1. 7
Inventories
Student Version

2. Describe the importance of control over inventory.1
Describe the importance of control over inventory.
7-2

3. Two primary objectives of control over inventory are:1
Two primary objectives of control over inventory are:
Safeguarding the inventory, and
Properly reporting it in the financial statements.

4. 1
A physical inventory or count of inventory should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate.

5. 2
Describe the three inventory cost flow assumptions and how they impact the income statement and balance sheet.
7-5

6. 2
Under the first-in, first out (FIFO) inventory cost flow method, the first units purchased are assumed to be sold and the ending inventory is made up of the most recent purchases.

7. 2
Under the last-in, first out (LIFO) inventory cost flow method, the last units purchased are assumed to be sold first and the ending inventory is made up of the first units purchased.

8. 2
Under the average inventory cost flow method, the cost of the units sold and in ending inventory is an average of the purchase costs.

9. 3
Determine the cost of inventory under the perpetual inventory system, using the FIFO, LIFO, and average cost methods.
7-9

10. First-In, First-Out Method3
First-In, First-Out Method
On January 1, the firm had 100 units of Item 127B that cost $20 per unit.
Item 127B
Units Cost Jan. 1 Inventory 100 $20

11. First-In, First-Out Method3
First-In, First-Out Method
On January 4, the firm sold 70 units of 127B at $30 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70

12. 3
Exhibit 3
Entries and Perpetual Inventory Account (FIFO)

13. First-In, First-Out Method3
First-In, First-Out Method
On January 10, the firm purchased 80 units at $21 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70
10 Purchase 80 21

14. 3 Entries and Perpetual Inventory Account (FIFO) (continued) Exhibit 3
10 Merchandise Inventory 1,680
Accounts Payable 1,680
Date
Jan. 1

15. First-In, First-Out Method3
First-In, First-Out Method
On January 22, the firm sold 40 units for $30 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70
10 Purchase 80 21
22 Sale 40

16. 3 Entries and Perpetual Inventory Account (FIFO) (continued) Exhibit 3
Jan. 1
Date

17. First-In, First-Out Method3
First-In, First-Out Method
On January 28, the firm sold 20 units at $30 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70
10 Purchase 80 21
22 Sale 40
28 Sale 20

18. 3 Entries and Perpetual Inventory Account (FIFO) (continued) Exhibit 3
Date
Jan. 1

19. First-In, First-Out Method3
First-In, First-Out Method
On January 30, purchased one hundred additional units of Item 127B at $22 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70
10 Purchase 80 21
22 Sale 40
28 Sale 20
30 Purchase

20. 3
Entries and Perpetual Inventory Account (FIFO) (continued)
Exhibit 3

21. Cost of merchandise sold3
Entries and Perpetual Inventory Account (FIFO) (concluded)
Exhibit 3
Cost of merchandise sold
January 31 inventory

22. Last-In, First-Out Method3
Last-In, First-Out Method
On January 1, the firm had 100 units of Item 127B that cost $20 per unit.
Item 127B
Units Cost Jan. 1 Inventory 100 $20

23. Last-In, First-Out Method3
Last-In, First-Out Method
On January 4, the firm sold 70 units of 127B at $30 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70

24. 3
Exhibit 4
Entries and Perpetual Inventory Account (LIFO)

25. Last-In, First-Out Method3
Last-In, First-Out Method
On January 10, the firm purchased 80 units at $21 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70
10 Purchase 80 21

26. 3 Entries and Perpetual Inventory Account (LIFO) (continued) Exhibit 4
10 Merchandise Inventory 1,680
Accounts Payable 1,680
Date
Jan. 1 4

27. Last-In, First-Out Method3
Last-In, First-Out Method
On January 22, the firm sold 40 units for $30 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70
10 Purchase 80 21
22 Sale 40

28. 3 Entries and Perpetual Inventory Account (LIFO) (continued) Exhibit 4
Date
Jan. 1 4

29. Last-In, First-Out Method3
Last-In, First-Out Method
On January 28, the firm sold 20 units at $30 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70
10 Purchase 80 21
22 Sale 40
28 Sale 20

30. 3 Entries and Perpetual Inventory Account (LIFO) (continued) Exhibit 4
Date
Jan. 1 4

31. Last-In, First-Out Method3
Last-In, First-Out Method
On January 30, the firm purchased one hundred additional units of Item 127B at $22 each.
Item 127B
Units Cost Jan. 1 Inventory 100 $20
4 Sale 70
10 Purchase 80 21
22 Sale 40
28 Sale 20
30 Purchase

32. 3 Entries and Perpetual Inventory Account (LIFO) (continued) Exhibit 4
Date
Jan. 1 4 10

33. Cost of Merchandise Sold3
Entries and Perpetual Inventory Account (LIFO) (concluded)
Exhibit 4
Cost of Merchandise Sold
January 31 Inventory

34. 4
Determine the cost of inventory under the periodic inventory system, using the FIFO, LIFO, and average cost methods.
7-34

35. 4
Exhibit 5
First-In, First-Out Flow of Costs

36. 4
Exhibit 5
Last-In, First-Out Flow of Costs

37. Total Cost of Units Available for Sale Units Available for Sale4
The weighted average unit cost is determined as follows:
Total Cost of Units Available for Sale
Units Available for Sale
Average Unit Cost =

38. Compare and contrast the use of the three inventory costing methods.5
Compare and contrast the use of the three inventory costing methods.
7-38

39. Partial Income Statements5
Partial Income Statements
First-In, First-Out
Net sales $3,900
Cost of merchandise sold:
Beginning inventory $2,000
Purchases 3,880
Merchandise available for sale $5,880
Less ending inventory 3,250
Cost of merchandise sold 2,630
Gross profit $1,270

40. Partial Income Statements5
Partial Income Statements
Average Cost
Net sales $3,900
Cost of merchandise sold:
Beginning inventory $2,000
Purchases 3,880
Merchandise available for sale $5,880
Less ending inventory 3,150
Cost of merchandise sold 2,730
Gross profit $1,170

41. Partial Income Statements5
Partial Income Statements
Last-In, First-Out
Net sales $3,900
Cost of merchandise sold:
Beginning inventory $2,000
Purchases 3,880
Merchandise available for sale $5,880
Less ending inventory 3,050
Cost of merchandise sold 2,830
Gross profit $1,070

42. 6
Describe and illustrate the reporting of merchandise inventory in the financial statements.
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43. 6
Cost
Cost is the primary basis for valuing and reporting inventories in the financial statements. However, inventory may be valued at other than cost in the following cases:
(continued)

44. The cost of replacing items in inventory is below the recorded cost.6
The cost of replacing items in inventory is below the recorded cost.
The inventory cannot be sold at normal prices due to imperfections, style changes, or other causes.

45. 6
Market
Market, as used in lower of cost or market, is the cost to replace the merchandise on the inventory date.

46. 6
Determining Inventory at Lower of Cost or Market
Exhibit 8

47. 6
Net Realizable Value
Merchandise that is out of date, spoiled, or damaged should be written down to its net realizable value. This is the estimated selling price less any direct cost of disposal, such as sales commissions.