1. Power Notes Chapter 9 Inventories Learning Objectives C9
1. Internal Control of Inventories
2. Effect of Inventory Errors
3. Inventory Cost Flow Assumptions
4. Perpetual Inventory Costing Methods
5. Periodic Inventory Costing Methods
6. Comparing Inventory Costing Methods
7. Inventory Valuation Other Than Cost
8. Balance Sheet Presentation of Merchandise
9. Estimating Inventory Cost
10. Financial Analysis and Interpretation C9

2. Power Notes Chapter 9 Inventories Slide # Power Note Topics 37 23 31 33 37
Inventory Control and Relationships
Perpetual Inventory Accounting
LIFO and FIFO Cost Flow Assumptions
Inventory at Lower-of-Cost-or-Market
Retail and Gross Profit Methods
Inventory Turnover Ratio
Note: To select a topic, type the slide # and press Enter.

3. 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.

4. Inventory Costs and Relationships
LIABILITIES
Merchandise
Inventory
ASSETS
OWNER’S
EQUITY
Net Income
Cost of
Mdse. Sold
COSTS & EXPENSES
REVENUES
If merchandise inventory is overstated
Cost of merchandise sold is
Gross profit and net income are . . .
Ending owner’s equity is
understated
overstated

5. Inventory Costs and Relationships
LIABILITIES
Merchandise
Inventory
ASSETS
OWNER’S
EQUITY
Net Income
Cost of
Mdse. Sold
COSTS & EXPENSES
REVENUES
If merchandise inventory is understated
Cost of merchandise sold is
Gross profit and net income are . . .
Ending owner’s equity is
overstated
understated

6. Merchandising and Inventory
Merchandising involves selling inventory.
Inventory is usually an important asset.
Inventory must be accounted for periodically or perpetually.
Traditional periodic method is often being replaced by perpetual inventory accounting.

7. Advantages of Using Perpetual Inventory
Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers, scanners, and bar codes on most products
Perpetual inventory accounting provides management controls.
Managers know which items are selling fastest and the profit margin on those items.

8. 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
Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

9. 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 sale of 7 units leaves a balance of 3 units.

10. 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.

11. 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
Of the 4 units sold, 3 come from the first units in (FIFO) at a cost of $20.

12. 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
Sold 2 units from the 7 units on hand. No allocation is necessary.

13. 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
Totals 18 $ $ $325

14. 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
Totals 18 $ $ $325

15. FIFO Perpetual Inventory Accounting
Date Description Debit Credit
Accounts Receivable 390
Sales 390
Cost of Merchandise Sold 263
Merchandise Inventory 263
Gross Profit = Sales ($390) minus
Cost of Merchandise Sold ($263) = $127
Jan. 31
To record January sales of item 127B.
(7 4 2
Jan. 31
To record cost of January sales of item 127B.

16. LIFO 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 sale of 7 units leaves a balance of 3 units.

17. LIFO 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 purchase price of $21 is different than the cost of the previous 3 units on hand; therefore, the inventory balance of 11 units is accounted for separately.

18. LIFO 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
Of the 4 units sold, all come from the last units in (LIFO) at a cost of $21.

19. LIFO 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
Of the 2 units sold, all come from the last units in (LIFO) at a cost of $21, leaving 2 units from that group.

20. LIFO 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

21. LIFO 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
Totals 18 $ $ $322

22. LIFO Perpetual Inventory Accounting
Date Description Debit Credit
Accounts Receivable 390
Sales 390
Cost of Merchandise Sold 266
Merchandise Inventory 266
Gross Profit = Sales ($390) minus
Cost of Merchandise Sold ($266) = $124
Jan. 31
To record January sales of item 127B.
(7 4 2
Jan. 31
To record cost of January sales of item 127B.

23. First-In, First-Out Flow of Costs
Merchandise
Available
for Sale
Purchases
Jan. 1
200 units at $9
$1,800
Mar. 10
300 units at $10
$3,000
Sep. 21
400 units at $11
$4,400
Nov. 18
100 units at $12
Using FIFO costing, which units are assumed to be sold first?
$1,200
$10,400

24. First-In, First-Out Flow of Costs
Cost of
Merchandise
Sold
Merchandise
Available
for Sale
Purchases
$1,800
200 units at $9
Jan. 1
200 units at $9
$1,800
$3,000
300 units at $10
Mar. 10
300 units at $10
$3,000
$2,200
200 units at $11
Sep. 21
400 units at $11
$7,000
$4,400
Nov. 18
100 units at $12
FIFO cost flow assumes merchandise acquired first is sold first.
$1,200
$10,400

25. First-In, First-Out Flow of Costs
Cost of
Merchandise
Sold
Merchandise
Available
for Sale
Purchases
$1,800
200 units at $9
Jan. 1
200 units at $9
$1,800
$3,000
300 units at $10
Mar. 10
300 units at $10
$3,000
$2,200
200 units at $11
Sep. 21
400 units at $11
$7,000
$4,400
Merchandise
Inventory
Nov. 18
100 units at $12
$1,200
$2,200
200 units at $11
$10,400
$1,200
100 units at $12
$3,400

26. First-In, First-Out Flow of Costs
Cost of
Merchandise
Sold
Merchandise
Available
for Sale
Purchases
$1,800
200 units at $9
Jan. 1
200 units at $9
$1,800
$3,000
300 units at $10
Mar. 10
300 units at $10
$3,000
$2,200
200 units at $11
Sep. 21
400 units at $11
$7,000
700 units
$4,400
Merchandise
Inventory
Nov. 18
100 units at $12
$1,200
$2,200
200 units at $11
1,000 units
$10,400
$1,200
100 units at $12
$3,400
300 units

27. Last-In, First-Out Flow of Costs
Merchandise
Available
for Sale
Purchases
Using LIFO costing, which units are assumed to be sold first?
Jan. 1
200 units at $9
$1,800
Mar. 10
300 units at $10
$3,000
Sep. 21
400 units at $11
$4,400
Nov. 18
100 units at $12
$1,200
1,000 units total
$10,400

28. Last-In, First-Out Flow of Costs
Merchandise
Available
for Sale
Purchases
LIFO cost flow assumes merchandise acquired last is sold first.
Jan. 1
200 units at $9
$1,800
Mar. 10
300 units at $10
$3,000
Cost of
Merchandise
Sold
Sep. 21
400 units at $11
$4,400
$2,000
200 units at $10
Nov. 18
100 units at $12
$1,200
$4,400
400 units at $11
1,000 units total
$10,400
$1,200
100 units at $12
$7,600

29. Last-In, First-Out Flow of Costs
Merchandise
Inventory
Merchandise
Available
for Sale
Purchases
$1,800
200 units at $9
Jan. 1
200 units at $9
$1,000
100 units at $10
$1,800
$2,800
Mar. 10
300 units at $10
$3,000
Cost of
Merchandise
Sold
Sep. 21
400 units at $11
$4,400
$2,000
200 units at $10
Nov. 18
100 units at $12
$1,200
$4,400
400 units at $11
$10,400
$1,200
100 units at $12
$7,600

30. Last-In, First-Out Flow of Costs
Merchandise
Inventory
Merchandise
Available
for Sale
Purchases
$1,800
200 units at $9
Jan. 1
200 units at $9
$1,000
100 units at $10
$1,800
$2,800
300 units
Mar. 10
300 units at $10
$3,000
Cost of
Merchandise
Sold
Sep. 21
400 units at $11
$4,400
$2,000
200 units at $10
Nov. 18
100 units at $12
$1,200
$4,400
400 units at $11
1,000 units
$10,400
$1,200
100 units at $12
$7,600
700 units

31. Valuation of Inventory at Lower-of-Cost-or-Market
Unit Unit
Inventory Cost Market Total Total Lower
Item Quantity Price Price Cost Market C or M
$ 3,800
2,700
4,650
3,920
Total $15,520 $15,472 $15,070
The market decline is either:
1. Based on total inventory ($15,520 – $15,472) = $48
2. Based on individual items ($15,520 – $15,070) = $450
The decline is reported on the income statement as a
separate item or included in the cost of merchandise sold.
A 400 $10.25 $ $ 4,100 $ 3,800
B ,700 2,892
C ,800 4,650
D ,920 4,130

32. Afro-Arts Balance Sheet December 31, 2004
Assets
Current assets:
Cash $ 19,400
Accounts receivable $80,000
Less allowance 3,000 77,000
Merchandise inventory
at lower of cost (first-in,
first-out method) or market 216,300

33. Retail Method of Estimating Inventory Cost
Retail method is based on relationship between cost of merchandise available for sale and the retail price.
Retail prices of all merchandise must be accumulated.
Inventory at retail is calculated as retail price of merchandise available for sale less sales.
Ratio is calculated as cost divided by retail price.
Inventory at retail price times cost ratio equals estimated cost of inventory.

34. Retail Inventory Method Calculation
Cost Retail
Merchandise inventory, January 1 $19,400 $36,000
Purchases in January (net) 42,600 64,000
Merchandise available for sale
Ratio of cost to retail price:
Sales for January (net) 70,000
Merchandise inventory, January 31, at retail
Merchandise inventory, January 31, at est. cost
$62,000 $100,000
($62,000 / $100,000 = 62%)
$30,000
($30,000 x 62%) $18,600

35. Gross Profit Method of Estimating Inventory Cost
1. A gross profit percentage rate is estimated based on previous experience adjusted for known changes.
2. Estimated gross profit is calculated by multiplying the estimated gross profit rate times the actual net sales.
3. Estimated cost of merchandise sold is calculated by subtracting the gross profit from actual sales.
4. The cost of merchandise sold estimate is deducted from actual merchandise available for sale to determine the estimated cost of merchandise inventory.

36. Gross Profit Method Calculation
Merchandise inventory, January 1 $ 57,000
Purchases in January (net) 180,000
Merchandise available for sale
Sales in January (net) $250,000
Less: Estimated gross profit
Estimated cost of merchandise sold
Estimated merchandise inventory, January 31
$237,000
($250,000 x 30%) 75,000
175,000
$ 62,000
Many firms generate a surprisingly stable and predictable gross profit as a percentage of sales.

37. Inventory Turnover Ratios
SUPERVALU Zale
Cost of goods sold $15,620,127,000 $ 737,188,000
Inventories:
Beginning of year $1,115,529,000 $478,467,000
End of year 1,067,837, ,669,000
Average $1,091,683,000 $525,068,000

38. Inventory Turnover Ratios
SUPERVALU Zale
Cost of goods sold $15,620,127,000 $ 737,188,000
Inventories:
Beginning of year $1,115,529,000 $478,467,000
End of year 1,067,837, ,669,000
Average $1,091,683,000 $525,068,000
Inventory turnover 14.3 times 1.4 times

39. Inventory Turnover Ratios
SUPERVALU La-Z-Boy
Cost of goods sold $15,620,127,000 $ 737,188,000
Inventories:
Beginning of year $1,115,529,000 $478,467,000
End of year 1,067,837, ,669,000
Average $1,091,683,000 $525,068,000
Inventory turnover 14.3 times 1.4 times
Average selling period 25 days 283 days
Use: To assess the efficiency in the management of inventory

40. Power Notes This is the last slide in Chapter 9. Chapter 9 Inventories
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