Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 By Jessica Huff.

Created for ENMU Tutoring/Supplemental Instruction

Huff Fall 2011

InventoryBy Jessica Huff


Huff Fall 2011

Ownership of GoodsGoods in Transit

Free on Board (FOB) shipping says that the goods are yours once another company ships them to you

FOB destination means that the goods are yours when you receive them

Consigned GoodsThese are goods that you are holding, but

they are not yoursYou sell them for a fee/commissionAntique dealers do this quite often


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Inventory SystemsPerpetual- Perpetual systems keep track

of inventory simultaneouslyAn example would be a grocery store where

every time an items crosses the scanner, it is taken off of inventory

Periodic- Inventory is physically checked at certain timesThis could be a small business that cannot

afford to have a perpetual systemMany companies adopt both systems

because even a computer can be wrong (theft is a good example of why it would be wrong)


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Solving Inventory ProblemsWhen doing inventory problems, you first

need to think about the system that is being used

Every company will begin with a certain amount, then make purchases and sell inventory in any given periodFIFO will sell inventory starting with the

beginning balanceLIFO will sell inventory starting with the

last purchaseWeighted-Average will sell inventory in any

order without giving preference


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Inventory MethodsFIFO (First-in, First-out)- The goods that are

received or made first will be sold firstMost companies use this methodMakes sense for things that expire because if you

don’t sell them now, they will go bad (milk, eggs, etc.)

LIFO (Last-in, First-out)- The newest goods that are received or made will be sold firstGeneral Accepted Accounting Principles (GAAP)

is doing away with this methodCompanies that don’t have goods that expire can

use this (tires, laundry detergent, etc.)Weighted-Average- The average unit cost is

found and then everything is sold as a lump


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Formula

Cost of Goods Available for Sale

Less: Cost of Goods Sold= Ending Inventory

Ending InventoryAdd: Cost of Goods Sold= Cost of Goods Available

for Sale

Cost of Goods Available for SaleLess: Ending Inventory= Cost of Goods Sold

It can also be written as:

Cost of Goods SoldAdd: Ending Inventory=Cost of Goods Available

for Sale


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Formula, ContinuedThe point of the different variations is to

point out that there are many different ways to solve inventory problems

Depending on what is easiest for you will dictate how to approach the problems

Cost of Goods Available for Sale is almost always givenWhat is important is calculating Cost of Goods

Sold or Ending InventoryProblems will give one of these two to calculate

the rest of the equation


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FIFO ExampleDate Explanation Units Unit Cost

Total CostJan. 1 Beg. Bal. 200 x $5 =

$1,000Mar. 10 Purchase 50 x 8 =

400Jun. 20 Purchase 300 x 4 =

1,200Nov. 3 Purchase 150 x 6 =

900 Total 700

$3,500

Units sold during the year= 600


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Cost of Goods Available for SaleThe Cost of Goods Available for Sale (COGAS)

is calculated by taking the beginning inventory + any purchases made during the period being looked at

Question: So, for this problem, what is the Cost of Goods Available for Sale?


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Cost of Goods Available for SaleDate Explanation Units Unit Cost


$1,000Mar. 10 Purchase 50 x 8 =



900 Total 700

$3,500

Cost of Goods Available for Sale


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Calculating Ending InventoryThe problem says that 600 units were sold

during the periodQuestion: What is the amount for Ending

Inventory (EI)?Remember, we’re doing FIFO!!


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Ending InventoryDate Explanation Units Unit Cost

Total CostJan. 1 Beg. Bal. 200 x $5

= $1,000Mar. 10 Purchase 50 x 8

= 400Jun. 20 Purchase 300 x 4

= 1,200Nov. 3 Purchase 150 x 6

= 900 Total 700

$3,500Since we’re selling 600, we’re selling

everything in red and part of the orange which leaves 100 units not sold

100*$6= $600 is the Ending Inventory


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Calculating Cost of Goods SoldThe problem says that 600 units were sold

during the periodQuestion: What is the amount for Cost of

Goods Sold (COGS)?Work it out not plugging into the formula


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Cost of Goods SoldDate Explanation Units Unit Cost Total CostJan. 1 Beg. Bal. 200 x $5 = $1,000Mar. 10 Purchase 50 x 8 = 400Jun. 20 Purchase 300 x 4 = 1,200Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500Since we’re selling 600, we’re selling everything in red and

part of the orange to make up the 600$1,000+$400+$1,200+ (50*$6)= $2,900 is Cost of Goods Sold


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Checking Your WorkNow, to check your work, you put the numbers into

the equation Cost of Goods Available for Sale $3,500 Less: Cost of Goods Sold 2,900 Ending Inventory $600Sure enough, the equation works outAnother way of solving the problem is to figure out

two parts of the equation and solve for the thirdThis is where what’s easiest for you comes inSince COGAS was given, you can calculated EI or

COGS to get to the other answer instead of working it out by hand


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LIFO Example- Same ProblemDate Explanation Units Unit Cost


$1,000Mar. 10 Purchase 50 x 8 =



900 Total 700

$3,500



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SolvingQuestion: What is the Cost of Goods

Available for Sale? Question: What is the Ending Inventory?

Remember: we’re doing LIFO!!Question: What is the Cost of Goods

Sold?Don’t plug it into the formula again


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Cost of Goods Available for SaleDate Explanation Units Unit Cost


$1,000Mar. 10 Purchase 50 x 8 =



900 Total 700

$3,500

Cost of Goods Available for SaleNote: It’s the same answer as

before


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Total CostJan. 1 Beg. Bal. 200 x $5

= $1,000Mar. 10 Purchase 50 x 8

= 400Jun. 20 Purchase 300 x 4

= 1,200Nov. 3 Purchase 150 x 6

= 900 Total 700

$3,500Since we’re selling 600, we’re selling

everything in red and part of the orange which leaves 100 units not sold

100*$5= $500 is the Ending Inventory


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Cost of Goods SoldDate Explanation Units Unit Cost Total CostJan. 1 Beg. Bal. 200 x $5 = $1,000Mar. 10 Purchase 50 x 8 = 400Jun. 20 Purchase 300 x 4 = 1,200Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500Since we’re selling 600, we’re selling everything in red and

part of the orange to make up the 600$900+$1,200+$400+ (100*$5)= $3,000 is Cost of Goods Sold


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Checking Your WorkNow, to check your work, you put the

numbers into the equation Cost of Goods Available for Sale

$3,500 Less: Cost of Goods Sold

3,000 Ending Inventory

$500Sure enough, the equation works out


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Weighted-Average- Same Problem

Date Explanation Units Unit Cost Total Cost

Jan. 1 Beg. Bal. 200 x $5 = $1,000

Mar. 10 Purchase 50 x 8 = 400

Jun. 20 Purchase 300 x 4 = 1,200

Nov. 3 Purchase 150 x 6 = 900

Total 700 $3,500



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SolvingQuestion: What is the Cost of Goods

Available for Sale?If you said $3,500, you are correct!!

Question: What is the Ending Inventory?Remember: we’re doing Weighted-Average!!

Question: What is the Cost of Goods Sold?Don’t plug it into the formula again


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$1,000Mar. 10 Purchase 50 x 8 =



900 Total 700

$3,500Unit Cost= COGAS/Units= $3,500/700= $5Since there are 100 units left 100*5=$500 is Ending Inventory


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Cost of Goods SoldDate Explanation Units Unit Cost Total CostJan. 1 Beg. Bal. 200 x $5 = $1,000Mar. 10 Purchase 50 x 8 = 400Jun. 20 Purchase 300 x 4 = 1,200Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500Since we’re selling 600 units 600*5=$3,000 Cost of Goods Sold


Huff Fall 2011

Checking Your WorkNow, to check your work, you put the

numbers into the equation Cost of Goods Available for Sale

$3,500 Less: Cost of Goods Sold

3,000 Ending Inventory

$500Sure enough, the equation works out


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Income Statement Effects FIFO Average LIFO

COGAS $3,500 $3,500 $3,500COGS 2,900 3,000 3,000EI 600 500 500Net Income Highest Medium Medium

With the exception of this problem, Weighted-Average and LIFO do not usually come out equalLIFO has a higher COGS and lower EILIFO will result in a lower Net Income than Weighted-

Average


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Lower of Cost or MarketThis is used after an inventory method is

chosenThis replacement method is used when

the value of inventory go down (is impaired)

Basically, the company looks at if the cost is lower than the market or vice versa and takes that amount as the new value


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Lower of Cost or Market Example

Lower of Cost Market

Cost or MarketBooks $3,000 $2,500

$2,500Music 3,500 3,600

3,500Movies 4,000 5,000

4,000Total Inventory $10,500 $11,100

$10,000

So, you take the lower of the cost or market, and that becomes your new amount ($10,000)


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More ProblemsYou can challenge yourself by coming up with

different problemsOnce you understand the basics, these

problems are very easy to doWork them as many ways as you can think of

and remember to CHECK YOUR WORK!!

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 By Jessica Huff.

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