1. Chapter 9 Inventories Accounting, 21st Edition Warren Reeve Fess
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PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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3. After studying this chapter, you should be able to:
Objectives
1. Summarize and provide examples of internal control procedures that apply to inventories.
2. Describe the effect of inventory errors on the financial statement.
3. Describe the three inventory cost flow assumptions and how they impact the income statement and balance sheet.
4. Compute the cost of inventory under the perpetual inventory system, using the following cost methods: first-in, first-out; last-in, first-out; average cost.
After studying this chapter, you should be able to:

4. Objectives
5. Compute the cost of inventory under the periodic inventory system, using the following costing methods: first-in, first-out; last-in, first-out; average cost.
6. Compare and contrast the use of the three inventory costing methods.
7. Compute the proper valuation of inventory at other than cost, using the lower-of-cost-or-market and net realization value concepts.
8. Prepare a balance sheet presentation of merchandise inventory.

5. Objectives
9. Estimate the cost of inventory, using the retail method and the gross profit method.
10. Compute the interpret the inventory turnover ratio and number of days’ sales in inventory.

6. Why is Inventory Control Important?
Inventory is a significant asset and for many companies the largest asset.
Inventory is central to the main activity of merchandising and manufacturing companies.
Mistakes in determining inventory cost can cause critical errors in financial statements.
Inventory must be protected from external risks ( such as fire and theft) and internal fraud by employees.

7. AGREE AGREE AGREE Receiving report Purchase order Invoice JOURNAL
Date
Description
Post Ref.
Nov. 9
Inventory
Accounts Payable--XYZ Co
Purchased merchandise on
account.

8. Effect of Inventory Errors on Financial Statements
LIABILITIES
Merchandise
Inventory
ASSETS
OWNER’S
EQUITY
Net Income
Cost of
Merchandise Sold
COSTS & EXPENSES
REVENUES
If merchandise inventory is
Cost of merchandise sold is
Gross profit and net income are . . .
Ending owner’s equity is
overstated
understated

9. Effect of Inventory Errors on Financial Statements
If merchandise inventory is
Cost of merchandise sold is
Gross profit and net income are . . .
Ending owner’s equity is
understated
overstated

10. Inventory Cost Flow Assumptions
Purchased goods
FIFO
Sold goods

11. Inventory Cost Flow Assumptions
Sold goods
Purchased goods
LIFO

12. Inventory Cost Flow Assumptions
Purchased goods
Sold goods
Average
Cost

13. Inventory Costing Methods
43%
40%
30%
20%
10% 0%
34%
19% 4%
Fifo
Lifo
Average
Other

14. Perpetual Inventory Costs
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
Cost of
Mdse. Sold

15. Fifo
Perpetual

16. FIFO Perpetual Inventory Account
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan
The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.

17. FIFO Perpetual Inventory Account
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
Cost of
Mdse. Sold
On January 4, 7 units of Item 127B are sold at $30 each.

18. FIFO Perpetual Inventory Account
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan
Jan
The sale of 7 units leaves a balance of 3 units.
On January 4, 7 units of Item 127B are sold at $30 each.

19. FIFO Perpetual Inventory Account
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
Cost of
Mdse. Sold
On January 10, the firm purchased eight units at $21 each.

20. FIFO Perpetual Inventory Account
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan
Because the purchase price of $21 is different than the cost of the previous 3 units on hand, the inventory balance of 11 units is accounted for separately.
On January 10, the firm purchased eight units at $21 each.

21. FIFO Perpetual Inventory Account
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
On January 22, the firm sold four units for $31 each.