1. HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT
Retail Inventory
Chapter 9
HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

2. Objectives
1 Account for inventory by the physical and perpetual systems.
2. Apply the inventory costing methods: specific unit cost, weighted average cost, FIFO and LIFO
3. Identify the profit effects of the inventory costing methods

3. Objectives
4. Apply the lower-of-cost-and-net-reliable-value rule to inventory
5. Determine the effects of inventory errors on cost of goods sold and net profits
6. Estimate ending inventory by the gross profit and retail inventory method

4. Objective 1
Account for inventory
by the periodic and
perpetual systems

5. Inventory Accounting Systems
Perpetual systems maintain a running record
to show the inventory on hand at all times.
Periodic systems do not keep a
continuous record of inventory on hand.

6. Perpetual System Debit Inventory Credit Cash or Accounts Payable
Debit Cash or Accounts Receivable
Credit Sales Revenue
Debit Cost of Goods Sold
Credit Inventory

7. Perpetual System (see page 369 text)
Item: Sandals
Quantity Quantity Quantity
Date Received Sold on Hand
Nov. 1 5 7 12 26 30
Totals 25 50 6 13 21 40 10 4 29 16 41 20

8. Periodic System Cost of Goods Sold
Beginning
Inventory
$100,000
Net
Purchases
$560,000 + =
Cost of Goods
Available for
Sale $660,000
Ending
Inventory
$120,000
Cost of Goods
Sold
$540,000 – =

9. Gross Profit Sales revenues – Cost of goods sold =
Gross profit (before operating expenses)
Gross profit – Operating expenses =
Net profit

10. Cost-of-Goods-Sold Model
Budgeted Cost of Goods Sold +
Budgeted Ending Inventory =
Budgeted Cost of Goods Available for Sale –
Actual Beginning Inventory =
Purchases

11. Calculating the Cost of Inventory
Cost of inventory on hand = Quantity × unit cost
Physical count is made at least once a year, even with a perpetual system.
Consigned goods are excluded.

12. Periodic System
At the end of the period make a physical count and apply unit cost to determine ending inventory.
Inventory purchases are debited to the purchases account.
The inventory account carries the beginning inventory balance until adjusted at period end.

13. Periodic System Inventory Purchases Cost of Goods Sold
100,000
Beginning
Balance
100,000
Beginning
Balance
560,000
Purchases
560,000
Purchases
120,000
Ending
Balance
Cost of Goods Sold
100,000
560,000
540,000
120,000
Ending
Balance
Accounts Payable
560,000
Purchases

14. Apply the inventory costing methods: specific unit cost,
Objective 2
Apply the inventory costing
methods: specific unit cost,
weighted-average cost,
FIFO and LIFO

15. Units Purchased in 2004 January 8 20 units @ $20 = $ 400
May $30 = $1,650
October $31 = $ 775
Total units 100
Units sold 70
Units left 30

16. Units Sold and in Ending Inventory
Units sold by date:
Jan
May
Oct
Total sales 70
30 units left in inventory

17. Specific Identification
20 $31
5 $31
Cost of Goods Sold
Oct 23 $ 620
May
Jan
Total $1,950
33 $30
22 $30
17 $20
3 $20

18. Specific Identification
20 $31
5 $31
Ending Inventory
Oct $155
May
Jan
Total $875
33 $30
22 $30
17 $20
3 $20

19. Weighted Average 25 Units @ $31 (Oct) = $ 775 = 1,650
= $ 775
= 1,650 =
= $2,825 Total Cost
55 $30 (May)
20 $20 (Jan)
100 Total Units

20. Weighted Average $2,825 total cost/100 units = $28.25/unit
Cost of goods sold = 70 × $28.25 = $
Ending inventory = 30 × $28.25 = $847.50

21. First-In, First-Out 25 Units @ $31 (Oct) Cost of Goods Sold Jan $ 400
May 1,500
Total $1,900
5 $30 (May)
50 $30
20 $20 (Jan)

22. First-In, First-Out 25 Units @ $31 (Oct) Ending Inventory Oct $775
May
Total $925
5 $30 (May)
50 $30
20 $20 (Jan)

23. Last-In, First-Out 25 Units @ $31 (Oct) Cost of Goods Sold Oct $ 775
May 1,350
Total $2,125
45 $30 (May)
10 $30
20 $20 (Jan)

24. Last-In, First-Out 25 Units @ $31 (Oct) Ending Inventory Oct $300
May
Total $700
45 $30 (May)
10 $30
20 $20 (Jan)

25. Comparison of Methods Ending Inventory Specific identification $875.00
FIFO $925.00
LIFO $700.00
Weighted-average $847.50

26. Comparison of Methods Cost of Goods Sold
Specific identification $1,965.00
FIFO $1,900.00
LIFO $2,125.00
Weighted-average $1,977.50

27. Comparison of Methods Gross Profit from Sales:
Specific identification $1,035.00
FIFO $1,100.00
LIFO $
Weighted-average $1,022.50
When prices are rising LIFO produces
the lowest income and lowest income tax.

28. Identify the profit effects inventory costing methods
Objective 3
Identify the profit effects
of the
inventory costing methods

29. The Income Tax Advantage of LIFO
During periods of inflation, LIFO’s income is the lowest.
The most attractive feature of LIFO is reduced income tax payments.
That is probably why it cannot be used not tax (and financial reporting purposes) in Australia!

30. Perpetual System FIFO Example
Many companies keep their perpetual inventory records in quantities only.
Other companies keep perpetual records in both quantities and dollar cost.

31. Perpetual System FIFO Example (see page 379 text
Deckers Outdoor
Item: Wambat Sandals
Received Sold Balance on Hand
Unit Unit Unit
Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Nov $30 $300
$30 $
$31 $

32. Perpetual System FIFO Example
Deckers Outdoor
Item: Teva Sandals
Received Sold Balance on Hand
Unit Unit Unit
Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Nov $32 $ $31 $496 $
Totals $1, $1, $32 $640

33. Accounting Principles: Comparability
The business should use the same accounting
methods and procedures from one period to the next.
A company may change inventory methods, but it
must disclose the effects of the change on net profits.

34. Accounting Principles: Relevance
The financial statements
should report sufficient
information to enable
an outsider to make
knowledgeable decisions
about the company.

35. Accounting Principles: Materiality
An item is material if it has the potential
to alter a statement user’s decision.
Materiality is specific to
the entity being evaluated.

36. Accounting Principles: Conservatism
Err on the side
of caution when
reporting any item in
the financial statements.

37. Apply the lower-of-cost- and-net-realisable-value
Objective 4
Apply the lower-of-cost-
and-net-realisable-value
rule to inventory

38. Lower-of-Cost-and-N-R-V
An asset is reported at the lower of its historical cost or market (replacement) value.
If the replacement cost falls below its historical cost, the business must write down the value of its inventory.

39. Lower-of-Cost-and-N-R-V Example
Cost of inventory: $3,000
Market value at balance sheet date: $2,200
What is the journal entry?
June 30
Loss on Inventory (or COGS)
Inventory
Write down inventory to LCNRV

40. Determine the effects of inventory errors on cost of
Objective 5
Determine the effects of
inventory errors on cost of
goods sold and net profit

41. Inventory Errors
If inventory is calculated incorrectly, how many years of financial statements will it affect?
Two years
The current year’s ending inventory is next year’s beginning inventory.

42. Estimate ending inventory retail inventory method
Objective 6
Estimate ending inventory
by the gross profit and
retail inventory method

43. Gross Profit Method Example
Net Sales $150,000
Gross Profit Margin %
Beginning Inventory $ 18,500
Net Purchases $110,500
Net Sales $150,000
– Gross Profit of 31.5% ,250
= Cost of Goods Sold $102,750

44. Gross Profit Method Example
Beginning
Inventory
$18,500
Net
Purchases
$110,500 + =
Cost of Goods
Available for
Sale $129,000
Cost of Goods
Sold
$102,750
Ending
Inventory
$26,250 – =

45. Retail Inventory Method
Businesses with high turnover, low cost inventory, AASB 1019 allows the use of the retail inventory method.
Like the gross profit method it is based on the COGS model.
Requires the recording of inventory purchases at cost and at retail (selling) price.
See exhibit 9-13 page 385 of you text book.

46. Internal Control over Inventory
Physically counting inventory (stocktake)
Safe storage
Separate inventory and accounting records
Keeping perpetual inventory records
Sufficient inventory to prevent stock-outs
Not too much inventory – avoid obsolesce
Economic order quantities
Investigate just-in-time inventory systems.

47. End of Chapter 9