2. Two methods of tracking merchandise are the perpetual inventory system and the periodic inventory system. Businesses can choose one of four methods to assign cost values to inventories. Businesses must apply consistency and conservatism when reporting merchandise inventory on the financial statements.
Glencoe Accounting
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

3. Explain the importance of maintaining accurate inventory records.
Explain the difference between a periodic and a perpetual inventory system.
Take a physical inventory count and record inventories.
Determine the cost of merchandise inventory using the specific identification; first-in, first-out; last-in, first-out; and weighted average cost methods.
Assign a value to merchandise inventory using the lower-of-cost-or- market rule.
Explain the accounting principles of consistency and conservatism.
Glencoe Accounting
Glencoe Accounting
Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

4. Key Terms perpetual inventory system point-of-sale terminal (POS)
Determining the Quantity of Inventories
Section 25.1
Key Terms
perpetual inventory system
point-of-sale terminal (POS)
online
periodic inventory system
Glencoe Accounting

5. Merchandise Inventory
Determining the Quantity of Inventories
Section 25.1
Shows the cost of goods purchased for resale.
Merchandise Inventory
Account
Reported on the balance sheet and the income statement.
Glencoe Accounting

6. Methods of Tracking Inventory
Determining the Quantity of Inventories
Section 25.1
perpetual inventory system
Two methods of merchandise tracking
inventory
periodic inventory system
perpetual inventory system
An inventory system that keeps a constant, up-to-date record of the amount of merchandise on hand.
Glencoe Accounting

7. Methods of Tracking Inventory
Determining the Quantity of Inventories
Section 25.1
perpetual inventory system
Two methods of merchandise tracking
inventory
periodic inventory system
periodic inventory system
An inventory system in which inventory records are updated only after a physical count of merchandise on hand is made.
Glencoe Accounting

8. Methods of Tracking Inventory
Determining the Quantity of Inventories
Section 25.1
Computers update a perpetual inventory system through point of sale terminals (POS) are online.
point of sale terminal (POS)
An electronic cash register.
online
The link of a terminal or cash register to a centralized computer system.
Glencoe Accounting

9. Methods of Tracking Inventory
Determining the Quantity of Inventories
Section 25.1
Time consuming
Usually done at the end of a peak selling period
Physical Inventory
Glencoe Accounting

10. Key Terms specific identification method
Determining the Cost of Inventories
Section 25.2
Key Terms
specific identification method
first-in, first-out method (FIFO)
last-in, first-out method (LIFO)
weighted average cost method
Glencoe Accounting

11. Purchased merchandise is recorded in the accounting records at cost.
Inventory Costs
Determining the Cost of Inventories
Section 25.2
Purchased merchandise is recorded in the accounting records at cost.
Glencoe Accounting

12. Methods of Assigning Costs to Inventories
Determining the Cost of Inventories
Section 25.2
Specific Identification
Four methods of determining inventory cost
First-In, First-Out (FIFO)
Last-In, First-Out (LIFO)
Weighted Average Cost
Glencoe Accounting

13. Methods of Assigning Costs to Inventories
Determining the Cost of Inventories
Section 25.2
Specific Identification Method
specific identification method
An inventory costing method in which the exact cost of each item in inventory is determined and assigned; used most often by businesses that have a low unit volume of merchandise with high unit prices.
Glencoe Accounting

14. Methods of Assigning Costs to Inventories
Determining the Cost of Inventories
Section 25.2
First-In, First-Out Method (FIFO)
first-in, first-out method (FIFO)
An inventory costing method that assumes that the first items purchased (first in) were the first items sold (first out).
Glencoe Accounting

15. Methods of Assigning Costs to Inventories
Determining the Cost of Inventories
Section 25.2
Last-In, First-Out Method (LIFO)
last-in, first-out method (LIFO)
An inventory costing method that assumes that the last items purchased (last in) are the first items sold (first out).
Glencoe Accounting

16. Methods of Assigning Costs to Inventories
Determining the Cost of Inventories
Section 25.2
Weighted Average Cost Method
Add the number of units on hand at the beginning of the period and the number of units purchased.
Add the cost of the units on hand at the beginning of the period and the cost of units purchased.
Divide the total cost by the total number of units.
weighted average cost method
An inventory costing method in which all purchases of an item are added to the beginning inventory of that item; the total cost is then divided by the total units to obtain the average cost per unit.
Glencoe Accounting

17. Key Terms consistency principle lower-of-cost-or-market rule
Choosing an Inventory Costing Method
Section 25.3
Key Terms
consistency principle
lower-of-cost-or-market rule
market value
conservatism principle
Glencoe Accounting

18. Consistency and Inventory Costing
Choosing an Inventory Costing Method
Section 25.3
What is the GAAP consistency principle?
consistency principle
Accounting principle requiring a business to apply the same accounting methods in the same way from one period to the next.
Glencoe Accounting

19. Comparison of the Four Inventory Costing Methods
Choosing an Inventory Costing Method
Section 25.3
The present economic conditions
Considerations when choosing an inventory costing method:
The future economic outlook
Whether the prices and demand for the product will remain stable, increase, or decrease
Glencoe Accounting

20. Conservatism and the Lower-of-Cost-or-Market Rule
Choosing an Inventory Costing Method
Section 25.3
What is the lower-of-cost-or-market rule?
lower-of-cost-or-market rule
The requirement that ending merchandise inventory be stated at the lesser of cost (calculated using one of the four inventory costing methods) or market value.
Glencoe Accounting

21. Conservatism and the Lower-of-Cost-or-Market Rule
Choosing an Inventory Costing Method
Section 25.3
What is market value?
market value
The current price that is charged for a similar item of merchandise in the market.
Glencoe Accounting

22. Conservatism and the Lower-of-Cost-or-Market Rule
Choosing an Inventory Costing Method
Section 25.3
What is GAAP conservatism principle?
conservatism principle
Accounting principle requiring that when there is a choice, accountants choose the safer or more conservative method that is least likely to result in an overstatement of income or assets.
Glencoe Accounting

23. Question 1
Use the information in this table to calculate the value of the ending inventory using the LIFO method, assuming that 42 units remain.
Using the LIFO method, assume that all from the July 2 beginning inventory remain:
15 x $145 = $2,175
42 – 15 = 27 more units remain
Assume that all 25 from the July 31 purchase remain:
25 x $148 = $3,700
You have now accounted for 40 of the 42 units. Thus, 2 units from the August 15 purchase remain:
2 x $150 = $300
$2,175 + $3,700 + $300 = $6,175 ending LIFO value
Glencoe Accounting

24. Question 2
In an economy that is experiencing inflation, which method of costing inventory results in the highest gross profit on sales?
FIFO. If costs are rising, the FIFO method assumes that the merchandise sold represents the oldest, or least expensive, units. If this method is used, the business will report the lowest cost of merchandise sold and, thus, the result will be the highest gross profit on sales.
Glencoe Accounting

25. End of