Two methods of tracking merchandise are the perpetual inventory system and the periodic inventory system. Businesses can choose one of four methods to assign cost values to inventories. Businesses must apply consistency and conservatism when reporting merchandise inventory on the financial statements. Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Explain the importance of maintaining accurate inventory records. Explain the difference between a periodic and a perpetual inventory system. Take a physical inventory count and record inventories. Determine the cost of merchandise inventory using the specific identification; first-in, first-out; last-in, first-out; and weighted average cost methods. Assign a value to merchandise inventory using the lower-of-cost-or- market rule. Explain the accounting principles of consistency and conservatism. Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Key Terms perpetual inventory system point-of-sale terminal (POS) Determining the Quantity of Inventories Section 25.1 Key Terms perpetual inventory system point-of-sale terminal (POS) online periodic inventory system Glencoe Accounting

Merchandise Inventory Determining the Quantity of Inventories Section 25.1 Shows the cost of goods purchased for resale. Merchandise Inventory Account Reported on the balance sheet and the income statement. Glencoe Accounting

Methods of Tracking Inventory Determining the Quantity of Inventories Section 25.1 perpetual inventory system Two methods of merchandise tracking inventory periodic inventory system perpetual inventory system An inventory system that keeps a constant, up-to-date record of the amount of merchandise on hand. Glencoe Accounting

Methods of Tracking Inventory Determining the Quantity of Inventories Section 25.1 perpetual inventory system Two methods of merchandise tracking inventory periodic inventory system periodic inventory system An inventory system in which inventory records are updated only after a physical count of merchandise on hand is made. Glencoe Accounting

Methods of Tracking Inventory Determining the Quantity of Inventories Section 25.1 Computers update a perpetual inventory system through point of sale terminals (POS) are online. point of sale terminal (POS) An electronic cash register. online The link of a terminal or cash register to a centralized computer system. Glencoe Accounting

Methods of Tracking Inventory Determining the Quantity of Inventories Section 25.1 Time consuming Usually done at the end of a peak selling period Physical Inventory Glencoe Accounting

Key Terms specific identification method Determining the Cost of Inventories Section 25.2 Key Terms specific identification method first-in, first-out method (FIFO) last-in, first-out method (LIFO) weighted average cost method Glencoe Accounting

Purchased merchandise is recorded in the accounting records at cost. Inventory Costs Determining the Cost of Inventories Section 25.2 Purchased merchandise is recorded in the accounting records at cost. Glencoe Accounting

Methods of Assigning Costs to Inventories Determining the Cost of Inventories Section 25.2 Specific Identification Four methods of determining inventory cost First-In, First-Out (FIFO) Last-In, First-Out (LIFO) Weighted Average Cost Glencoe Accounting

Methods of Assigning Costs to Inventories Determining the Cost of Inventories Section 25.2 Specific Identification Method specific identification method An inventory costing method in which the exact cost of each item in inventory is determined and assigned; used most often by businesses that have a low unit volume of merchandise with high unit prices. Glencoe Accounting

Methods of Assigning Costs to Inventories Determining the Cost of Inventories Section 25.2 First-In, First-Out Method (FIFO) first-in, first-out method (FIFO) An inventory costing method that assumes that the first items purchased (first in) were the first items sold (first out). Glencoe Accounting

Methods of Assigning Costs to Inventories Determining the Cost of Inventories Section 25.2 Last-In, First-Out Method (LIFO) last-in, first-out method (LIFO) An inventory costing method that assumes that the last items purchased (last in) are the first items sold (first out). Glencoe Accounting

Methods of Assigning Costs to Inventories Determining the Cost of Inventories Section 25.2 Weighted Average Cost Method Add the number of units on hand at the beginning of the period and the number of units purchased. Add the cost of the units on hand at the beginning of the period and the cost of units purchased. Divide the total cost by the total number of units. weighted average cost method An inventory costing method in which all purchases of an item are added to the beginning inventory of that item; the total cost is then divided by the total units to obtain the average cost per unit. Glencoe Accounting

Key Terms consistency principle lower-of-cost-or-market rule Choosing an Inventory Costing Method Section 25.3 Key Terms consistency principle lower-of-cost-or-market rule market value conservatism principle Glencoe Accounting

Consistency and Inventory Costing Choosing an Inventory Costing Method Section 25.3 What is the GAAP consistency principle? consistency principle Accounting principle requiring a business to apply the same accounting methods in the same way from one period to the next. Glencoe Accounting

Comparison of the Four Inventory Costing Methods Choosing an Inventory Costing Method Section 25.3 The present economic conditions Considerations when choosing an inventory costing method: The future economic outlook Whether the prices and demand for the product will remain stable, increase, or decrease Glencoe Accounting

Conservatism and the Lower-of-Cost-or-Market Rule Choosing an Inventory Costing Method Section 25.3 What is the lower-of-cost-or-market rule? lower-of-cost-or-market rule The requirement that ending merchandise inventory be stated at the lesser of cost (calculated using one of the four inventory costing methods) or market value. Glencoe Accounting

Conservatism and the Lower-of-Cost-or-Market Rule Choosing an Inventory Costing Method Section 25.3 What is market value? market value The current price that is charged for a similar item of merchandise in the market. Glencoe Accounting

Conservatism and the Lower-of-Cost-or-Market Rule Choosing an Inventory Costing Method Section 25.3 What is GAAP conservatism principle? conservatism principle Accounting principle requiring that when there is a choice, accountants choose the safer or more conservative method that is least likely to result in an overstatement of income or assets. Glencoe Accounting

Question 1 Use the information in this table to calculate the value of the ending inventory using the LIFO method, assuming that 42 units remain. Using the LIFO method, assume that all from the July 2 beginning inventory remain: 15 x $145 = $2,175 42 – 15 = 27 more units remain Assume that all 25 from the July 31 purchase remain: 25 x $148 = $3,700 You have now accounted for 40 of the 42 units. Thus, 2 units from the August 15 purchase remain: 2 x $150 = $300 $2,175 + $3,700 + $300 = $6,175 ending LIFO value Glencoe Accounting

Question 2 In an economy that is experiencing inflation, which method of costing inventory results in the highest gross profit on sales? FIFO. If costs are rising, the FIFO method assumes that the merchandise sold represents the oldest, or least expensive, units. If this method is used, the business will report the lowest cost of merchandise sold and, thus, the result will be the highest gross profit on sales. Glencoe Accounting

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