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Inventories

Learn about inventory types, costing methods, internal controls, and valuation concepts with examples and practical applications. Enhance your grasp on inventory management for improved financial analysis and decision-making.

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Inventories

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  1. Chapter 8 Inventories Electronic Presentationby Douglas Cloud Pepperdine University

  2. Learning Goals 1. Identify the types of inventory used by merchandisers and manufacturers. 2. Summarize and provide examples of internal control procedures that apply to inventory. 3. Describe three inventory cost flow assumptions and how they impact the income statement and the balance sheet. After studying this chapter, you should be able to: Continued

  3. Learning Goals 4. Determine the cost of inventory under the perpetual inventory system, using the first-in, first-out; last-in, first-out; and average cost methods. 5. Determine the cost of inventory under the periodic inventory system, using the first-in, first-out; last-in, first-out; and average cost methods. 6. Compare and contrast the use of the three inventory costing methods. Continued

  4. Learning Goals 7. Determine the proper valuation of inventory at other than cost, using the lower-of-cost-or-market and net realizable value concepts. 8. Describe how inventories are being reduced through quick response. 9. Determine and interpret the inventory turnover ratio, the number of days’ sales in inventory, and lifo reserve adjustments.

  5. Learning Goal 1 Identify the types of inventory used by merchandisers and manufacturers.

  6. Materials inventory consists of the cost of raw materials used in manufacturing a product. Work in process inventory consists of the costs for partially completed products. Direct materials Direct labor costs Factory overhead

  7. Finished goods inventory consists of the costs of direct materials, direct labor, and factory overhead for completed products. When the merchandise is sold, the costs are transferred to Cost of Goods Sold

  8. Learning Goal 2 Summarize and provide examples of internal control procedures that apply to inventories.

  9. Why is Inventory Control Important? • Inventory is a significant assetand for many companies the largest asset. • Inventory is central to the main activity of merchandising and manufacturing companies. • Mistakes in determining inventory cost can cause critical errors in financial statements. • Inventory must be protected from external risks( such as fire and theft) and internal fraud by employees.

  10. Using a perpetual inventory system, the amount of each type of merchandise is always readily available in a subsidiary inventory ledger.

  11. To ensure the accuracy of the amount of inventory reported in the financial statements, a merchandising should take a physical count. This is true even though a firm uses a perpetual inventory system.

  12. Learning Goal 3 Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet.

  13. Three identical units of Item X are purchased during May. One unit is sold on May 30 for $20, the unit that was purchased on May 18. Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12 Specific Identification

  14. The gross profit from this sale would be $7, which is the selling price of $20 less the May 18th cost of $13.

  15. Fifo Method Purchased goods FIFO Sold goods

  16. Fifo Method Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12

  17. Fifo Method Effect of Inventory Costing Methods on Financial Statements $14 13 Balance Sheet Merchandise inventory $27 Income Statement Sales $20 Cost of merchandise sold 9 Gross profit $11

  18. Lifo Method Purchased goods Sold goods LIFO

  19. Lifo Method Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12

  20. Lifo Method Effect of Inventory Costing Methods on Financial Statements Income Statement Sales $20 Cost of merchandise sold 14 Gross profit $ 6 $13 9 Balance Sheet Merchandise inventory $22

  21. Average Cost Method Purchased goods Sold goods Average Cost

  22. Average Cost Method Item X Units Cost May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12

  23. Average Cost Method Effect of Inventory Costing Methods on Financial Statements $12 12 Income Statement Sales $20 Cost of merchandise sold 12 Gross profit $ 8 Balance Sheet Merchandise inventory $24

  24. Inventory Costing Methods 600 500 400 300 200 100 0 Number of firms (> $1Billion Sales) Average cost FIFO LIFO

  25. Learning Goal 4 Determine the cost of inventory under the perpetual inventory system, using the first-in, first-out; last-in, first-out; and average cost methods.

  26. Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit. Perpetual Inventory System Inventory Cost Data Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold

  27. FIFO Perpetual

  28. FIFO Perpetual Inventory Account 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 10 20 200 The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.

  29. FIFO Perpetual Inventory Account Inventory Cost Data Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold On January 4, 7 units of Item 127B are sold at $30 each.

  30. The sale of 7 units leaves a balance of 3 units. FIFO Perpetual Inventory Account 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 10 20 200 4 7 20 140 3 20 60 On January 4, 7 units of Item 127B are sold at $30 each.

  31. FIFO Perpetual Inventory Account Inventory Cost Data Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold On January 10, the firm purchased eight units at $21 each.

  32. Because the purchase price of $21 is different than the cost of the previous three units on hand, the inventory balance of 11 units is accounted for at two prices. FIFO Perpetual Inventory Account Item 127B On January 10, the firm purchased eight units at $21 each. 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 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168

  33. FIFO Perpetual Inventory Account Inventory Cost Data Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold On January 22, the firm sold four units for $31 each.

  34. Of the four units sold, three are from the first units in (fifo) at a cost of $20. FIFO Perpetual Inventory Account 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 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 3 20 60 1 21 21 7 21 147 On January 22, the firm sold four units for $31 each.

  35. FIFO Perpetual Inventory Account Inventory Cost Data Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold On January 28, the firm sold two units at $32.

  36. FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance On January 28, the firm sold two units at $32. Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 3 20 60 1 21 21 7 21 147 28 2 21 42 5 21 105

  37. FIFO Perpetual Inventory Account Inventory Cost Data Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold On January 30, purchased ten additional units of Item 127B at $22 each.

  38. FIFO Perpetual Inventory Account Item 127B On January 30, purchased ten additional units of Item 127B at $22 each. 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 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 3 20 60 1 21 21 7 21 147 28 2 21 42 5 21 105 30 10 22 220 5 21 105 10 22 220

  39. FIFO Perpetual Inventory Accounting Inventory Cost Data Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold Let’s record this sale of Item 127B on January 4.

  40. FIFO Perpetual Inventory Accounting Jan. 4 Accounts Receivable 210 Sales 210 4 Cost of Merchandise Sold 140 Merchandise Inventory 140

  41. LIFO Perpetual

  42. LIFO Perpetual Inventory Account 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 10 20 200 The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.

  43. LIFO Perpetual Inventory Account 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 10 20 200 4 7 20 140 3 20 60 On January 4, the firm sold 7 units at $30 each.

  44. LIFO Perpetual Inventory Account 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 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 Note that a new layer is formed. On January 10, the firm purchased eight units at $21 each.

  45. LIFO Perpetual Inventory Account 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 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 4 21 84 3 20 60 4 21 84 On January 22, the firm sells four units at $31 each. Of the four units sold, all come from the most recent purchase at a cost of $21 each.

  46. LIFO Perpetual Inventory Account 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 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42 On January 28, sold two units at $32 each.

  47. LIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance On January 30, purchase 10 units at $22 each. Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42 30 10 22 220 3 20 60 2 21 42 10 22 220

  48. Learning Goal 5 Determine the cost of inventory under the periodic inventory system, using the first-in, first-out; last-in, first-out; and average cost methods.

  49. 1,000 units available for sale during year Fifo Periodic Jan. 1 Beginning Inventory 200 units @ $9 300 units @ $10 Mar. 10 Purchase 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase Note: These amounts are not from the textbook.

  50. = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 1,000 units available for sale during year Cost of merchandise available for sale Fifo Periodic 200 units @ $9 300 units @ $10 400 units @ $11 100 units @ $12 $10,400

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