Inventory Valuation Example

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Presentation transcript:

Inventory Valuation Example The Most Challenging Globally Recognized Finance Training & Certification Programs

AGENDA What is inventory? Average Cost FIFO LIFO Valuation Example

Inventory Beginning Inventory + Net Purchases - Cost of Goods Sold (COGS) Ending Inventory Inventory consists of: Raw material inventory Packing material inventory Work in Process Inventory Finished Goods Inventory Variances 3

FIFO - First In – First Out FIFO assumes that the first unit on inventory is the first one sold. For instance you produce 50 units on Monday, your production cost is $10 per unit, you produce 40 units on Tuesday, your production cost is $11 per unit. You sell 40 units on Wednesday. Based on the FIFO method your COGS will be $10 per unit, as this was the cost of the first unit taken to inventory.

LIFO - Last In – First Out LIFO assumes that the last unit on inventory is the first one sold. For instance you produce 50 units on Monday, your production cost is $10 per unit, you produce 40 units on Tuesday, your production cost is $11 per unit. You sell 40 units on Wednesday. Based on the LIFO method your COGS will be $11 per unit, as this was the cost of the last unit taken to inventory.

Average Cost Method Weighted Average during accounting period $11.75 = $47 000 / 4000 units = $11.75 / unit

Comparison Example How inventory valuation methods affect the financial analysis of the company?

Comparison Example We have the following Income Statement Based on the inventory purchases. Note: expenses are given in this exercise

Comparison Example Total inventory purchase = $39 000 – from inventory table Different valuation methods calculate ending inventory value for the 1000 units. (see next slide) COGS = Beginning Inventory + Net Purchases - Ending Inventory. Net Income = Sales – COGS - Expense

Comparison Example Calculating Ending Inventory: FIFO = $8 x 1000 units = $8 000 LIFO = $16 x 1000 units = $16 000 Average = ($8x1000+ $10x1000 +$13x1000+ $16x1000)/4000 units = $11.75

Comparison Example

SUMMARY What is inventory? – Raw, pack material, WIP, Finished Goods Average Cost - Weighted Average FIFO – First In – First Out LIFO – Last In – First OUt Valuation Example Thank you for your attention, if you have any questions, please contact us! 12