2. Inventory Valuation

3. Standards 0 BCS-PAI-4 d. Identify and explain the advantages and disadvantages of different types of accounting systems. 0 BCS-PAI-4 g. Analyze business transactions and their effect on the accounting equation.

4. Objectives 0 Students will be able to explain the difference between the three cost assumption methods to value ending inventory. 0 Students will be able to value inventory using the LIFO, FIFO, and Average Cost methods.

5. What is inventory? 0 Will eventually bring in revenue 0 Merchandise 0 Finished Goods 0 Work in process 0 Raw materials

6. What determines how we value inventory? 0 What type of business we are in? 0 Retail, manufacturing 0 How much variance there is in the unit cost for purchases

7. Ways to value inventory 0 Specific Identification 0 Identification by specific item, barcode, etc. 0 Ex. VIN # on car lots 0 Cost Flow assumptions 0 First–in-First-out 0 Last-in-First-out 0 Average Cost Method

8. First-in-First-Out 0 Assumes that the first items in the door are the first items that will be sold 0 Assumes that ending inventory must consist of only the most recent purchases 0 Ending inventory is valued using the most recent purchases going backward.

9. FIFO cont’d DateExplanationUnitsUnit CostTotal Cost Jan 1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr 10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec 1Purchases40301250 Total available for sale2005575 Ending Inventory30 Units Sold170

10. FIFO cont’d 0 Ending Inventory 0 Total units *most recent prices Dec 1 Purchase price 30 * 30 = $900 *note use the price until you get the pricing on all of the units 0 Cost of Goods Sold Available for sale Less ending inventory 5575 -900 COGS $ 4625

11. Last-in-First-Out 0 Assumes that the last items in the door are the first items that will be sold 0 Assumes that ending inventory must consist of oldest purchases 0 Ending inventory is valued using the oldest recent purchases going forward.

12. LIFO cont’d DateExplanationUnitsUnit CostTotal Cost Jan 1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr 10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec 1Purchases40301250 Total available for sale2005575 Ending Inventory30 Units Sold170

13. LIFO cont’d 0 Ending Inventory 0 Total units *oldest prices Beginning inventory $750 (25 units) Feb 1 purchase 5 units 5 * 25 = 125 750+ 125 = 875 0 Cost of Goods Sold Available for sale Less ending inventory 5575 -875 COGS $ 4700

14. Average Cost Method 0 Assumes that the unit cost of inventory will remain basically the same throughout the period 0 Ending inventory is valued using the total value of units available during period divided by total units available. This gives you the average unit cost.

15. Average cost cont’d DateExplanationUnitsUnit CostTotal Cost Jan 1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr 10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec 1Purchases40301250 Total available for sale2005575 Ending Inventory30 Units Sold170

16. Average Cost Method cont’d 0 Ending Inventory Value of total available Inventory $5575 divided by Available units 200 Cost per unit 27.88 Times units in Ending inventory 30 Ending inventory $836.40 0 Cost of Goods Sold Available for sale Less ending inventory $ 5575.00 -836.40 COGS $ 4738.60

17. Why do care how we value it? 0 We have to pay taxes on it 0 It affects cost of goods sold, which affects our profits

18. QUIZ

19. Which method assumes that the first items in the door are the first items that will be sold? 0 A. FIFO A. FIFO 0 C. LIFO C. LIFO 0 D. Specific Identification D. Specific Identification 0 B. Average Cost B. Average Cost

20. Which method assumes that the unit cost of inventory will remain basically the same throughout the period? 0 A. FIFO A. FIFO 0 C. LIFO C. LIFO 0 D. Specific Identification D. Specific Identification 0 B. Average Cost B. Average Cost

21. Which method assumes that ending inventory is valued using the most recent purchases going backward? 0 A. FIFO A. FIFO 0 C. LIFO C. LIFO 0 D. Specific Identification D. Specific Identification 0 B. Average Cost B. Average Cost

22. Which is not a cost assumption valuation method? 0 A. FIFO A. FIFO 0 C. Specific Identification C. Specific Identification 0 B. LIFO B. LIFO 0 D. Average Cost Method D. Average Cost Method

23. Which type of company would use specific identification to value inventory? 0 A. Retail A. Retail 0 C. Manufacturing C. Manufacturing 0 B. Car Dealership B. Car Dealership 0 D. Small Business D. Small Business

24. Which is not something to consider when choosing a valuation method? 0 A. The way we have always done it A. The way we have always done it 0 C. How often the unit costs changes during the accounting period C. How often the unit costs changes during the accounting period 0 B. The type of business that we are in B. The type of business that we are in 0 D. Which gives a better representation of actual cost of the goods that were sold D. Which gives a better representation of actual cost of the goods that were sold

25. The FIFO method assumes that the first items in the door are the first items that will be sold. 0 True True 0 False False

26. The LIFO method assumes that ending inventory must consist of only the most recent purchases. 0 True True 0 False False

27. There is only one appropriate way to value inventory? 0 True True 0 False False

28. A company may change their valuation methods often so that they can show a profit? 0 True True 0 False False

29. The end

30. Correct! Great Job!!

31. Sorry, incorrect! Try Again