNAL Page 1Date Description PR Debit Credit
PERIODIC
PERPETUAL
7-19
Comparing Journal EntriesComparing Journal Entries
On September 7, Worley Co. sold 10 of the previously purchased units for $50 each.
GENERAL JOURNAL Page 1Date Description PR Debit Credit
9/7 Accounts Receivable 500
Sales 500
9/7 Accounts Receivable 500
Sales 500
Cost of Goods Sold 300
Merchandise Inventory 300
PERIODIC
PERPETUAL
AT SALES PRICE
AT COST
The Cost of Goods Sold account is an expense account and is closed to Income Summary at the end
of the period just like all other expense accounts.
The Cost of Goods Sold account is an expense account and is closed to Income Summary at the end
of the period just like all other expense accounts.
7-20
Comparing Journal EntriesComparing Journal Entries
On Sept. 8, Worley Co. returned 2 of the previously purchased units as defective.
GENERAL JOURNAL Page 1Date Description PR Debit Credit
Periodic
Perpetual
7-21
Comparing Journal EntriesComparing Journal Entries
On Sept. 8, Worley Co. returned 2 of the previously purchased units as defective.
GENERAL JOURNAL Page 1Date Description PR Debit Credit
9/8 Accounts Payable 60
Purchase Returns and Allowances 60
( 2 @ $30 per units = $60)
9/8 Accounts Payable 60
Merchandise Inventory 60
Periodic
Perpetual
7-22
Inventory Cost Flow MethodsInventory Cost Flow Methods
Specific identification
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Weighted average
7-23
7-24
7-25
Reminder from the “Saturday Night Page”
Inventory Cost Flow MethodsInventory Cost Flow Methods
Calculation of Cost of Goods Sold
Beginning Inventory
+ Purchases, etc
Cost of Goods Available for Sale
- Ending Inventory
Cost of Goods Sold
So, GAS - EI = CGS Or, GAS = EI + CGS
(The top part is not relevant to this discussion.)
7-26
Ending Inventory Cost of Goods Sold
Cost of Goods Available for Sale
Inventory Cost Flow MethodsInventory Cost Flow Methods
7-27
Specific IdentificationSpecific Identification
Attaches actual cost to an identifiable unit of product
Used for relatively large inventory items Frequently identified by serial number
7-28
First-In, First-OutFirst-In, First-Out
COST OF GOODS
AVAILABLE FOR SALE
7-29
First-In, First-OutFirst-In, First-Out
Cost of Goods Sold
Cost of Goods Sold
Ending InventoryEnding
Inventory
Oldest CostsOldest Costs
Newest CostsNewest Costs
7-30
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
The following schedule shows the mouse pad inventory for Computers, Inc. for September.
The physical inventory count shows 800800 mouse pads in ending inventory.
Use the FIFO procedure to determine:
(1) Ending inventory
(2) Cost of goods sold
7-31
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure Computer, Inc. Mouse Pad Inventory
Date Units Unit Cost TotalBI 1,000 5.25$ 5,250.00$
9/3 Pur. 100 5.30 530.00 9/15 Pur. 150 5.60 840.00 9/21 Pur. 200 5.80 1,160.00 9/29 Pur. 100 5.90 590.00
Goods available for sale 1,550 8,370.00$ Ending inventory 800 Cost of goods sold 750
7-32
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure Computer, Inc. Mouse Pad Inventory
Date Units Unit Cost TotalBI 1,000 5.25$ 5,250.00$ 9/3 100 5.30 530.00
9/15 150 5.60 840.00 9/21 Pur. 200 5.80 1,160.00 9/29 Pur. 100 5.90 590.00
Goods available for sale 1,550 8,370.00$ Ending inventory 800 Cost of goods sold 750
Remember: Remember: FIFO ending inventory is calculated using the cost of the newest purchases. Start with 9/29 and then add other purchases until
you reach the number of units in ending inventory.
7-33
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Cost of
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv. Goods Sold
9/29 100@$5.90 100@$5.90Units 100
7-34
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Cost of
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv. Goods Sold
9/21 200@$5.80 200@$5.809/29 100@$5.90 100@$5.90Units 300
7-35
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Cost of
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv. Goods Sold
9/15 150@$5.60 150@$5.609/21 200@$5.80 200@$5.809/29 100@$5.90 100@$5.90Units 450
7-36
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Cost of
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv. Goods Sold
9/3 100@$5.30 100@$5.309/15 150@$5.60 150@$5.609/21 200@$5.80 200@$5.809/29 100@$5.90 100@$5.90Units 550
7-37
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Cost of
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv. Goods SoldBI 1000@$5.25
250@$5.259/3 100@$5.30 100@$5.309/15 150@$5.60 150@$5.609/21 200@$5.80 200@$5.809/29 100@$5.90 100@$5.90
800Units
7-38
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Cost of
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv. Goods SoldBI 1000@$5.25 750@$5.25
250@$5.259/3 100@$5.30 100@$5.309/15 150@$5.60 150@$5.609/21 200@$5.80 200@$5.809/29 100@$5.90 100@$5.90Units 800 750Costs 4,432.50$ 3,937.50$
Cost of Goods Available for Sale $8,370.00
7-39
First-In, First-OutFirst-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Cost of
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv. Goods SoldBI 1000@$5.25 750@$5.25
250@$5.259/3 100@$5.30 100@$5.309/15 150@$5.60 150@$5.609/21 200@$5.80 200@$5.809/29 100@$5.90 100@$5.90Units 800 750Costs 4,432.50$ 3,937.50$
Cost of Goods Available for Sale $8,370.00
7-40
Last-In, First-OutLast-In, First-Out
7-41
Last-In, First-OutLast-In, First-Out
Ending InventoryEnding
Inventory
Cost of Goods Sold
Cost of Goods Sold
Oldest CostsOldest Costs
Newest CostsNewest Costs
7-42
Last-In, First-OutLast-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
The following schedule shows the mouse pad inventory for Computers, Inc. for September.
The physical inventory count shows 800800 mouse pads in ending inventory.
Use the LIFO periodic procedure to determine:
(1) Ending inventory
(2) Cost of goods sold
7-43
Last-In, First-OutLast-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure Computer, Inc. Mouse Pad Inventory
Date Units Unit Cost TotalBI 1,000 5.25$ 5,250.00$
9/3 Pur. 100 5.30 530.00 9/15 Pur. 150 5.60 840.00 9/21 Pur. 200 5.80 1,160.00 9/29 Pur. 100 5.90 590.00
Goods available for sale 1,550 8,370.00$
Ending inventory 800 Cost of goods sold 750
7-44
Last-In, First-OutLast-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure Computer, Inc. Mouse Pad Inventory
Date Units Unit Cost TotalBI 1,000 5.25$ 5,250.00$
9/3 Pur. 100 5.30 530.00 9/15 Pur. 150 5.60 840.00
9/21 200 5.80 1,160.00 9/29 100 5.90 590.00
Goods available for sale 1,550 8,370.00$ Ending inventory 800 Cost of goods sold 750
Remember: Remember: LIFO ending inventory is calculated using the cost of the oldest
purchases. Start with beginning inventory and then add other
purchases until you reach the number of units in ending inventory.
7-45
Last-In, First-OutLast-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv.Cost of
Goods SoldBI 1000@$5.25 800@$5.25
Units 800
7-46
Last-In, First-OutLast-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv.Cost of
Goods SoldBI 1000@$5.25 800@$5.25
200@$5.25
Units 800 200
7-47
Last-In, First-OutLast-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv.Cost of
Goods SoldBI 1000@$5.25 800@$5.25
200@$5.259/3 100@$5.30 100@$5.30
800 300
7-48
Last-In, First-OutLast-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv.Cost of
Goods SoldBI 1000@$5.25 800@$5.25
200@$5.259/3 100@$5.30 100@$5.309/15 150@$5.60 150@$5.609/21 200@$5.80 200@$5.809/29 100@$5.90 100@$5.90Units 800 750
7-49
Last-In, First-OutLast-In, First-OutPeriodic Inventory ProcedurePeriodic Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Inv. Purchases End Inv.Cost of
Goods SoldBI 1000@$5.25 800@$5.25
200@$5.259/3 100@$5.30 100@$5.309/15 150@$5.60 150@$5.609/21 200@$5.80 200@$5.809/29 100@$5.90 100@$5.90Units 800 750Costs 4,200.00$ 4,170.00$
Cost of goods available for sale $8,370.00
7-50
Weighted-AverageWeighted-AveragePeriodic Inventory ProcedurePeriodic Inventory Procedure
7-51
Weighted-AverageWeighted-AveragePeriodic Inventory ProcedurePeriodic Inventory Procedure
Cost per unit Goods Available for Sale in $_ Goods Available for Sale in units
Ending InventoryEnding Inv. = Cost per unit x No. Units in Ending Inv.
7-52
Weighted-AverageWeighted-Average Periodic Inventory ProcedurePeriodic Inventory Procedure
The following schedule shows the mouse pad inventory for Computers, Inc. for September.
The physical inventory count shows 800800 mouse pads in ending inventory.
Use the weighted-average periodic procedure to determine:
(1) Ending inventory
(2) Cost of goods sold
7-53
Weighted-AverageWeighted-Average Periodic Inventory ProcedurePeriodic Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeg. Inventory 1,000 $5.25 $5,250.00
9/3 100 5.30 530.00 9/15 150 5.60 840.00 9/21 200 5.80 1,160.00 9/29 100 5.90 590.00
Goods Available for Sale 1,550 $8,370.00
Ending Inventory - 800 Goods Sold 750
7-54
Computer, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeg. Inventory 1,000 $5.25 $5,250.00
9/3 100 5.30 530.00 9/15 150 5.60 840.00 9/21 200 5.80 1,160.00 9/29 100 5.90 590.00
Goods Available for Sale 1,550 $8,370.00
Ending Inventory - 800 Goods Sold 750
Weighted-AverageWeighted-Average Periodic Inventory ProcedurePeriodic Inventory Procedure
$8,370 ÷ 1,550 = $5.40 weighted-average
7-55
Weighted-AverageWeighted-Average Periodic Inventory ProcedurePeriodic Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeg. Inventory 1,000 $5.25 $5,250.00
9/3 100 5.30 530.00 9/15 150 5.60 840.00 9/21 200 5.80 1,160.00 9/29 100 5.90 590.00
Goods Available for Sale 1,550 $8,370.00
Ending Inventory - 800 5.40 = - 4,320.00 Goods Sold 750 $4,050.00
×
$8,370 ÷ 1,550 = $5.40 weighted-average
7-56
Effect of Different Cost Flow Effect of Different Cost Flow Methods on Inventory and CGSMethods on Inventory and CGS
FIFO LIFO Wtd. Avg.Goods Available for
Sale $8,370.00Ending Inventory 4,320.00 Cost of Goods Sold $4,050.00
$8,370.004,200.00
$4,170.00
$8,370.004,432.50
$3,937.50
Computer, Inc.Mouse Pad Inventory
In the previous examples of the three cost flow methods, what are the two possibilities for
what happened to GAS as of year end? Became either: (1) Ending Inventory or
(2) Cost of Goods Sold
7-57
Effect of Different Cost Flow Effect of Different Cost Flow Methods on Inventory and CGSMethods on Inventory and CGS
255
Facts for all 4 Cost Flow Examples
Goods Available for Sale
Also see Illustrations 7.7, 7.8, 7.10 & 7.12
7-58
Effect of Different Cost Flow Effect of Different Cost Flow Methods on Inventory and CGSMethods on Inventory and CGS
ILL. 7.18 (Periodic)
264
7-59
Effect of Different Cost Flow Effect of Different Cost Flow Methods on Inventory and CGSMethods on Inventory and CGS
7-60
Perpetual Inventory ProcedurePerpetual Inventory Procedure
Now let’s turn our attention to the perpetual inventory procedure.
7-61
FIFOFIFOPerpetual Inventory ProcedurePerpetual Inventory Procedure
Let’s start with some fresh information. Computers, Inc. has 1,2001,200 units in inventory on November 30. The company started the
month of November with 1,000 units on hand at a cost of $5.25 per unit.
The company uses the FIFO perpetual procedure to determine:
(1) Ending inventory
(2) Cost of goods sold
7-62
FIFOFIFOPerpetual Inventory ProcedurePerpetual Inventory Procedure
To calculate the FIFO cost for ending inventory and cost of goods sold, we we
must know when each unit must know when each unit was soldwas sold. In this example
we will provide information for purchases and sales as it is needed.
7-63
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.25 1,000@$5.25
FIFOFIFOPerpetual Inventory ProcedurePerpetual Inventory Procedure
On November 3rd, 300units were purchased
at $5.30 per unit. We needto update the inventory.
On November 3rd, 300units were purchased
at $5.30 per unit. We needto update the inventory.
7-64
FIFOFIFOPerpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.25 1,000@$5.2511/3 300@$5.30 300@$5.30
7-65
FIFOFIFOPerpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.25 1,000@$5.2511/3 300@$5.30 300@$5.30
On November 5th, 600units were sold. We needto update the inventory.
On November 5th, 600units were sold. We needto update the inventory.
7-66
FIFOFIFOPerpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.25 400@$5.2511/3 300@$5.30 300@$5.3011/5 600@$5.25
7-67
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/5
On November 10th, 150units were purchased
at $5.60 per unit. We needto update the inventory.
On November 10th, 150units were purchased
at $5.60 per unit. We needto update the inventory.
400@$5.25300@$5.30
600@$5.25
7-68
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.60 150@$5.60
400@$5.25300@$5.30
600@$5.25
7-69
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.60 150@$5.60
On November 14th, 200units were purchased
at $5.80 per unit. We needto update the inventory.
On November 14th, 200units were purchased
at $5.80 per unit. We needto update the inventory.
400@$5.25300@$5.30
600@$5.25
7-70
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.60 150@$5.6011/14 200@$5.80 200@$5.80
400@$5.25300@$5.30
600@$5.25
7-71
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.60 150@$5.6011/14 200@$5.80 200@$5.80
On November 17th, 500units were sold. We needto update the inventory.
On November 17th, 500units were sold. We needto update the inventory.
400@$5.25300@$5.30
600@$5.25
7-72
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.6011/14 200@$5.8011/17 400@$5.25
200@$5.30600@$5.25
100@$5.30
150@$5.60200@$5.80
7-73
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.6011/14 200@$5.8011/17
On November 23rd, 400units were sold. We needto update the inventory.
On November 23rd, 400units were sold. We needto update the inventory.
400@$5.25
200@$5.30600@$5.25
100@$5.30
150@$5.60200@$5.80
7-74
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.6011/14 200@$5.8011/17
11/23
400@$5.25
600@$5.25
100@$5.30
150@$5.80
200@$5.30150@$5.60 50@$5.80
7-75
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.6011/14 200@$5.8011/17
11/23
400@$5.25
600@$5.25
100@$5.30
150@$5.80
200@$5.30150@$5.60 50@$5.80
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
On November 30th, 150units were purchased
at $5.90 per unit. We needto update the inventory.
On November 30th, 150units were purchased
at $5.90 per unit. We needto update the inventory.
7-76
FIFO FIFO Perpetual Inventory ProcedurePerpetual Inventory Procedure
Computer, Inc.Mouse Pad Inventory
Date Beg. Bal. Purchases BalanceCost of
Goods SoldBI 1,000@$5.2511/3 300@$5.3011/511/10 150@$5.6011/14 200@$5.8011/17
11/23
400@$5.25
600@$5.25
100@$5.30
150@$5.80
200@$5.30150@$5.60 50@$5.80
11/30 150@$5.90 150@$5.90
7-77
LIFOLIFOPerpetual Inventory ProcedurePerpetual Inventory Procedure
You are not responsible for this method.
260
7-78
First-In, First-OutFirst-In, First-Out
PeriodicInventorySystem
PeriodicInventorySystem
PerpetualInventorySystem
PerpetualInventorySystem
Cost of Goods Sold Cost of Goods SoldSame
EndingInventory
EndingInventory
Same
7-79
Last-In, First-OutLast-In, First-Out
PeriodicInventorySystem
PeriodicInventorySystem
PerpetualInventorySystem
PerpetualInventorySystem
Cost of Goods Sold Different
EndingInventory
Cost of Goods Sold
Different Ending Inventory
7-80
Weighted-AverageWeighted-AveragePerpetual Inventory ProcedurePerpetual Inventory Procedure
You are not responsible for this method.
261
7-81
Advantages and Disadvantages Advantages and Disadvantages of FIFOof FIFO
AdvantagesAdvantages Easy to apply. Inventory value
approximates current cost.
Flow of costs tends to be consistent with usual physical flow of goods.
Systematic and objective.
Not subject to manipulation.
262
7-82
Advantages and Disadvantages Advantages and Disadvantages of FIFOof FIFO
AdvantagesAdvantages Easy to apply. Inventory value
approximates current cost.
Flow of costs tends to be consistent with usual physical flow of goods.
Systematic and objective.
Not subject to manipulation.
DisadvantagesDisadvantages Does not match current
cost of goods sold with current revenues.
Inventory (or paper) profits.
In periods of rising prices, pay higher income taxes.
7-83
Advantages and Disadvantages Advantages and Disadvantages of LIFOof LIFO
Advantages In periods of rising
prices, pay less taxes. Matches latest
inventory costs with current revenues.
Disadvantages LIFO conformity rule
for tax and book purposes.
Cost of record keeping higher.
Inventory valuation is at older costs.
7-84
In Periods of Rising Prices. . .In Periods of Rising Prices. . .
LIFOLIFO Matches high
(newer) costs with current (higher) sales.
Values inventory on low (older) cost basis.
Results in lower taxable income.
FIFOFIFO Matches low (older)
costs with current (higher) sales.
Values inventory approximating higher current costs.
Results in higher taxable income.
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GAAP requires inventory be valued at the Lower of Cost or Market (LCM). Cost Cost refers to the invoice price and other costs
such as transportation. It is determined by one of the four inventory cost flow methods previously discussed.
Market Market generally refers to the replacement cost of the inventory.
LCM is called the inventory “valuation method”
Departures From Cost Basis of Departures From Cost Basis of Inventory ValuationInventory Valuation
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Departures From Cost Basis of Departures From Cost Basis of Inventory ValuationInventory Valuation
Lower-of-Cost-or-Market Method (LCM)
Item Quantity Unit CostUnit
Market Total Cost
Total Market LCM**
Mouse pad 800 5.75$ 4.50$ 4,600$ 3,600$ 3,600$ Diskettes 1,000 2.19 2.25 2,190 2,250 2,190 Keyboard 75 27.00 29.00 2,025 2,175 2,025
8,815$ 8,025$ 7,815$
**LCM applied on an item-by-item basis.
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Estimating InventoryEstimating Inventory
Necessary due to fire, theft, and interim reporting, primarily when
using the periodic inventory method.
Methods for Estimating Gross Margin Method Retail Inventory Method
Not responsible for this one
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Gross Margin MethodGross Margin Method
To use this method we must know the following:
Net sales for the period. Cost of beginning inventory. Net purchases for the period. The historical gross margin rate.
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Because of a May 31st fire at its warehouse, DonCo, Inc. must use the gross margin method to estimate the value of its lost inventory. The controller develops the following information: gross profit 43% of sales; Inventory at May 1
$237,400; net purchases for May $728,300; net sales for May $1,213,000.
Let’s estimate inventory at May 31.
Gross Margin MethodGross Margin Method
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Gross Margin MethodGross Margin MethodBeginning inventory, May 1 237,400$ Net purchases for May 728,300 Cost of goods available for sale 965,700$
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Gross Margin MethodGross Margin MethodBeginning inventory, May 1 237,400$ Net purchases for May 728,300 Cost of goods available for sale 965,700$
Net sales for May 1,213,000$ Estimated gross profit percentage 43%
Estimated gross profit 521,590$
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Gross Margin MethodGross Margin MethodBeginning inventory, May 1 237,400$ Net purchases for May 728,300 Cost of goods available for sale 965,700$
Net sales for May 1,213,000$ Estimated gross profit percentage 43%
Estimated gross profit 521,590$
Net sales for May 1,213,000$ Estimated gross profit 521,590 Estimated cost of goods sold 691,410$
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Gross Margin MethodGross Margin MethodBeginning inventory, May 1 237,400$ Net purchases for May 728,300 Cost of goods available for sale 965,700$
Net sales for May 1,213,000$ Estimated gross profit percentage 43%
Estimated gross profit 521,590$
Net sales for May 1,213,000$ Estimated gross profit 521,590 Estimated cost of goods sold 691,410$
Cost of goods available for sale 965,700$ Less: Estimated cost of goods sold 691,410 Estimated inventory, May 31 274,290$
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Gross Margin MethodGross Margin Method
Proof of EstimateSales for May 1,213,000$ Cost of goods sold: Beginning inventory 237,400$ Net purchases 728,300 Cost of goods available for sale 965,700 Estimated ending inventory 274,290
Cost of goods sold 691,410 Gross profit for May 521,590$
269
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THEEND(Almost)