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Click to edit Master title style 1 1 Inventories 6.

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Presentation on theme: "Click to edit Master title style 1 1 Inventories 6."— Presentation transcript:

1 Click to edit Master title style 1 1 Inventories 6

2 2 2 Two primary objectives of control over inventory are: 1)Safeguarding the inventory, and 2)Properly reporting it in the financial statements. 6-1

3 Click to edit Master title style 3 3 Controls over inventory include developing and using security measures to prevent inventory damage or customer or employee theft. 6-1

4 Click to edit Master title style 4 4 To ensure the accuracy of the amount of inventory reported in the financial statements, a merchandising business should take a physical inventory. 6-1

5 Click to edit Master title style Inventory Costing Methods 6-2

6 Click to edit Master title style FifoLifo Average cost Inventory Costing Methods Number of firms (> $1B Sales) 6-2

7 Click to edit Master title style Example Exercise 6-1 The three identical units of Item QBM are purchased during February, as shown below. Feb. 8Purchase1$ 45 15Purchase148 26Purchase Item QBMUnits Cost Assume that one unit is sold on February 27 for $70. Determine the gross profit for February and ending inventory on February 28 using (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) average cost methods. Total3$144 Average cost per unit$48 ($144/3 units)

8 Click to edit Master title style 8 8 Follow My Example For Practice: PE 6-1A, PE 6-1B Gross ProfitEnding Inventory (a)First-in, first-out (FIFO):$25 ($70 – $45)$99 ($48 – $51) (b)Last-in, first-out (LIFO):$19 ($70 – $51)$93 ($45 + $48) (c)Average cost:$22 ($70 – $48)$96 ($48 x 2) $144/3 units

9 Click to edit Master title style Item 127B UnitsCost Jan. 1Inventory100$20 4Sale70 10Purchase Sale40 28Sale20 30Purchase10022 Item 127B UnitsCost Jan. 1Inventory100$20 4Sale70 10Purchase Sale40 28Sale20 30Purchase10022 FIFO Perpetual 6-3

10 Click to edit Master title style Example Exercise 6-2 Beginning inventory, purchases, and sales for Item ER27 are as follows: Nov.1Inventory40 units at $5 5Sale32 units 11Purchase60 units at $7 21Sale45 units 36 Assuming a perpetual inventory system and the first-in, first-out (FIFO) method, determine (a) the cost of the merchandise sold for the November 21 sale and (b) the inventory on November 30.

11 Click to edit Master title style 11 Follow My Example For Practice: PE 6-2A, PE 6-2B a)Cost of merchandise sold: 8 $5$40 37 $ units $299 b)Inventory, November 30: $161 = (23 units x $7)

12 Click to edit Master title style Item 127B UnitsCost Jan. 1Inventory100$20 4Sale70 10Purchase Sale40 28Sale20 30Purchase10022 Item 127B UnitsCost Jan. 1Inventory100$20 4Sale70 10Purchase Sale40 28Sale20 30Purchase10022 LIFO Perpetual On January 30, the firm purchased one hundred additional units of Item 127B at $22 each. 6-3

13 Click to edit Master title style Example Exercise 6-3 Beginning inventory, purchases, and sales for Item ER27 are as follows: Nov.1Inventory40 units at $5 5Sale32 units 11Purchase60 units at $7 21Sale45 units 56 Assuming a perpetual inventory system and the last-in, first-out (LIFO) method, determine (a) the cost of the merchandise sold for the November 21 sale and (b) the inventory on November 30.

14 Click to edit Master title style 14 Follow My Example For Practice: PE 6-3A, PE 6-3B a)Cost of merchandise sold: $315 = (45 units x $7) b) Inventory, November 30: 8 $5$ 40 $ $145

15 Click to edit Master title style 15 The weighted average unit cost method is based on the average cost of identical units. The total cost of merchandise available for sale is divided by the related number of units of that item. Average Cost 6-4

16 Click to edit Master title style 16 Average Cost $5,880 =$2,000 = 1,680 =2, $20 80 $ $ Jan. 1 Jan. 10 Jan. 30 Average unit cost: $5,880 ÷ 280 = $21 Cost of merchandise sold: 130 units at $21 = $2,730 Ending merchandise inventory: 150 units at $21= $3, $22 6-4

17 Click to edit Master title style Example Exercise 6-4 The units of an item available for sale during the year were as follows: $50$ 300 Mar. $55770 $62 1,240 Available for sale40units$2, There are 16 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out (FIFO) method, (b) the last-in, first-out (LIFO) method, and (c) the average cost method.

18 Click to edit Master title style 18 Follow My Example For Practice: PE 6-4A, PE 6-4B a)First-in, first-out (FIFO) method: $992 (16 units x $62) b)Last-in, first-out (LIFO) method: $850 (6 units x $50) + (10 units x $55) c)Average method: $924 (16 units x $57.75) where average cost = $57.75 ($2,310 ÷ 40 units)

19 Click to edit Master title style 19 If the cost of replacing an item in inventory is lower than the original purchase cost, the lower-of-cost-or- market (LCM) method is used to value the inventory. Lower-of-Cost-or-Market Method 6-6

20 Click to edit Master title style 20 Market, as used in lower of cost or market, is the cost to replace the merchandise on the inventory date. 6-6


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