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0. 7. Inventories. 0. After studying this chapter, you should be able to:. Describe the importance of control over inventory. Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet. 0. After studying this chapter, you should be able to:.

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0

7

Inventories


0

After studying this chapter, you should be able to:

  • Describe the importance of control over inventory.

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


0

After studying this chapter, you should be able to:

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

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

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


0

After studying this chapter, you should be able to:

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

  • Estimate the cost of inventory using the retail method and the gross profit method.


0

7-1

Objective 1

Describe the importance of control over inventory.


0

7-1

Two primary objectives of control over inventory are:

  • Safeguarding the inventory, and

  • Properly reporting it in the financial statements.


0

7-1

Controls over inventory include developing and using security measures to prevent inventory damage or customer or employee theft.


0

7-1

To ensure the accuracy of the amount of inventory reported in the financial statements, a merchandising business should take a physical inventory.


0

7-2

Objective 2

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


0

7-2

Inventory Costing Methods

10


0

7-2

(Continued)

11


0

7-2

(Continued)

12


0

7-2

(Concluded)

13


0

7-2

Inventory Costing Methods

400

300

200

100

0

371

299

Number of firms (> $1B Sales)

130

FIFO

LIFO

Average cost

14


Example Exercise 7-1

0

7-2

-

The three identical units of Item QBM are purchased during February, as shown below.

Item QBMUnitsCost

Feb. 8 Purchase 1 $ 45

15 Purchase 1 48

26 Purchase 1 51

Total 3 $144

Average cost per unit $48 ($144 ÷ 3 units)

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.

15


Follow My Example 7-1

$144/3 units

0

7-2

Gross ProfitEnding Inventory

  • First-in, first-out (FIFO): $25 ($70 – $45) $99 ($48 – $51)

  • Last-in, first-out (LIFO): $19 ($70 – $51) $93 ($45 + $48)

  • Average cost: $22 ($70 – $48) $96 ($48 x 2)

16

For Practice: PE 7-1A, PE 7-1B


0

7-3

Objective 3

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


Item 127B

Units Cost Jan. 1 Inventory 100 $20

0

7-3

FIFO Perpetual

On January 1, the firm had 100 units of Item 127B that cost $20 per unit.

18


Item 127B

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

0

7-3

FIFO Perpetual

On January 4, the firm sold 70 units of 127B at $30 each.

19


0

7-3

FIFO Perpetual

On January 4, the firm sold 70 units of 127B at $30 each.

4 Accounts Receivable 2 100 00

Sales 2 100 00

On January 22, the firm sold twenty units at $30.

4 Cost of Merchandise Sold 1 400 00

Merchandise Inventory 1 400 00

20


0

7-3

FIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000

4 70 20 1,400 30 20 600

21


Item 127B

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

10 Purchase 80 21

0

7-3

FIFO Perpetual

On January 10, the firm purchased 80 units at $21 each.

22


0

7-3

FIFO Perpetual

On January 10, the firm purchased 80 units at $21 each.

10 Merchandise Inventory 1 680 00

Accounts Payable 1 680 00

23


0

7-3

FIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

24


Item 127B

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

10 Purchase 80 21

22 Sale 40

0

7-3

FIFO Perpetual

On January 22, the firm sold 40 units for $30 each.

25


0

7-3

FIFO Perpetual

On January 22, the firm sold 40 units for $30 each.

22 Accounts Receivable 1 200 00

Sales 1 200 00

On January 22, the firm sold twenty units at $30.

22 Cost of Merchandise Sold 810 00

Merchandise Inventory 810 00

26


Of the forty sold, thirty are considered to be from those acquired at $20 each. The other ten are considered to be from the January 10 purchase.

0

7-3

FIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 30 20 600 10 21 210 70 21 1,470

27


Item 127B acquired at $20 each. The other ten are considered to be from the January 10 purchase.

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

10 Purchase 80 21

22 Sale 40

28 Sale 20

0

7-3

FIFO Perpetual

On January 28, the firm sold 20 units at $30 each.

28


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

FIFO Perpetual

On January 28, the firm sold 20 units at $30 each.

28 Accounts Receivable 600 00

Sales 600 00

28 Cost of Merchandise Sold 420 00

Merchandise Inventory 420 00

29


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

FIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 30 20 600 10 21 210 70 21 1,470

28 20 21 420 50 21 1,050

30


Item 127B acquired at $20 each. The other ten are considered to be from the January 10 purchase.

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

10 Purchase 80 21

22 Sale 40

28 Sale 20

30 Purchase 100 22

0

7-3

FIFO Perpetual

On January 30, purchased ten additional units of Item 127B at $22 each.

31


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

FIFO Perpetual

On January 30, purchased ten additional units of Item 127B at $22 each.

30 Merchandise Inventory 2 200 00

Accounts Payable 2 200 00

32


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

FIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 30 20 600 10 21 210 70 21 1,470

28 20 21 420 50 21 1,050

30 100 22 2,200 50 21 1,050 100 22 2,200

33


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

FIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 30 20 600 10 21 210 70 21 1,470

28 20 21 420 50 21 1,050

30 100 22 2,200 50 21 1,050 100 22 2,200

Cost of merchandise sold for January is $2,630.

34


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

FIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 30 20 600 10 21 210 70 21 1,470

28 20 21 420 50 21 1,050

30 100 22 2,200 50 21 1,050 100 22 2,200

January 31, inventory is $3,250 ($1,050 + $2,200)

35


Example Exercise 7-2 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

0

7-3

-

Beginning inventory, purchases, and sales for Item ER27 are as follows:

Nov. 1 Inventory 40 units at $5

5 Sale 32 units

11 Purchase 60 units at $7

21 Sale 45 units

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.

36


Follow My Example 7-2 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

  • Cost of merchandise sold:

    • 8 units @ $5 $40

    • 37 units @ $7 259

    • 45 units $299

0

7-3

  • Inventory, November 30:

  • $161 = (23 units x $7)

37

For Practice: PE 7-2A, PE 7-2B


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

On January 1, the firm had 100 units of Item 127B that cost $20 per unit.

Item 127B

Units Cost Jan. 1 Inventory 100 $20

38


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

On January 4, the firm sold 70 units of 127B at $30 each.

Item 127B

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

39


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

On January 4, the firm sold 70 units of 127B at $30 each.

4 Accounts Receivable 2 100 00

Sales 2 100 00

On January 22, the firm sold twenty units at $30.

4 Cost of Merchandise Sold 1 400 00

Merchandise Inventory 1 400 00

40


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000

4 70 20 1,400 30 20 600

41


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

On January 10, the firm purchased 80 units at $21 each.

Item 127B

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

10 Purchase 80 21

42


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

On January 10, the firm purchased 80 units at $21 each.

10 Merchandise Inventory 1 680 00

Accounts Payable 1 680 00

43


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

44


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

On January 22, the firm sold 40 units for $30 each.

Item 127B

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

10 Purchase 80 21

22 Sale 40

45


0 acquired at $20 each. The other ten are considered to be from the January 10 purchase.

7-3

LIFO Perpetual

On January 22, the firm sold 40 units for $30 each.

22 Accounts Receivable 1 200 00

Sales 1 200 00

On January 22, the firm sold twenty units at $30.

22 Cost of Merchandise Sold 840 00

Merchandise Inventory 840 00

46


All of the 40 sold are considered to be from the January 10 purchase.

0

7-3

LIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 40 21 840 30 20 600

40 21 840

47


Item 127B purchase.

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

10 Purchase 80 21

22 Sale 40

28 Sale 20

0

7-3

LIFO Perpetual

On January 28, the firm sold 20 units at $30 each.

48


0 purchase.

7-3

LIFO Perpetual

On January 28, the firm sold 20 units at $30 each.

28 Accounts Receivable 600 00

Sales 600 00

28 Cost of Merchandise Sold 420 00

Merchandise Inventory 420 00

49


All of the 20 sold are considered to be from the January 22 purchase.

0

7-3

LIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 40 21 840 30 20 600

40 21 840

28 20 21 420 30 20 600

20 21 420

50


0 purchase.

7-3

LIFO Perpetual

On January 30, the firm purchased one hundred additional units of Item 127B at $22 each.

Item 127B

Units Cost Jan. 1 Inventory 100 $20

4 Sale 70

10 Purchase 80 21

22 Sale 40

28 Sale 20

30 Purchase 100 22

51


0 purchase.

7-3

LIFO Perpetual

On January 30, the firm purchased one hundred additional units of Item 127B at $22 each.

30 Merchandise Inventory 2 200 00

Accounts Payable 2 200 00

52


0 purchase.

7-3

7-3

LIFO Perpetual

LIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 40 21 840 30 20 600

40 21 840

28 20 21 420 30 20 600

20 21 420

30 100 22 2,200 30 20 600

20 21 420

100 22 2,200

33

53


0 purchase.

7-3

7-3

LIFO Perpetual

LIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 40 21 840 30 20 600

40 21 840

28 20 21 420 30 20 600

20 21 420

30 100 22 2,200 30 20 600

20 21 420

100 22 2,200

33

54

Cost of merchandise sold $2,660


0 purchase.

7-3

7-3

LIFO Perpetual

LIFO Perpetual

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600 80 21 1,680

22 40 21 840 30 20 600

40 21 840

28 20 21 420 30 20 600

20 21 420

30 100 22 2,200 30 20 600

20 21 420

100 22 2,200

33

55

January 31, inventory….. $3,220


Example Exercise 7-3 purchase.

0

7-3

-

Beginning inventory, purchases, and sales for Item ER27 are as follows:

Nov. 1 Inventory 40 units at $5

5 Sale 32 units

11 Purchase 60 units at $7

21 Sale 45 units

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.

56


Follow My Example 7-3 purchase.

  • Inventory, November 30:

  • 8 units @ $5 $ 40

  • 15 units @ $7 105

  • 23 $145

0

7-3

  • Cost of merchandise sold:

    • $315 = (45 units x $7)

57

For Practice: PE 7-3A, PE 7-3B


0 purchase.

7-4

Objective 4

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


0 purchase.

7-4

FIFO Periodic

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.


280 units available for sale during year purchase.

$5,880

Cost of merchandise available for sale

0

7-4

FIFO Periodic

100 units @ $20

= $2,000

Jan. 1

80 units @ $21

Jan. 10

= 1,680

100 units @ $22

Jan. 30

= 2,200

60


100 units @ $20 purchase.

Jan. 1

80 units @ $21

Jan. 10

100 units @ $22

Jan. 30

Ending inventory $3,250

0

7-4

FIFO Periodic

The physical count on January 31 shows that 150 units are on hand (conclusion: 130 units were sold). What is the cost of the ending inventory?

Sold these

= $ 0

Sold 30 of these

= 1,050

50 units @ $21

100 units @ $22

= 2,200

61


0 purchase.

7-4

FIFO Periodic

Now we can calculate the cost of goods sold as follows:

Beginning inventory, January 1 (Slide 60) $2,000

Purchases ($1,680 + $2,200) 3,880

Cost of merchandise available for sale $5,880

Ending inventory, January 31(Slide 61) 3,250

Cost of merchandise sold $2,630

62


0 purchase.

7-4

LIFO Periodic

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.


280 units available for sale during year purchase.

$5,880

Cost of merchandise available for sale

0

7-4

LIFO Periodic

100 units @ $20

= $2,000

Jan. 1

80 units @ $21

Jan. 10

= 1,680

100 units @ $22

Jan. 30

= 2,200

64


100 units @ $20 purchase.

Jan. 1

80 units @ $21

Jan. 10

100 units @ $22

Jan. 30

Ending inventory $3,050

0

7-4

LIFO Periodic

Assume again that the physical count on January 31 is 150 units (and that 130 units were sold). What is the cost of the ending inventory?

= $2,000

50 units @ $21

= 1, 680

= 1,050

Sold 30 of these

Sold these

= 2,200

= 0

65


0 purchase.

7-4

LIFO Periodic

Now we can calculate the cost of goods sold as follows:

Beginning inventory, January 1 (Slide 64) $2,000

Purchases ($1,680 + $2,200) 3,880

Cost of merchandise available for sale $5,880

Ending inventory, January 31(Slide 65) 3,050

Cost of merchandise sold $2,830

66


0 purchase.

7-4

Average Cost

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.


100 units @ $20 purchase.

= $2,000

Jan. 1

80 units @ $21

Jan. 10

= 1,680

100 units @ $22

Jan. 30

= 2,200

280

$5,880

0

7-4

Average Cost

100 units @ $22

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


0 purchase.

7-4

Average Cost

Now we can calculate the cost of goods sold as follows:

Beginning inventory, January 1 (Slide 68) $2,000

Purchases ($1,680 + $2,200) 3,880

Cost of merchandise available for sale $5,880

Ending inventory, January 31(Slide 68) 3,150

Cost of merchandise sold $2,730

69


Example Exercise 7-4 purchase.

0

7-4

-

The units of an item available for sale during the year were as follows:

Jan. 1 Inventory 6 units @ $50 $ 300

Mar. 20 Purchase 14 units @ $55 770

Oct. 30 Purchase 20 units @ $62 1,240

Available for sale 40 units $2,310

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.

70


Follow My Example 7-4 purchase.

0

7-4

  • First-in, first-out (FIFO) method: $992 (16 units x $62)

  • Last-in, first-out (LIFO) method: $850 (6 units x $50) + (10 units x $55)

  • Average method: $924 (16 units x $57.75) where average cost = $57.75 ($2,310 ÷ 40 units)

71

For Practice: PE 7-4A, PE 7-4B


0 purchase.

7-5

Objective 5

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


0 purchase.

7-5

Partial Income Statements

First-In, First-Out

Net sales $3,900

Cost of merchandise sold:

Beginning inventory $2,000

Purchases 3,880

Merchandise available for sale $5,880

Less ending inventory 3,250

Cost of merchandise sold 2,630

Gross profit $1,270

73


0 purchase.

7-5

Partial Income Statements

Average Cost

Net sales $3,900

Cost of merchandise sold:

Beginning inventory $2,000

Purchases 3,880

Merchandise available for sale $5,880

Less ending inventory 3,150

Cost of merchandise sold 2,730

Gross profit $1,170

74


0 purchase.

7-5

Partial Income Statements

Last-In, First-Out

Net sales $3,900

Cost of merchandise sold:

Beginning inventory $2,000

Purchases 3,880

Merchandise available for sale $5,880

Less ending inventory 3,050

Cost of merchandise sold 2,830

Gross profit $1,070

75


0 purchase.

7-5

Recap

Weighted

FIFO LIFO Average

Ending inventory $3,250 $3,150 $3,050

Cost of merchandise sold $2,630 $2,730 $2,830

Gross profit $1,270 $1,170 $1,070


0 purchase.

7-6

Objective 6

Describe and illustrate the reporting of merchandise inventory in the financial statements.


0 purchase.

7-6

Lower-of-Cost-or-Market Method

If the cost of replacing an item in inventory is lower than the original purchase cost, the lower-of-cost-or-market (LCM) methodis used to value the inventory.


0 purchase.

7-6

Market, as used in lower of cost or market, is the cost to replace the merchandise on the inventory date.


0 purchase.

7-6

Cost and replacement cost can be determined for—

  • each item in the inventory,

  • major classes or categories of inventory, or

  • the inventory as a whole.


0 purchase.

7-6

Determining Inventory at Lower-of-Cost-or-Market Method

81


0 purchase.

7-6

Merchandise that is out of date, spoiled, or damaged should be written down to its net realizablevalue. This is the estimated selling price less any direct cost of disposal, such as sales commissions.


0 purchase.

7-6

Merchandise Inventory on the Balance Sheet

Merchandise inventory is usually presented in the Current Assets section of the balance sheet, following receivables.


0 purchase.

7-6

The method of determining the cost of inventory (FIFO, LIFO, or weighted average) should be shown.


Example Exercise 7-5 purchase.

0

7-6

-

On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item as shown in Exhibit 7.

Inventory Unit Unit

Commodity Quantity Cost Price Market Price

C17Y 10 $ 39 $40

B563 7 110 98

85


Follow My Example 7-5 purchase.

Unit Unit Lower of

Commodity Qty Cost Price Market Price Cost Market C or M

C17Y 10 $ 39 $40 $ 390 $ 400 $ 390

B563 7 110 98 770 686 686

Total $1,160 $1,086 $1,076

0

7-6

-

86

For Practice: PE 7-5A, PE 7-5B


Example Exercise 7-6 purchase.

0

7-6

-

Zula Repair Shop incorrectly counted its December 31, 2008 inventory as $250,000 instead of the correct amount of $220,000. Indicate the effect of the misstatement on Zula’s December 31, 2008 balance sheet and income statement for the year ended December 31, 2008.

87


Follow My Example 7-6 purchase.

Amount of Misstatement Overstatement (Understatement)

Balance Sheet:

Merchandise inventory overstated $30,000

Current assets overstated 30,000

Total assets overstated 30,000

Owner’s equity overstated 30,000

Income Statement:

Cost of merchandise sold understated $(30,000)

Gross profit overstated 30,000

Net income overstated 30,000

0

7-6

-

88

For Practice: PE 7-6A, PE 7-6B


0 purchase.

7-7

Objective 7

Estimate the cost of inventory, using the retail method and the gross profit method.


The purchase.retail inventory method of estimating inventory cost is based on the relationship of the cost of merchandise available for sale to the retail price of the same merchandise.

0

7-7

Retail Inventory Method


0 purchase.

7-7

Determining Inventory by the Retail Method

91


Example Exercise 7-7 purchase.

Follow My Example 7-7

0

7-7

A business using the retail method of inventory costing determines that merchandise inventory at retail is $900,000. If the ratio of cost to retail price is 70%, what is the amount of inventory to be reported on the financial statements?

$630,000 ($900,000 x 70%)

For Practice: PE 7-7A, PE 7-7B

92


The purchase.gross profit method uses the estimated gross profit for the period to estimate the inventory at the end of the period.

61

0

7-7

Gross Profit Method


0 purchase.

7-7

Estimating Inventory by Gross Profit Method

94


0 purchase.

7-7

The gross profit method is useful for estimating inventories for monthly or quarterly financial statements in a periodic inventory system.


Example Exercise 7-8 purchase.

0

7-7

Based on the following data, estimate the cost of ending merchandise inventory:

Sales (net) $1,250,000Estimated gross profit rate 40%

Beginning merchandise inventory $100,000

Purchases (net) 800,000

Merchandise available for sale $900,000

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Follow My Example 7-8 purchase.

Merchandise available for sale $900,000

Less cost of merchandise sold

[$1,250,000 x (100% – 40%)] 750,000

Estimated ending merchandise inventory $150,000

0

7-7

97

For Practice: PE 7-8A, PE 7-8B


Cost of merchandise sold purchase.

Average inventory

0

7-7

Inventory turnover measures the relationship between the volume of goods (merchandise) sold and the amount of inventory carried during the period.

Inventory turnover =


Inventory turnover 15.8 times 1.4 times purchase.

0

7-7

SUPERVALU Zale

Cost of merchandise sold $16,681,472,000 $1,157,226,000

Inventories:

Beginning of year $1,078,343,000 $826,824,000

End of year $1,032,034,000 $853,580,000

Average $1,055,188,500 $840,202,000

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0 purchase.

7-7

Generally, the larger the inventory turnover, the more efficient and effective the management of inventory.


Average inventory purchase.

Number of days’ sales in inventory

=

Average daily cost of merchandise sold

0

7-7

The number of days’ sales ininventory is a rough measure of the length of time it takes to acquire, sell, and replace the inventory.


0 purchase.

7-7

SUPERVALU Zale

Average daily cost of

merchandise sold:

$16,681,472,000/365 $45,702,663

$1,157,226,000/365 $3,170,482

Average inventory $1,055,188,500 $840,202,000

Number of days’ sales

in inventory 23.1 days 265.0 days

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