1. Accounting for Inventories

2. Inventory Costs All expenditures incurred

3. Inventory Costs All expenditures incurred to bring the item to its

4. Inventory Costs All expenditures incurred to bring the item to its existing condition and location

5. Costs include n Invoice cost n Shipping n Cash discounts n Purchases allowances

6. Inventory Systems - Periodic n Compute inventory balance at end of each accounting period n Compute cost of goods sold at accounting period end

7. Inventory Systems - Perpetual n Compute cost of goods sold at each sale n Compute new inventory balance at each sale

8. Cost Flow Assumptions n Only with specific identification do we attempt to match the actual movement of product through the business with the movement of costs through the accounting system

9. Cost Flow Assumptions n With other inventory cost methods, we make an assumption of the movement of costs through the accounting system. n This "flow" of costs through the system need not match the movement of product through the business.

10. Cost Flow Assumptions n First-In, First-Out

11. Cost Flow Assumptions n First-In, First-Out – Earliest goods assumed to be first units sold

12. Cost Flow Assumptions n First-In, First-Out – Earliest goods assumed to be first units sold – Inventory made up of latest goods acquired

13. Cost Flow Assumptions n Last-In, First-Out

14. Cost Flow Assumptions n Last-In, First-Out – Newest goods assumed to be first units sold

15. Cost Flow Assumptions n Last-In, First-Out – Newest goods assumed to be first units sold – Inventory made up of earliest goods acquired

16. Cost Flow Assumptions n Average cost

17. Cost Flow Assumptions n Average cost – Cost of items sold is the weighted average of costs incurred

18. Cost Flow Assumptions n Average cost – Cost of items sold is the weighted average of costs incurred – Inventory is the weighted average of costs incurred

19. Inventory Example Data Jan. 1Beg Inven.200$4.00$ 800.00 Apr. 10Purchase7005.003,500.00 Oct. 23Purchase4006.002,400.00 Available1,300$6,700.00 Merchandise Sales May 5500 Dec. 19300 Total800

20. First-In First-Out Newest layer$6.00

21. First-In First-Out Newest layer400 units @ $6.00$2,400

22. First-In First-Out Newest layer400 units @ $6.00$2,400 Next newest layer$5.00

23. First-In First-Out Newest layer400 units @ $6.00$2,400 Next newest layer100 units @ $5.00500

24. First-In First-Out Newest layer400 units @ $6.00$2,400 Next newest layer100 units @ $5.00500 Total cost$2,900

25. First-In First-Out Cost of Goods Sold Beginning Inventory$ 800

26. First-In First-Out Cost of Goods Sold Beginning Inventory$ 800 Purchases5,900 Cost of goods available for sale$6,700

27. First-In First-Out Cost of Goods Sold Beginning Inventory$ 800 Purchases5,900 Cost of goods available for sale$6,700 Deduct: Ending Inventory2,900 Cost of goods sold$3,800

28. First-In First-Out Proof of cost of goods sold: Oldest cost layer 200 units @ $4.00$ 800

29. First-In First-Out Proof of cost of goods sold: Oldest cost layer 200 units @ $4.00$ 800 Next oldest layer 600 units @ $5.003,000 Total$3,800

30. Last-In First-Out Oldest layer $4.00

31. Last-In First-Out Oldest layer 200 units @ $4.00$ 800

32. Last-In First-Out Oldest layer 200 units @ $4.00$ 800 Next oldest layer $5.00

33. Last-In First-Out Oldest layer 200 units @ $4.00$ 800 Next oldest layer 300 units @ $5.001,500

34. Last-In First-Out Oldest layer 200 units @ $4.00$ 800 Next oldest layer 300 units @ $5.001,500 Total cost$2,300

35. Last-In First-Out LIFO Periodic Inventory Cost of goods sold: Beginning inventory$ 800

36. Last-In First-Out LIFO Periodic Inventory Cost of goods sold: Beginning inventory$ 800 Purchase5,900 Cost of goods available$6,700

37. Last-In First-Out LIFO Periodic Inventory Cost of goods sold: Beginning inventory$ 800 Purchase5,900 Cost of goods available$6,700 Deduct: Ending inventory2,300 Cost of goods sold$4,400

38. Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold

39. Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold Newest cost layer 400 units @ $6.00$2,400

40. Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold Newest cost layer 400 units @ $6.00$2,400 Next newest layer 400 units @ $5.002,000 Total cost$4,400

41. Weighted Average Periodic Inventory Weighted average cost equals Cost of goods available for sale$6,700 divided by Total units available1,300 equals Weighted average cost per unit$5.1538

42. Weighted Average Periodic Inventory December 31 Inventory 500 units x $5.1538 = $2,577 500 units x $5.1538 = $2,577

43. Weighted Average Periodic Inventory Cost of goods sold:

44. Weighted Average Periodic Inventory Cost of goods sold: Beginning inventory$ 800 Purchases5,900 Cost of goods available$6,700

45. Weighted Average Periodic Inventory Cost of goods sold: Beginning inventory$ 800 Purchases5,900 Cost of goods available$6,700 Deduct: Ending inventory2,577 Cost of goods sold$4,123

46. Weighted Average Periodic Inventory Proof of cost of goods sold 800 units x $5.1538 = $4,123 800 units x $5.1538 = $4,123

47. Income Statement Comparison Periodic Inventory FIFOLIFOWA Sales$8,000$8,000$8,000 CGS3,8004,4004,123 GM$4,200$3,600$3,877 Op. expense1,0001,0001,000 Net income$3,200$2,600$2,877

48. Last-In First-Out LIFO - Perpetual Inventory 200 x $4 $800

49. Last-In First-Out LIFO - Perpetual Inventory 4/4700 x $5$3500200 x $4 $800 700 x $5 3500$4300

50. Last-In First-Out LIFO - Perpetual Inventory 4/4700 x $5$3500200 x $4 $800 700 x $5 3500$4300 5/5500 x $5 $2500200 x $4 $800 200 x $5 1000$1800

51. Last-In First-Out LIFO - Perpetual Inventory 4/4700 x $5$3500200 x $4 $800 700 x $5 3500$4300 5/5500 x $5 $2500200 x $4 $800 200 x $5 1000$1800 10/23400 x $6$2400200 x $4 $800 200 x $5 1000 400 x $6 2400$4200

52. Last-In First-Out LIFO - Perpetual Inventory 4/4700 x $5$3500200 x $4 $800 700 x $5 3500$4300 5/5500 x $5 $2500200 x $4 $800 200 x $5 1000$1800 10/23400 x $6$2400200 x $4 $800 200 x $5 1000 400 x $6 2400$4200 12/19300x $6 $1800200 x $4 $800 200 x $5 1000 100 x $6 600$2400

53. Last-In First-Out LIFO - Perpetual Inventory 4/4700 x $5$3500200 x $4 $800 700 x $5 3500$4300 5/5500 x $5 $2500200 x $4 $800 200 x $5 1000$1800 10/23400 x $6$2400200 x $4 $800 200 x $5 1000 400 x $6 2400$4200 12/19300x $6 $1800200 x $4 $800 200 x $5 1000 100 x $6 600$2400 Cost of goods sold$4300

54. Lower of Cost or Market Class ACostMktLCM Item 1$100$120 Item 1$100$120 Item 28070 Item 28070 Class B Item 6$50$65 Item 6$50$65 Item 74020 Item 74020

55. Lower of Cost or Market - By Item Class ACostMktLCM Item 1$100$120$100 Item 1$100$120$100

56. Lower of Cost or Market - By Item Class ACostMktLCM Item 1$100$120$100 Item 1$100$120$100 Item 2807070 Item 2807070

57. Lower of Cost or Market - By Item Class ACostMktLCM Item 1$100$120$100 Item 1$100$120$100 Item 2807070 Item 2807070 Class B Item 6$50$6550 Item 6$50$6550

58. Lower of Cost or Market - By Item Class ACostMktLCM Item 1$100$120$100 Item 1$100$120$100 Item 2807070 Item 2807070 Class B Item 6$50$6550 Item 6$50$6550 Item 7402020 Item 7402020 Total$240

59. Lower of Cost or Market - By Class Class ACostMktLCM Item 1$100$120 Item 1$100$120 Item 28070 Item 28070 Total$180$190$180 Total$180$190$180

60. Lower of Cost or Market - By Class Class ACostMktLCM Item 1$100$120 Item 1$100$120 Item 28070 Item 28070 Total$180$190$180 Total$180$190$180 Class B Item 6$50$65 Item 6$50$65 Item 74020 Item 74020 Total$90$8585 Total$90$8585 Total$265

61. Lower of Cost or Market- By Total Class ACostMktLCM Item 1$100$120 Item 1$100$120 Item 28070 Item 28070 Class B Item 65040 Item 65040 Item 74020 Item 74020 Total$270$275$270

62. Gross Margin Method Logic of Income Statement Net Sales$70 Cost of goods sold: Begin inv$ 5 Begin inv$ 5 Net purchases 50 Net purchases 50 Cost goods avail$55 Cost goods avail$55 End inv 10 45 End inv 10 45 Gross margin$25

63. Gross Margin Method Inventory Estimation Cost of goods available: Begin inv$ 20,000 Begin inv$ 20,000 Net purchases 135,000 Net purchases 135,000 Cost of goods available $155,000 Cost of goods available $155,000 Deduct cost of goods sold:

64. Gross Margin Method Inventory Estimation Cost of goods available $155,000 Net sales$150,000 Multiply by (1 - Gross margin rate) (1 - 0.30) x 0.70 (1 - 0.30) x 0.70 Est cost of goods sold 105,000 Est ending inventory$ 50,000

65. Gross Margin Method Proof of Answer Net sales $150,000 Cost of goods sold Begin inv$ 20,000 Begin inv$ 20,000 Net purchases 135,000 Net purchases 135,000 CGAS$155,000 CGAS$155,000 End inv 50,000 End inv 50,000 Cost of goods sold 105,000 Cost of goods sold 105,000 Gross margin$ 45,000

66. Inventory Errors An error in the computation of inventory at the end of one period

67. Inventory Errors An error in the computation of inventory at the end of one period causes an error in assets and owners equity at the end of that period

68. Inventory Errors An error in the computation of inventory at the end of one period causes an error in assets and owners equity at the end of that period and an error in income for two periods.

69. Effect of Inventory Errors n Overstatement of inventory at end of period 1 – Causes an overstatement of net income for period 1

70. Effect of Inventory Errors n Overstatement of inventory at end of period 1 – Causes an overstatement of net income for period 1 – and an overstatement of assets and owner's equity at period 1 end

71. Effect of Inventory Errors n Overstatement of inventory at end of period 1 – Causes an understatement of net income for period 2

72. Effect of Inventory Errors n Overstatement of inventory at end of period 1 – Causes an understatement of net income for period 2 – BUT assets and owner's equity at period 2 end will be correct

73. Effect of Inventory Errors n Understatement of inventory at end of period 1 – Causes an understatement of net income for period 1

74. Effect of Inventory Errors n Understatement of inventory at end of period 1 – Causes an understatement of net income for period 1 – and an understatement of assets and owner's equity at period 1 end

75. Effect of Inventory Errors n Understatement of inventory at end of period 1 – Causes an overstatement of net income for period 2

76. Effect of Inventory Errors n Understatement of inventory at end of period 1 – Causes an overstatement of net income for period 2 – BUT assets and owner's equity at period 2 end will be correct