# Acct 3311 - Class 12 Chapter 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACH Sommers – ACCT 3311 Chapter 1: Environment and Theoretical Structure.

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Acct Class 12 Chapter 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACH Sommers – ACCT 3311 Chapter 1: Environment and Theoretical Structure of Financial Accounting.

Discussion Question Q8-6 Goods out on approval to customers
Goods in transit that were recently purchased f.o.b. destination Land held by a realty firm for sale Raw Materials Goods received on consignment Manufacturing supplies

Transfer of ownership A company should record purchases when it obtains legal title to the goods.

Discussion Question Q8-3 What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?

Comparison of Inventory Systems
This chart summarizes all the differences between periodic and perpetual inventory systems, and will certainly help you understand the differences between the two methods.

Periodic Inventory System
We need the following adjusting entry to record cost of good sold. December 31, 2011 To adjust inventory, close purchases, and record cost of goods sold. Part I Here is a typical calculation of cost of goods sold. Let’s assume a beginning inventory of \$120,000 and net purchases of \$600,000. Cost of goods available for sale would be \$720,000. Now we subtract ending inventory of \$180,000 to arrive at cost of goods sold of \$540,000. Part II Under the periodic inventory system, we need to prepare an adjusting entry to determine cost of goods sold. The entry at the end of 2011 will be to debit cost of goods sold for \$540,000, debit inventory for \$180,000 (our ending inventory), credit inventory for \$120,000 (our beginning inventory), and finally credit purchases for \$600,000. This entry has determined cost of goods sold for the income statement and has established the value of ending inventory on the balance sheet at \$180,000.

Cost of Goods Available for Sale
Inventory Notation Beginning Balance Purchases Cost of Goods Available for Sale Ending Balance Cost of Goods Sold ? ?

Specific Identification --- Average Cost
Choosing a Cost Flow Assumption Specific Identification Average Cost LIFO FIFO Cost Flow Assumption Adopted does not need to equal Physical Movement of Goods Method adopted should be one that most clearly reflects periodic income.

Example 1: FIFO Periodic
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is \$8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using FIFO, periodic system. Purchases Date Units Unit Cost Total Cost Jan 10 5,000 \$9 \$45,000 Jan 18 6,000 10 60,000 Totals 11,000 \$105,000 Sales Date Units Jan 5 3,000 Jan 12 2,000 Jan 20 4,000 Total 9,000

Example 1: FIFO Periodic
Units Dollars Cost of Goods Sold: Ending Inventory:

Example 1: LIFO Periodic
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is \$8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using LIFO, periodic system. Purchases Date Units Unit Cost Total Cost Jan 10 5,000 \$9 \$45,000 Jan 18 6,000 10 60,000 Totals 11,000 \$105,000 Sales Date Units Jan 5 3,000 Jan 12 2,000 Jan 20 4,000 Total 9,000

Example 1: LIFO Periodic
Units 6,000 11,000 17,000 8,000 9,000 Dollars 48,000 105,000 153,000 Old Stuff New Stuff Cost of Goods Sold: Ending Inventory:

Example 1: LIFO Perpetual
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is \$8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using LIFO, perpetual system. Purchases Date Units Unit Cost Total Cost Jan 10 5,000 \$9 \$45,000 Jan 18 6,000 10 60,000 Totals 11,000 \$105,000 Sales Date Units Jan 5 3,000 Jan 12 2,000 Jan 20 4,000 Total 9,000

Ex 1: LIFO Perpetual (January 5th Sale)
Units Dollars Available: Cost of Goods Sold: Ending Inventory:

Ex 1: LIFO Perpetual (January 12th Sale)
Units Dollars Available: Cost of Goods Sold: Ending Inventory:

Ex 1: LIFO Perpetual (January 20th Sale)
Units 6,000 12,000 8,000 4,000 Dollars 51,000 60,000 111,000 Old Stuff New Stuff Available: Beg 3,000 \$ 8 = \$ 24,000 Jan ,000 \$ 9 = ,000 Jan ,000 \$10 = ,000 12,000 units \$111,000 Cost of Goods Sold: Jan ,000 \$10 = \$ 40,000 Ending Inventory: Beg 3,000 \$ 8 = \$ 24,000 Jan ,000 \$ 9 = ,000 Jan ,000 \$10 = ,000 8,000 units \$ 71,000

Example 1: LIFO Perpetual (Summary)
Cost of Goods Sold: Jan 5 3,000 units = \$24,000 Jan 12 2,000 units = 18,000 Jan 20 4,000 units = 40,000 Total 9,000 units = \$82,000 Ending Inventory: Beg 3,000 \$ 8 = \$24,000 Jan ,000 \$ 9 = 27,000 Jan ,000 \$10 = 20,000 8,000 units \$71,000

Example 1: Average Cost, Periodic
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is \$8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using Average Cost, Periodic. Purchases Date Units Unit Cost Total Cost Jan 10 5,000 \$9 \$45,000 Jan 18 6,000 10 60,000 Totals 11,000 \$105,000 Sales Date Units Jan 5 3,000 Jan 12 2,000 Jan 20 4,000 Total 9,000

Example 1: Average Cost Periodic
Units Dollars Cost of Goods Sold: Ending Inventory:

Example 1: Average Cost, Perpetual
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is \$8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using Average Cost, Perpetual. Purchases Date Units Unit Cost Total Cost Jan 10 5,000 \$9 \$45,000 Jan 18 6,000 10 60,000 Totals 11,000 \$105,000 Sales Date Units Jan 5 3,000 Jan 12 2,000 Jan 20 4,000 Total 9,000

Ex 1: Average Cost Perpetual (Jan 5th Sale)
Units Dollars Cost of Goods Sold: Ending Inventory:

Ex 1: Average Cost Perpetual (Jan 12th Sale)
Units Dollars Cost of Goods Sold: Ending Inventory:

Ex 1: Average Cost Perpetual (Jan 20th Sale)
Units 6,000 12,000 8,000 4,000 Dollars 51,750 60,000 111,750 ? 111,750 / 12,000 = \$ Cost per unit Cost of Goods Sold: 4,000 \$ = \$37,250 Ending Inventory: 8,000 \$ = \$74,500

Ex 1: Average Cost Perpetual (Summary)
Cost of Goods Sold: Jan 5 3,000 units = \$24,000 Jan 12 2,000 units = 17,250 Jan 20 4,000 units = 37,250 Total 9,000 units = \$78,500 Ending Inventory: 8,000 \$ = \$74,500

Example 1: Summary of Results
Cost of Goods Sold Ending Inventory FIFO, Periodic \$75,000 \$78,000 LIFO, Periodic 87,000 66,000 LIFO, Perpetual 82,000 71,000 Avg Cost, Periodic 81,000 72,000 Avg Cost, Perpetual 78,500 74,500

Supplemental LIFO Disclosures
Tootsie Roll 2008 Balance Sheet Finished goods and work-in-process 34,862 37,031 Raw materials and supplies 20,722 20,371 Income Statement Product cost of goods sold 333, ,695 Footnote: Inventories are stated at cost, not to exceed market. The cost of substantially all of the Company’s inventories (\$53,557 and \$54,367 at December 31, 2008 and 2007, respectively) has been determined by the last-in, first-out (LIFO) method. The excess of current cost over LIFO cost of inventories approximates \$12,432 and \$11,284 at December 31, 2008 and 2007, respectively. The cost of certain foreign inventories (\$2,027 and \$3,036 at December 31, 2008 and 2007, respectively) has been determined by the first-in, first-out (FIFO) method. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases is reflected as a reduction in the cost of the related inventory item, and is therefore reflected in cost of sales when the related inventory item is sold.

Supplemental LIFO Disclosures
Tootsie Roll 2008 Balance Sheet Finished goods and work-in-process 34,862 37,031 Raw materials and supplies 20,722 20,371 Total LIFO inventory 55,584 57,402 LIFO reserve 12,432 11,284 Total FIFO inventory 68,016 68,686 Income Statement Product cost of goods sold – LIFO 333, ,695 Product cost of goods sold – FIFO ? ?

LIFO to FIFO Conversion – Tootsie Roll
Inventory Turnover: LIFO: FIFO:

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