7e Contemporary Mathematics FOR BUSINESS AND CONSUMERS Brechner PowerPoint Presentation by Domenic Tavella, MBA Inventory ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

7e PERFORMANCE OBJECTIVES Section I Inventory Valuation 16-1:Pricing inventory by using the first-in, first-out (FIFO) method 16-2:Pricing inventory by using the last-in, first-out (LIFO) method 16-3:Pricing inventory by using the average cost method 16-4:Pricing inventory by using the lower-of- cost-or-market (LCM) rule 2 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7e PERFORMANCE OBJECTIVES Section II Inventory Estimation 16-5: Estimating the value of ending inventory by using the retail method 16-6: Estimating the value of ending inventory by using the gross profit method Section III Inventory Turnover and Targets 16-7: Calculating inventory turnover rate at retail 16-8: Calculating inventory turnover rate at cost 16-9: Calculating target inventories based on industry standards 3 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued

7e Inventory Valuation 4 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. inventory Goods that a company has in its possession at any given time. May be in the form of raw materials, partially finished goods, or goods available for sale. merchandise inventory Goods purchased by wholesalers and retailers for resale.

7e Inventory Systems 5 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. periodic inventory system Inventory system in which merchandise is physically counted at least once a year to determine the value of the goods available for sale. perpetual inventory system Inventory system in which goods available for sale are updated on a continuous basis by computer. Purchases by the company are added to inventory, whereas sales to customers are subtracted from inventory.

7e Inventory Systems 6 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued book inventory Is the balance of a perpetual inventory system at any given time. Must be confirmed with an actual physical count at least once a year. specific identification method Is a valuation method in which each item in inventory is matched or coded with its actual cost. Is feasible only for low-volume merchandise flow such as automobiles, boats, or other expensive items.

7e Methods for Pricing Inventory 7 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. first-in, first-out (FIFO) method Assumes the items purchased by a company first are the first items to be sold. Items remaining in ending inventory at the end of an accounting period are therefore considered as if they were the most recently purchased. last-in, first-out (LIFO) method Assumes the items purchased by a company last are the first items to be sold. Items remaining in ending inventory at the end of an accounting period are therefore considered as if they were the oldest goods. average cost, or weighted average, method Assumes the cost of each unit of inventory is the average cost of all goods available for sale during that accounting period.

7e STEPS 8 STEP 1 List the number of units on hand at the end of the year and their corresponding costs starting with the ending balance and working backward through the incoming shipments. STEP 2 Multiply the number of units by the corresponding cost per unit for each purchase. STEP 3 Calculate the value of ending inventory by totaling the extensions from Step 2. TO CALCULATE THE VALUE OF ENDING INVENTORY BY USING FIFO ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7e 9 EXHIBIT 16-1 First-In, First-Out—FIFO ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7e FIFO Example 10 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the FIFO method of inventory pricing for the following data, what is the dollar value of ending inventory if 167 units were on hand on December 31? DateInventoryUnitsCost Jan 1Beginning inventory March 10Purchase May 16Purchase Oct 9Purchase Total600 FIFO Inventory Valuation (12/31) Units Cost Oct May Total 167 Total 11,700 13, , Total 32,900 21,812 19,818 11,700 86,230

7e Inventory Costs and Inventory Valuation 11 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. When inventory costs are rising: FIFO: Higher gross profit LIFO: Lower gross profit When inventory costs are decreasing: FIFO: Lower gross profit LIFO: Higher gross profit

7e STEPS 12 STEP 1 List the number of units on hand at the end of the year and their corresponding costs starting with the beginning inventory and working forward through the incoming shipments. STEP 2 Multiply the number of units by the corresponding cost per unit for each purchase. STEP 3 Calculate the value of ending inventory by totaling the extensions from Step 2. TO CALCULATE THE VALUE OF ENDING INVENTORY BY USING LIFO ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7e 13 EXHIBIT 16-2 Last-In, First-Out—LIFO ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7e Last-In, First-Out (LIFO) Method Example 14 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the LIFO method of inventory pricing for the following data, what is the dollar value of ending inventory if 167 units were on hand on December 31? DateInventoryUnitsCost Jan 1Beginning inventory March 10Purchase May 16Purchase Oct 9Purchase Total600 Total 32,900 21,812 19,818 11,700 86,230 LIFO Inventory Valuation (12/31) Units Cost Total Jan ,380

7e STEPS 15 STEP 1 Calculate the average cost per unit by using the following formula. Average cost per unit = STEP 2 Calculate the value of ending inventory by multiplying the number of units in ending inventory by the average cost per unit. Ending inventory = Units in ending inventory × Average cost per unit TO CALCULATE THE VALUE OF ENDING INVENTORY BY USING AVERAGE COST ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost of goods available for sale Total units available for sale

7e Average Cost Method Example 16 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the average cost method of inventory pricing for the following data, what is the dollar value of ending inventory if 167 units were on hand on December 31? DateInventoryUnitsCost Jan 1Beginning inventory March 10Purchase May 16Purchase Oct 9Purchase Total600 Total 32,900 21,812 19,818 11,700 86,230 Average Cost Inventory Valuation Units Average Cost 86, = Total Value =167 x = 24,001.24

7e STEPS 17 STEP 1 Calculate the cost for each item in the inventory by using one of the acceptable methods: FIFO, LIFO, or weighted average. STEP 2 Determine the market price or current replacement cost for each item. STEP 3 For each item, select the basis for valuation, cost or market, by choosing the lower figure. STEP 4 Calculate the total amount for each inventory item by multiplying the number of items by the valuation price chosen in Step 3. STEP 5 Calculate the total value of the inventory by adding all the figures in the Amount column. TO CALCULATE THE VALUE OF ENDING INVENTORY BY USING THE LOWER-OF-COST-OR-MARKET RULE ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7e Lower-of-Cost-or-Market (LCM) Rule Example 18 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Determine the value of the following inventory by using lower-of- cost-or-market rule. Unit PriceValuation DescriptionQuantityCostMarketBasisAmount Lamp Tray ’ vase ’ vase Fruit bowl , , , , Total Value of Inventory 10,259.00

7e Inventory Estimation 19 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. retail method Is used by most retailers based on a comparison of goods available for sale at cost and at retail. cost to retail price ratio, or cost ratio Is the ratio of goods available for sale at cost to the goods available for sale at retail. Used in the retail method of inventory estimation to represent the cost of each dollar of retail sales.

7e STEPS 20 STEP 1 List beginning inventory and purchases at both cost and retail. STEP 2 Add purchases to beginning inventory to determine goods available for sale at both cost and retail. Beginning inventory +Purchases Goods available for sale STEP 3 Calculate the cost ratio. Cost ratio = STEP 4 Subtract net sales from goods available for sale at retail to get ending inventory at retail. Goods available for sale at retail –Net sales Ending inventory at retail STEP 5 Convert ending inventory at retail to ending inventory at cost by multiplying the ending inventory at retail by the cost ratio. Ending inventory at cost = Ending inventory at retail × Cost ratio TO ESTIMATE THE VALUE OF ENDING INVENTORY BY USING THE RETAIL METHOD ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Goods available for sale at cost Goods available for sale at retail

7e Retail Method Example 21 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Using the retail method, estimate the value of the ending inventory at cost on August 31, from the following information: August 1 – August 31CostRetail Beginning inventory600,000800,000 Net purchases285, ,000 Goods available for sale 885,000 1,180,000.75=75%

7e Retail Method Example 22 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued August 1 – August 31CostRetail Beginning inventory600,000800,000 Net purchases285, ,000 Goods available for sale885,0001,180,000 Net sales- 744,000 Ending inventory Ending inventory at cost = Ending inventory at retail × Cost Ratio Ending inventory at cost = 436, ,000 ×.75 = 327,000

7e Inventory Estimation: Gross Profit Method 23 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. gross profit or gross margin method Uses a company’s gross margin percent to estimate the ending inventory. This method assumes that a company maintains approximately the same gross margin from year to year.

7e STEPS 24 STEP 1 Calculate the goods available for sale. Beginning inventory +Net Purchases Goods available for sale STEP 2 Find the estimated cost of goods sold by multiplying net sales by the cost of goods sold percent (complement of gross margin percent). Estimated cost of goods sold = Net sales(100% – Gross margin %) STEP 3 Calculate the estimate of ending inventory by subtracting the estimated cost of goods sold from the goods available for sale. Goods available for sale –Estimated cost of goods sold Estimated ending inventory TO ESTIMATE THE VALUE OF ENDING INVENTORY BY USING THE GROSS PROFIT METHOD ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

7e Gross Profit Method Example 25 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A firm maintains a gross margin of 41% on all its inventory. In November, the company had a beginning inventory of $149,000, net purchases of $242,000, and net sales of $425,000. Use the gross profit method to estimate the cost of ending inventory in November. Beginning inventory 149,000 Net Purchases+242,000 Goods available for sale Estimated cost of goods sold = Net sales × (100% - Gross margin %)= Goods available for sale 391,000 Estimated cost of goods sold-250, , ,000 (100% - 41%) =425,000 (.59) = $250,750 Estimated ending inventory 140,250

7e Inventory Turnover and Targets 26 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. inventory or stock turnover The number of times during an operating period that the average dollars invested in merchandise inventory was theoretically sold out or turned over. May be calculated in retail dollars or in cost dollars. average inventory An estimate of a company’s typical inventory at any given time, calculated by dividing the total of all inventories taken during an operating period by the number of times inventory was taken.

7e STEPS 27 STEP 1 Calculate average inventory at retail. Average inventory at retail = STEP 2 Calculate the inventory turnover at retail. Round to the nearest tenth when necessary. Inventory turnover at retail = TO CALCULATE INVENTORY TURNOVER RATE AT RETAIL ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Beginning inventory at retail + Ending inventory at retail 2 Net sales Average inventory at retail

7e Inventory Turnover Rate at Retail Example 28 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A firm had net sales of $260,700 for the year. If the beginning inventory at retail was $65,100 and the ending inventory at retail was $52,800, what are (a) the average inventory and (b) the inventory turnover rounded to the nearest tenth? 65, ,800 2 = $58, ,700 58,950 = 4.4

7e STEPS 29 STEP 1 Calculate average inventory at cost. Average inventory at cost = STEP 2 Calculate the inventory turnover at cost. Inventory turnover at cost = TO CALCULATE INVENTORY TURNOVER RATE AT COST ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Beginning inventory at cost + Ending inventory at cost 2 Cost of goods sold Average inventory at cost

7e Inventory Turnover Rate at Cost Example 30 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A store had a cost of goods sold of $756,400 for the year. If the beginning inventory at cost was $43,500 and the ending inventory at cost was $59,300, what are (a) the average inventory at cost and (b) the inventory turnover rounded to the nearest tenth? 43, ,300 2 = $51, ,400 51,400 = 14.7

7e Target Inventories 31 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. target average inventory Inventory standards published by trade associations and the federal government for companies of all sizes and in all industries. Used by managers as targets for the ideal amount of inventory to carry for maximum efficiency.

7e Target Inventories Example 32 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A firm had net sales of $2,650,000 for the year. The beginning inventory at retail was $495,000, and the ending inventory at retail amounted to $380,000. The inventory turnover at retail published as the standard for a business of this size is seven times. (a) Calculate the average inventory and actual inventory turnover for the company. (b) If the turnover is less than seven times, calculate the target average inventory needed to come up to industry standards. 495, ,000 2 = $437,500

7e Target Inventories Example 33 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. continued 2,650, ,500 = 6.1 2,650,000 7 = $378,571.43

7e CHAPTER REVIEW PROBLEM 1 34 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A firm had net sales of $340,250 for the year. If the beginning inventory at retail was $82,300 and the ending inventory at retail was $61,750, what are (a) the average inventory and (b) the inventory turnover rounded to the nearest tenth? 82, ,750 2 = $72, ,250 72,025 = 4.7