cpa, mba by rachelle agatha, cpa, mba inventory slides by rachelle agatha, cpa, with excerpts from...

BY R A C H E L L E A G AT H A , C PA , M B A

Inventory

Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

1. Describe the importance of control over inventory.

2. Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet.

Objectives

3. Determine the cost of inventory under the perpetual system, using the FIFO, LIFO, and average cost methods.

4. Determine the cost of inventory under the periodic system, using the FIFO, LIFO, and average cost methods.

5. Compare and contrast the use of the three inventory costing methods.

6. Describe and illustrate the reporting of merchandise inventory in the financial statement.

Objectives

Describe the importance of control over inventory.

Objective 1

Objective 1

Two primary objectives of control over inventory are:

1)Safeguarding the inventory, and

2)Properly reporting it in the financial statements.

Controls over inventory include

developing and using security measures to

prevent inventory damage or customer or

employee theft.

To ensure the accuracy of the amount of inventory reported in the financial

statements, a merchandising business should take a physical inventory.

Describe three inventory cost flow

assumptions and how they impact the income statement and balance

sheet.

Objective 2

Objective 2

Inventory Costing Methods

FIFO LIFO WTD AVG

BEG INVENTORY 2,500.00$ 2,500.00$ 2,500.00$

PURCHASES + 2,031.25$ 2,031.25$ 2,031.25$

GOODS AVAILABLE 4,531.25$ 4,531.25$ 4,531.25$

ENDING INVENTORY - 687.50$ 625.00$ 647.32$

CGS = 3,843.75$ 3,906.25$ 3,883.93$

COMPARISON OF CGS PER INVENTORY METHOD

Three identical inventory items were purchases during July:

Units CostJuly 6 Purchase 1 115$

19 Purchase 1 118$ 24 Purchase 1 121$

Total 3 354$

Average Cost 118.00$ ($354/3)

Assume one unit is sold on July 28th for $150.

Determine gross profit for July under the three methods.

Gross Profit Ending Inventory CGS

FIFO $35 ($150 - $115) $239 ($118 + $121) 115$

LIFO $29 ($150 - $121) $233 ($115 + $118) 121$

Avg Cost $32 ($150 - $118) $236 ($118 × 2) 118$

Determine the cost of inventory under the perpetual inventory system, using FIFO, LIFO, and average

cost methods.

Objective 3

Objective 3

In FIFO, the cost in ending inventory are the newer costs and the cost of merchandise

sold has the older cost (First In – First out).

FIFO - cost inventory from the bottom up. Newest in is sitting

in inventory.

Date Units Cost SalesAug 8 15 34$ 510$ Aug 30 13 34$ 442$ Aug 30 7 38$ 266$

35 1,218$

FIFOCost of merchandise sold (August 30):

Units Cost SALES INV

Aug 1 Beg Inv 28 34$ (28) -

8 Sale 1515 Purchase 22 38$ (7) 15

30 Sale 20

FIFO Perpetual Inventory

Beg inv 28 Sales (35) (sold 28 out of beg inv and 7 out of purchases on 8/15)

Purch 22 End Inv 15 (Under FIFO cost from bottom)

FIFO End Inv Cost 570$ (15 units @ $38)



DATE QTYUNIT COST

TOTAL COST QTY

UNIT COST

TOTAL COST QTY

UNIT COST

TOTAL COST

Aug 1 28 34$ 952$

Aug 8 15 34$ 510$ 13 34$ 442$

Aug 15 22 38$ 836$ 13 34$ 442$ Aug 15 22 38$ 836$

Aug 30 13 34$ 442$ 7 38$ 266$ 15 38$ 570$

Aug 31 Balances 1,218$ 570$

PURCHASES COST MERCH SOLD INVENTORY

In LIFO, the cost in ending inventory are the older cost and the cost of merchandise

sold has the newer cost (Last In – First out).

LIFO - cost inventory from the top down. Oldest is sitting in

inventory.

LIFO Perpetual Inventory

Date Units Cost SalesAug 8 15 34$ 510$ Aug 30 20 38$ 760$

35 1,270$

LIFOCost of merchandise sold (August 30):

Units Cost SALES INV

Aug 1 Beg Inv 28 34$ (15) 13

8 Sale 1515 Purchase 22 38$ (20) 2

30 Sale 20



DATE QTYUNIT COST

TOTAL COST QTY

UNIT COST

TOTAL COST QTY

UNIT COST

TOTAL COST

Aug 1 28 34$ 952$

Aug 8 15 34$ 510$ 13 34$ 442$

Aug 15 22 38$ 836$ 13 34$ 442$ Aug 15 22 38$ 836$

Aug 30 20 38$ 760$ 13 34$ 442$ 2 38$ 76$

Aug 31 Balances 1,270$ 518$

PURCHASES COST MERCH SOLD INVENTORY

When the Average Cost Method is used with in a perpetual system, the average cost for each type of

item is computed each time a purchase is made

The Average Cost Method is rarely used in a perpetual system so it is

not illustrated.

1. Most companies will use a computerized system if they chose to do perpetual inventory as is it very time intensive manually.2. Computerized systems track all relevant information about each inventory item, such as description, quantity, cost, size, location.3. For every inventory transaction, there is an entry into the system. Companies will use bar codes, scanners, and other technology.

Computerized Perpetual Accounting Systems

4. A physical inventory is taken at the end of the year and compared to the system records.

Determine the cost of inventory under the periodic inventory

system, using FIFO, LIFO, and average cost

methods.

Objective 4

Objective 4

Using FIFO, the earliest batch purchased is

considered the first batch of merchandise sold. The

physical flow does not have to match the accounting

method chosen.

FIFO Periodic

Beginning inventory, purchases, and sales for Item SJ68 units:

Units CostAug 1 Beg Inv 28 34$

8 Sale 1515 Purchase 22 38$ 30 Sale 20

Assume a periodic inventory system using FIFO.

Determine the cost of merch sold in August and the ending inventory balance.

FIFO Periodic

FIFO Periodic

Sales InvAug 1 28 @ 34$ 952$ (28) Aug 15 22 @ 38$ 836$ (7) 15 Available for Sale 50.0 1,788$ (35) 15

Sales 35

Ending Inventory 15 (15 units @ $38) 570$

Using LIFO, the most recent batch purchased is considered the first batch of merchandise sold. The

actual flow of goods does not have to be LIFO. For example, a store

selling fresh fish would want to sell the oldest fish first (which is FIFO)

even though LIFO is used for accounting purposes.

LIFO Periodic

LIFO Periodic




Assume a periodic inventory system using LIFO.


LIFO Periodic

Sales InvAug 1 28 @ 34$ 952$ (13) 15 Aug 15 22 @ 38$ 836$ (22) - Available for Sale 50.0 1,788$ (35) 15

Sales 35

Ending Inventory 15 (15 units @ $34) 510$

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

Average Cost - Periodic


Units Cost TotalAug 1 Beg Inv 28 34.00$ 952$

15 Purchase 22 38.00$ 836$ Available for Sale 50 1,788$

Assume a periodic inventory system using Avg Cost



Units Cost TotalAug 1 Beg Inv 28 34.00$ 952$

15 Purchase 22 38.00$ 836$ Available for Sale 50 1,788$

Average Cost ($1,788/50) 36$

End Inventory Cost ($36 * 15) 540$


Compare and contrast the use of the three inventory costing methods.

Objective 5

Objective 5




Assume items were sold at $40/unitSales (35 units @ $40) 1,400$

Comparison of Methods


Net sales 1,400$ Cost of merchandise sold:

Beginning inventory 952$ Purchases 836 Merchandise available for sale 1,788 Less ending inventory 570 Cost of merchandise sold 1,218

Gross profit 182$

FIFO




Gross profit 122$

LIFO




Gross profit 152$

AVERAGE COST

FIFO LIFO AVGNet sales 1,400$ 1,400$ 1,400$ Cost of merchandise sold:

Beginning inventory 952$ 952 952Purchases 836 836 836Merchandise available for sale 1,788 1,788 1,788 Less ending inventory 570 510 540 Cost of merchandise sold 1,218 1,278 1,248

Gross profit 182$ 122$ 152$

COMPARISON


Note - with FIFO and rising costs:CMS is lower and ending inventory is higher

Note - with LIFO and rising costs:CMS is higher and ending inventory is lower

Note - Average cost falls between FIFO and LIFO

Describe and illustrate the reporting of merchandise

inventory in the financial statements.

Objective 6

Objective 6

7-6

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

Market, as used in lower of cost or

market, is the cost to replace the

merchandise on the inventory date.

Cost and replacement cost can be determined for—

1)each item in the inventory,

2)major classes or categories of inventory, or

3)the inventory as a whole.

Merchandise that is out of date, spoiled, or damaged should be written down to its net realizable value.

This is the estimated selling price less any

direct cost of disposal, such as sales commissions.

Merchandise Inventory on the Balance Sheet

Merchandise inventory is usually presented in the Current Assets section of

the balance sheet, following receivables.

The method of determining the cost of inventory (FIFO, LIFO, or

weighted average) should be shown.

Summary

Inventory and Controls

Inventory Costing Methods

Perpetual vs. Periodic

systems

Reporting of Inventory

cpa, mba by rachelle agatha, cpa, mba inventory slides by rachelle agatha, cpa, with excerpts from...

Documents

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lifo cost inventory

perpetual inventory

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inventory transaction

periodic inventory system