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  1. 0 7 Inventories

  2. 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.

  3. 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.

  4. 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.

  5. 0 7-1 Objective 1 Describe the importance of control over inventory.

  6. 0 7-1 Two primary objectives of control over inventory are: • Safeguarding the inventory, and • Properly reporting it in the financial statements.

  7. 0 7-1 Controls over inventory include developing and using security measures to prevent inventory damage or customer or employee theft.

  8. 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.

  9. 0 7-2 Objective 2 Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet.

  10. 0 7-2 Inventory Costing Methods 10

  11. 0 7-2 (Continued) 11

  12. 0 7-2 (Continued) 12

  13. 0 7-2 (Concluded) 13

  14. 0 7-2 Inventory Costing Methods 400 300 200 100 0 371 299 Number of firms (> $1B Sales) 130 FIFO LIFO Average cost 14

  15. 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

  16. 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

  17. 0 7-3 Objective 3 Determine the cost of inventory under the perpetual inventory system, using FIFO, LIFO, and average cost methods.

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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

  26. 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

  27. 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

  28. Item 127B 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

  29. 0 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

  30. 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 28 20 21 420 50 21 1,050 30

  31. 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 7-3 FIFO Perpetual On January 30, purchased ten additional units of Item 127B at $22 each. 31

  32. 0 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

  33. 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 28 20 21 420 50 21 1,050 30 100 22 2,200 50 21 1,050 100 22 2,200 33

  34. 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 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

  35. 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 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

  36. Example Exercise 7-2 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

  37. Follow My Example 7-2 • 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

  38. 0 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

  39. 0 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

  40. 0 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

  41. 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 41

  42. 0 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

  43. 0 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

  44. 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 44

  45. 0 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

  46. 0 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

  47. 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

  48. Item 127B 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

  49. 0 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

  50. 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