1. CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 6-2 Inventory Costing

2. CENTURY 21 ACCOUNTING © Thomson/South-Western FIRST-IN, FIRST-OUT INVENTORY COSTING METHOD Using the price of merchandise purchased first to calculate the cost of merchandise sold first is called the first-in, first-out inventory costing method FIFO is an abbreviation for first-in, first-out Assumes that the merchandise purchased first (first in) is the merchandise sold first (first out) Uses the most recent purchase prices to determine the cost of merchandise inventory remaining 2 LESSON 6-2

3. CENTURY 21 ACCOUNTING © Thomson/South-Western 3 LESSON 6-2 1.Assign units from most recent purchase. 2.Assign units from next most recent purchase. 3.Multiply ending inventory units by unit price. 4.Total the ending inventory columns. FIRST-IN, FIRST-OUT INVENTORY COSTING METHOD page 176 1 2 3 4 OfficeMart has an inventory of 700 three-ring binders on November 30. The remaining 300 units from the June purchase & the 500 units in the beginning inventory are designated as the units that were sold.

4. CENTURY 21 ACCOUNTING © Thomson/South-Western LAST-IN, FIRST-OUT INVENTORY COSTING METHOD Using the price of merchandise purchased last to calculate the cost of merchandise sold first is called the last-in, first-out inventory costing method LIFO is an abbreviation for last-in, first-out Assumes that the merchandise purchased last (last in) is the merchandise sold first (first out) Uses the earliest purchase prices to determine the cost of merchandise inventory remaining 4 LESSON 6-2

5. CENTURY 21 ACCOUNTING © Thomson/South-Western 5 LESSON 6-2 1.Assign units from earliest purchase. 2.Assign units from next earliest purchase. 3.Multiply ending inventory units by unit price. 4.Total the ending inventory columns. LAST-IN, FIRST-OUT INVENTORY COSTING METHOD page 177 1 2 4 3 OfficeMart has an inventory of 700 three-ring binders on November 30. Of the 700 units on hand, 500 units are assumed to be the units in the beginning inventory. The remaining 200 units are assumed to have been purchased on the next earliest date, June.

6. CENTURY 21 ACCOUNTING © Thomson/South-Western WEIGHTED AVERAGE INVENTORY COSTING METHOD Using average cost of beginning inventory plus merchandise purchased during a fiscal period to calculate the cost of merchandise sold first is called the weighted-average inventory costing method Assumes that the cost is an average of the price paid for similar items purchased during the fiscal period. 6 LESSON 6-2

7. CENTURY 21 ACCOUNTING © Thomson/South-Western 7 LESSON 6-2 WEIGHTED-AVERAGE INVENTORY COSTING METHOD page 177 OfficeMart has an inventory of 700 three-ring binders on November 30. The total cost $1,725 is divided by the total units purchased, 1,500 to calculate the weighted- average cost per unit, $1.15 The 700 remaining units are assumed to have been purchased at an average cost of $1.15 each

8. CENTURY 21 ACCOUNTING © Thomson/South-Western COSTING INVENTORY DURING PERIODS OF INCREASING PRICES The cost of the ending inventory affects the cost of merchandise sold amount on the income statement. The higher the ending inventory, the lower the cost of merchandise sold amount, and vice versa. During a period of increasing prices, the FIFO method usually results in the lowest cost of merchandise sold and the highest net income The LIFO method usually results in the highest cost of merchandise sold & the lowest net income The higher the cost of merchandise sold, the lower the net income 8 LESSON 6-2

9. CENTURY 21 ACCOUNTING © Thomson/South-Western 9 LESSON 6-2 COSTING INVENTORY DURING PERIODS OF INCREASING PRICES page 178

10. CENTURY 21 ACCOUNTING © Thomson/South-Western 10 LESSON 6-2 COSTING INVENTORY DURING PERIODS OF DECREASING PRICES page 179  During a period of decreasing prices, the FIFO method usually results in the highest cost of merchandise sold and the lowest net income  The LIFO method usually results in the lowest cost of merchandise sold & the highest net income  The lower the cost of merchandise sold, the higher the net income

11. CENTURY 21 ACCOUNTING © Thomson/South-Western 11 LESSON 6-2 RESULTS OF THE THREE INVENTORY COSTING METHODS COMPARED page 179

12. CENTURY 21 ACCOUNTING © Thomson/South-Western LOWER OF COST OR MARKET INVENTORY COSTING METHOD Using the lower of cost or market price to calculate the cost of ending merchandise inventory is called the lower of cost or market inventory costing method Market refers to the current replacement cost of the merchandise item Two amounts are needed to apply the lower of cost or market method: The cost of the inventory using the FIFO, LIFO, or weighted-average method The current market price of the inventory 12 LESSON 6-2

13. CENTURY 21 ACCOUNTING © Thomson/South-Western 13 LESSON 6-2 1.Calculate the cost. 2.Calculate the market price. 3.Determine the smaller number to use as the lower of cost or market amount. LOWER OF COST OR MARKET INVENTORY COSTING METHOD page 180 123 If the unit price is higher than the market price at the end of a fiscal period, the inventory cost is reduced to the current market price. If the unit price is lower than the market price, the inventory cost is maintained at the unit price

14. CENTURY 21 ACCOUNTING © Thomson/South-Western 14 LESSON 6-2 TERMS REVIEW first-in, first-out inventory costing method last-in, first-out inventory costing method weighted-average inventory costing method lower of cost or market inventory costing method page 181