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Inventories

Inventories

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Inventories

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  1. 0 6 Inventories

  2. 0 6-1 Two primary objectives of control over inventory are: • Safeguarding the inventory, and • Properly reporting it in the financial statements.

  3. 0 6-1 Controls over inventory include developing and using security measures to prevent inventory damage or customer or employee theft.

  4. 0 6-1 To ensure the accuracy of the amount of inventory reported in the financial statements, a merchandising business should take a physical inventory.

  5. 0 6-2 Inventory Costing Methods 10

  6. 0 6-2 Inventory Costing Methods 400 300 200 100 0 371 299 Number of firms (> $1B Sales) 130 Fifo Lifo Average cost 14

  7. Example Exercise 6-1 0 6-2 - 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

  8. Follow My Example 6-1 $144/3 units 0 6-2 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 6-1A, PE 6-1B

  9. 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 0 6-3 FIFO Perpetual 31

  10. Example Exercise 6-2 0 6-3 - 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

  11. Follow My Example 6-2 • Cost of merchandise sold: • 8 units @ $5 $40 • 37 units @ $7 259 • 45 units $299 0 6-3 • Inventory, November 30: • $161 = (23 units x $7) 37 For Practice: PE 6-2A, PE 6-2B

  12. 0 6-3 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

  13. Example Exercise 6-3 0 6-3 - 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

  14. Follow My Example 6-3 • Inventory, November 30: • 8 units @ $5 $ 40 • 15 units @ $7 105 • 23 $145 0 6-3 • Cost of merchandise sold: • $315 = (45 units x $7) 57 For Practice: PE 6-3A, PE 6-3B

  15. 0 6-4 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.

  16. 100 units @ $20 = $2,000 Jan. 1 80 units @ $21 Jan. 10 = 1,680 100 units @ $22 Jan. 30 = 2,200 280 $5,880 0 6-4 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

  17. Example Exercise 6-4 0 6-4 - 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

  18. Follow My Example 6-4 0 6-4 • 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 6-4A, PE 6-4B

  19. 0 6-6 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.

  20. 0 6-6 Market, as used in lower of cost or market, is the cost to replace the merchandise on the inventory date.