1. Chapter Five Accounting for Inventories Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 5-1 First-in, First-out The first-in, first-out cost flow method requires that the cost of the items purchased first be assigned to Cost of Goods Sold.

3. 5-2 First-in, First-out Assume TMBC Company purchased two identical inventory items: the first for $100 and the second for $110. Using first-in, first-out, the cost assigned to the first item sold would be $100 (the first cost in). The cost of goods sold assigned to the second item sold would be $110.

4. 5-3 Last-in, First-out The last-in, first-out cost flow method requires that the cost of the items purchased last be assigned to Cost of Goods Sold.

5. 5-4 Last-in, First-out Assume TMBC Company purchased two identical inventory items: the first for $100 and the second for $110. Using last-in, first-out, the cost assigned to the first item sold would be $110 (the last cost in). The cost of goods sold assigned to the second item sold would be $100.

6. 5-5 Weighted Average The weighted average cost flow method assigns the average cost of the items available to Cost of Goods Sold.

7. 5-6 Weighted Average Assume TMBC Company purchased two identical inventory items: the first for $100 and the second for $110. Using weighted average, the cost assigned to the first item sold would be $105 (the average cost). Total Cost Total Number = $210 2 = $105

8. 5-7 Effect of Cost Flow on Income Statement The cost flow method a company uses can significantly affect the gross margin reported in the income statement.

9. 5-8 Effect of Cost Flow on Balance Sheet Since total product costs are allocated between costs of goods sold and ending inventory, the cost flow method used affects its balance sheet as well.

10. 5-9 Inventory Cost Flow Under a Perpetual System First-in, First- Out (FIFO) Last-in, First- Out (LIFO) Weighted Average Sold 43 bikes for $350 each

11. 5-10 Inventory Cost Flow Under a Perpetual System First-in, First- Out (FIFO) Last-in, First- Out (LIFO) Weighted Average Goods Available for Sale must be allocated between the Cost of Goods Sold and Ending Inventory We use one of these three methods:

12. 5-11 First-in, First-out Inventory Cost Flow

13. 5-12 Last-in, First-out Inventory Cost Flow

14. 5-13 Weighted Average Inventory Cost Flow Total Cost Total Number = $12,650 55 = $230

15. 5-14 Comparative Financial Statements and the Impact of Income Taxes

16. 5-15 Lower of Cost or Market (LCM) Inventory must be reported at lower of cost or market. Applied three ways: (1)separately to each individual item. (2)to major classes or categories of assets. (3)to the whole inventory. Applied three ways: (1)separately to each individual item. (2)to major classes or categories of assets. (3)to the whole inventory. Market is defined as current replacement cost (not sales price). Consistent with the conservatism principle. Market is defined as current replacement cost (not sales price). Consistent with the conservatism principle.