Section 2Determining the Cost of Inventories What You’ll Learn  How to determine the cost of the merchandise on hand.  How to use the four inventory costing methods. What You’ll Learn  How to determine the cost of the merchandise on hand.  How to use the four inventory costing methods.

Why It’s Important Much time and effort is spent determining the cost of merchandise inventory because it appears on both the balance sheet and the income statement. Why It’s Important Much time and effort is spent determining the cost of merchandise inventory because it appears on both the balance sheet and the income statement. Key Terms  specific identification method  first-in, first-out method  last-in, first-out method  weighted average cost method Key Terms  specific identification method  first-in, first-out method  last-in, first-out method  weighted average cost method Section 2Determining the Cost of Inventories (cont'd.)

Methods of Determining Inventory Costs Businesses use one of four inventory costing methods: Methods of Determining Inventory Costs Businesses use one of four inventory costing methods:  specific identification  specific identification Section 2Determining the Cost of Inventories (cont'd.)  first-in, first-out  first-in, first-out  last-in, first-out  last-in, first-out  weighted average cost  weighted average cost

The Specific Identification Costing Method  The exact cost of each item is determined and assigned to that item.  The actual cost of each item is obtained from the invoice.  Often used by businesses that sell a small number of items with high unit prices.  The exact cost of each item is determined and assigned to that item.  The actual cost of each item is obtained from the invoice.  Often used by businesses that sell a small number of items with high unit prices. Section 2Determining the Cost of Inventories (cont'd.)

The First-In, First-Out Costing Method (FIFO)  Assumes that the first items purchased (first in) are the first items sold (first out).  Assumes that the items purchased most recently are the ones on hand at the end of the period.  Assumes that the first items purchased (first in) are the first items sold (first out).  Assumes that the items purchased most recently are the ones on hand at the end of the period. Section 2Determining the Cost of Inventories (cont'd.)

The Last-In, First-Out Costing Method (LIFO)  Assumes that the last items purchased (last in) are the first items sold (first out).  Assumes that the items purchased first are still on hand at the end of the period.  Earliest costs are the ones used to assign a cost to the inventory.  Assumes that the last items purchased (last in) are the first items sold (first out).  Assumes that the items purchased first are still on hand at the end of the period.  Earliest costs are the ones used to assign a cost to the inventory. Section 2Determining the Cost of Inventories (cont'd.)

The Weighted Average Cost Method  Assigns the average cost to each unit in inventory.  The average cost is calculated by:  Assigns the average cost to each unit in inventory.  The average cost is calculated by: Section 2Determining the Cost of Inventories (cont'd.)  adding the number of units on hand at the beginning of the period and the number of units purchased  adding the cost of the units on hand at the beginning of the period and the cost of the units purchased  dividing the total cost by the total number of units  adding the number of units on hand at the beginning of the period and the number of units purchased  adding the cost of the units on hand at the beginning of the period and the cost of the units purchased  dividing the total cost by the total number of units

Check Your Understanding Contrast the LIFO and FIFO inventory costing methods. Section 2Determining the Cost of Inventories (cont'd.)