click to edit master title style 1 1 inventories 6
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InventoriesInventories
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Two primary objectives of control over inventory are:1) Safeguarding the inventory, and
2) Properly reporting it in the financial statements.
6-1
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Controls over inventory include developing and using security measures to prevent
inventory damage or customer or employee theft.
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To ensure the accuracy of the amount of inventory reported in
the financial statements, a merchandising business should
take a physical inventory.
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Inventory Costing Methods 6-2
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614
400
300
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100
0
371
299
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Fifo Lifo Average cost
Inventory Costing Methods
Number of firms (> $1B Sales)
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6-2-
Example Exercise 6-1
The three identical units of Item QBM are purchased during February, as shown below.
Feb. 8 Purchase 1 $ 4515 Purchase 1 4826 Purchase 1 51
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Item QBM Units Cost
Assume that one unit is sold on February 27 for $70.
Determine the gross profit for February and ending inventory on February 28 using (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) average cost methods.
Total 3 $144 Average cost per unit $48 ($144/3 units)
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Follow My Example 6-1
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6-2
For Practice: PE 6-1A, PE 6-1B
Gross Profit Ending Inventory
(a) First-in, first-out (FIFO): $25 ($70 – $45) $99 ($48 – $51)
(b) Last-in, first-out (LIFO): $19 ($70 – $51) $93 ($45 + $48)
(c) Average cost: $22 ($70 – $48) $96 ($48 x 2)
$144/3 units
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931
Item 127B
Units Cost
Jan. 1 Inventory 100
$204 Sale 70
10 Purchase 80 2122 Sale 40
28 Sale 20
30 Purchase 100 22
Item 127B
Units Cost
Jan. 1 Inventory 100
$204 Sale 70
10 Purchase 80 2122 Sale 40
28 Sale 20
30 Purchase 100 22
FIFO Perpetual 6-3
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6-3-
Example Exercise 6-2
Beginning inventory, purchases, and sales for Item ER27 are as follows:
Nov. 1 Inventory 40 units at $55 Sale 32 units
11 Purchase 60 units at $721 Sale 45 units
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Assuming a perpetual inventory system and the first-in, first-out (FIFO) method, determine (a) the cost of the merchandise sold for the November 21 sale and (b) the inventory on November 30.
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Follow My Example 6-2
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6-3
For Practice: PE 6-2A, PE 6-2B
a) Cost of merchandise sold:
8 units @ $5 $40
37 units @ $7 259
45 units $299
b) Inventory, November 30:
$161 = (23 units x $7)
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Item 127B
Units Cost
Jan. 1 Inventory 100
$204 Sale 70
10 Purchase 80 2122 Sale 40
28 Sale 20
30 Purchase 100 22
Item 127B
Units Cost
Jan. 1 Inventory 100
$204 Sale 70
10 Purchase 80 2122 Sale 40
28 Sale 20
30 Purchase 100 22
LIFO Perpetual
On January 30, the firm purchased one hundred additional units of Item 127B at $22 each.
6-3
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6-3-
Example Exercise 6-3
Beginning inventory, purchases, and sales for Item ER27 are as follows:
Nov. 1 Inventory 40 units at $55 Sale 32 units
11 Purchase 60 units at $721 Sale 45 units
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Assuming a perpetual inventory system and the last-in, first-out (LIFO) method, determine (a) the cost of the merchandise sold for the November 21 sale and (b) the inventory on November 30.
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Follow My Example 6-3
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6-3
For Practice: PE 6-3A, PE 6-3B
a) Cost of merchandise sold:
$315 = (45 units x $7)
b) Inventory, November 30:
8 units @ $5 $ 4015 units @ $7 10523 $145
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The weighted average unit cost method is based on the average cost of identical units. The total
cost of merchandise available for sale is divided by the related
number of units of that item.
Average Cost 6-4
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Average Cost
$5,880
= $2,000
= 1,680
= 2,200
100 units @ $20100 units @ $20
80 units @ $2180 units @ $21
100 units @ $22100 units @ $22
280
Jan. 1
Jan. 10
Jan. 30
Average unit cost: $5,880 ÷ 280 = $21
Cost of merchandise sold: 130 units at $21 = $2,730
Ending merchandise inventory: 150 units at $21= $3,150 68
100 units @ $22100 units @ $22
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6-4-
Example Exercise 6-4
The units of an item available for sale during the year were as follows:
Jan. 1 Inventory 6 units @ $50 $ 300Mar. 20 Purchase 14 units @ $55 770Oct. 30 Purchase 20 units @ $62 1,240 Available for sale 40 units $2,310
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There are 16 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out (FIFO) method, (b) the last-in, first-out (LIFO) method, and (c) the average cost method.
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Follow My Example 6-4
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6-4
For Practice: PE 6-4A, PE 6-4B
a) First-in, first-out (FIFO) method: $992 (16 units x $62)
b) Last-in, first-out (LIFO) method: $850 (6 units x $50) + (10 units x $55)
c) Average method: $924 (16 units x $57.75) where average cost = $57.75 ($2,310 ÷ 40 units)
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If the cost of replacing an item in inventory is lower than the original purchase cost, the lower-of-cost-or-market (LCM) method is
used to value the inventory.
Lower-of-Cost-or-Market Method 6-6
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Market, as used in lower of cost or market, is the
cost to replace the merchandise on the
inventory date.
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