©CourseCollege.com 1 14 Inventory Inventory held for sale by retailers, manufacturers and wholesalers. Learning Objectives 1.Identify all costs and apply.

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14 Inventory

ProfitDebit Credit or

Expenses

BALANCE SHEET INCOME STATEMENT

Assets Liabilities Revenue

Equity

Inventory held for sale by retailers,

manufacturers and wholesalers.

Learning Objectives1. Identify all costs and apply

the lower of cost or market to merchandise inventory

2. Assign costs to sold inventory using four different methods

3. Compare periodic with perpetual inventory systems

4. Estimate ending inventory

5. Analysis: Calculate and explain inventory turnover and days sales in inventory

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Expenses

Equity

Inventory subsidiary ledgers are separate records for each item of inventory.

Control LedgerInventory

Acct #150

Subsidiary Ledgers

InventoryBrass Chimes#150.236822

Balance

The Subsidiary Ledgers must add up to the

Control Ledger

Overview

Subsidiary example

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Units Cost Total Units Cost Total Units Cost Total

2005 12 11.20 134.40

10-Jan 5 11.20 56.00 56.00 17 11.20 190.40

12-Jan 7 11.20 78.40 78.40 10 11.20 112.00

Item: Brass Chimes, INVENTORY Acct #: 150.236822

SUBSIDIARY LEDGER -Merchandise Inventory

BALANCE

Date Debit Credit

Purchases

Balance Forward

The number of units and the cost paid per unit are collected for each purchase

and sale

Overview

Expenses

Equity

Subsidiary Ledgers

InventoryBrass Chimes#150.236822

With a Perpetual Inventory system,

sales and purchases are

updated as they happen to the

Inventory Control Ledger

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Objective 14.1: Identify all costs and apply the lower

of cost or market to inventory

The Cost Concept guides the initial valuation of inventory. Purchases are recorded at cost less any purchase discounts earned.

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Cost of Inventory

However, Inventory values should also include any incidental costs incurred to bring inventory to the sales location and into a saleable condition including:

Freight In , storage and insurance costsCosts to prepare, condition and assemble inventory for sale

However, Inventory values should also include any incidental costs incurred to bring inventory to the sales location and into a saleable condition including:

Freight In , storage and insurance costsCosts to prepare, condition and assemble inventory for sale

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Freight In is the cost incurred to bring inventory to the sale location

FOB (for Free On Board) describes shipping terms1. FOB shipping point means freight is free

to the purchaser only to the shipping point

2. FOB destination means freight is free to the purchaser to the purchaser’s destination

Freight In is the cost incurred to bring inventory to the sale location

FOB (for Free On Board) describes shipping terms1. FOB shipping point means freight is free

to the purchaser only to the shipping point

2. FOB destination means freight is free to the purchaser to the purchaser’s destination

Freight In

Shipping Point

DestinationO14.1

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FOB terms also indicate ownership of the inventory in transit 1. For FOB shipping point, the purchaser owns the

inventory from the shipping point on

2. FOB destination means the seller owns the inventory in transit until it arrives at the seller’s location

FOB terms also indicate ownership of the inventory in transit 1. For FOB shipping point, the purchaser owns the

inventory from the shipping point on

2. FOB destination means the seller owns the inventory in transit until it arrives at the seller’s location

Inventory ownership while in transit

Shipping Point

Destination

FOB DestinationSeller owns

FOB Shipping PointPurchaser owns

In transit

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Inventory in transit owned by the sellerInventory on consignment (for sale by the firm but owned by others )Damaged or obsolete goods that are not saleable*

Items not included in Inventory

*If saleable, the Conservatism Concept argues that damaged & obsolete goods should be recorded at their net realizable value

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Many firms rely on both the materiality and the cost benefit concept to argue that the incidental inventory acquisition costs of freight, storage, insurance, etc. are not material and further, the cost of appropriately assigning these costs to items of inventory outweigh any benefits received. They justify recording inventory costs using invoice prices only.

Inventory and the Cost Benefit Concept

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The Conservatism Concept governs the issue of changing market values for inventory

When preparing end of fiscal period financial statements the Lower of Cost or Market values should be used when the end of period inventory adjusting entry is considered.

The Conservatism Concept governs the issue of changing market values for inventory

When preparing end of fiscal period financial statements the Lower of Cost or Market values should be used when the end of period inventory adjusting entry is considered.

Lower of cost or market

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In practice, lower of cost or market can be applied to inventory on the following bases:

•An item by item •Category by category •Inventory as a whole

In practice, lower of cost or market can be applied to inventory on the following bases:

•An item by item •Category by category •Inventory as a whole

Example

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Items of Inventory

Units Cost (Book value)

Market each

Total Cost

Total Market

Items Category Whole

Chimes 35 45 45 1,575 1,575 1,575

Pendants 70 23 21 1,610 1,470 1,470

Candle holders 60 46 50 2,760 3,000 2,760

Rings 125 6 6 750 750 750

Brass subtotal 6,695 6,795 6,695

Cry stal

Chimes 88 92 94 8,096 8,272 8,096

Pendants 110 16 13 1,760 1,430 1,430

Candle holders 50 65 65 3,250 3,250 3,250

Vases 21 120 119 2,520 2,499 2,499

Crystal subtotal 15,626 15,451 15,451

Totals 22,321 22,246 21,830 22,146 22,246

Lower of Cost or Market Worksheet

Application of Lower of Cost or Market

The item total

column brings

over the lower

from the total

cost or total

market column for each inventory item.

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Lower of cost or marketAdjusting Entry (assumes item by item

analysis)

The value of inventory is

reduced by the adjustment.

Date Description PR Debit Credit

Adjusting Entry

31-Dec Cost of Goods Sold 510 491

Inventory 165 491

Lower of cost or market adjustment

GENERAL JOURNAL

Total cost of $22,321 minus Total market value on an item by item basis of $21,830 =

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LIFOFIFO

Weighted AverageSpecific

Identification

Objective 14.2: Assign costs to sold inventory

using four different methods

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Cost of sold inventory

Cost Concept -followed in recording the value of inventory purchased for sale in the ordinary course of business

Matching Concept -match expenses with the revenue those expenses helped to generate during any fiscal period. One of those expenses of course is the cost of inventory sold during the period.

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Which cost?

Prices paid for identical inventory items change often.

Which cost should be expensed when an item is sold?

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Methods used to determine which cost to expense include:

•Specific Identification

•Weighted Average

•Last in First Out –LIFO

•First in First Out –FIFO

Methods used to determine which cost to expense include:

•Specific Identification

•Weighted Average

•Last in First Out –LIFO

•First in First Out –FIFO

Which cost?

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Specific Identification expense as Cost of Goods Sold the costs incurred to purchase the exact inventory item sold

Which cost?

This may be impractical if inventory includes a large number of items which are difficult to match to the actual cost paid without considerable effort.

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•LIFO –Last in First Out

•FIFO –First in First Out

•Weighted Average

•LIFO –Last in First Out

•FIFO –First in First Out

•Weighted Average

Which cost?

If identifying the specific cost paid for an item of inventory is excessive,

these methods may be used:

If identifying the specific cost paid for an item of inventory is excessive,

these methods may be used:

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Which cost?LIFO method expenses the most

recent inventory costs firstLIFO method expenses the most

recent inventory costs first

FIFO method expenses the oldest inventory costs first

Weighted average method expenses the average of all

inventory costs incurred for the category

Weighted average method expenses the average of all

inventory costs incurred for the category

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$10.00$10.00

$10.25$10.25

$10.40$10.40

$10.50$10.50

$10.60$10.60Note the need to record purchase

information when accounting

for inventory

The price paid and the date purchased is recorded for each item of inventory.

The price paid and the date purchased is recorded for each item of inventory.LIFO

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$10.00$10.00

$10.25$10.25

$10.40$10.40

$10.50$10.50

$10.60$10.60

Regardless of which item was sold, What cost

should be expensed with LIFO method?

One blue hockey puck is sold. Which cost should be expensed?

One blue hockey puck is sold. Which cost should be expensed?LIFO

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$10.00$10.00

$10.25$10.25

$10.40$10.40

$10.50$10.50

$10.60$10.60$10.60$10.60

Using LIFO method, take

the most recent purchase cost out to match with a sale.

Cost expensedCost expensedLIFO

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$10.00$10.00

$10.25$10.25

$10.40$10.40

$10.50$10.50

$10.60$10.60

$10.00$10.00

Using FIFO method, take

the oldest purchase cost out to match with a sale.

Cost expensedCost expensed

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$10.00$10.00

$10.25$10.25

$10.40$10.40

$10.50$10.50

$10.60$10.60

$10.35$10.35

Using weighted average method,

a moving average cost is

expensed.

Weighted Average

$51.75/5 = $10.35O14.2

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$10.00$10.00

$10.25$10.25

$10.40$10.40

$10.50$10.50

$10.60$10.60

$10.40$10.40

Using the Specific ID method, the

physical item sold is matched with

its cost

Specific Identification

I want that green one.

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DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

1,040 Bal.Total COGS

Inventory BalancePurchases Cost of Goods Sold

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

LIFO -example

Karin’s Gifts sells a special punch bowl which is purchased regularly as required.

Using the LIFO method, record the purchase of 10Units of inventory at $23 per unit on April 3.

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4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

Next record the sale of 2 units on April 8

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4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

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4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

Next record the purchase of 20 units @ $24 on April 15

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4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

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4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

Finally record the purchase of 25 units @ $25 on April 25

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4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 23$ 46 20 22$ 4408 23$ 184

Bal.4/12 8 23$ 184 8 22$ 176

12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176

20 24$ 480Bal.

4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.

4/25 25 25$ 625 5 22$ 11025 25$ 625

Balance Forward

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FIFO -exampleDate

Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

Using the FIFO method, record the purchase of 10Units of inventory at $23 per unit on April 3.

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FIFODate

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

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FIFODate

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

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FIFODate

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

Next record the purchase of 20 units @ $24 on April 15

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FIFODate

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

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FIFODate

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

Record the purchase of 25 units for $25 on April 25O14.2

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FIFODate

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.4/12 18 22$ 396 8 23$ 184

2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184

20 24$ 480Bal.

4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.

4/25 25 25$ 625 5 24$ 12025 25$ 625

Balance Forward

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Weighted Average -example

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

1,032.38 Bal.Total COGS

742.62

625.33

178.67

658.67

117.62

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

Using the weighted average method, record the purchase of 10 units of inventory at $23 per unit on April 3.

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Weighted Average

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

($230 + $440 = $670/30 = $22.33)

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Weighted Average

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

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Weighted Average

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

Next record the purchase of 20 units@ $24 on April 15

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Weighted Average

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

Weighted Average

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

Finally record the purchase of 25 units @ $25 on April 25

Weighted Average

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230

30 22.33$ 670Bal.

4/8 2 22.33$ 44.6728 22.33$ 625.33

Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67

Bal.4/15 20 24$ 480

28 23.52$ 658.67Bal.

4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.

4/25 25 25$ 62530 24.75$ 742.62

742.62

625.33

178.67

658.67

117.62

Balance Forward

Specific Identification

For Specific Identification:

Date Specific Units Sold4/8 2 @ $224/12 12 @ $22

8 @ $23

4/20 3 @ $2220 @ $24

For Specific Identification:

Date Specific Units Sold4/8 2 @ $224/12 12 @ $22

8 @ $23

4/20 3 @ $2220 @ $24

Specific IdentificationDate

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.12 22$ 264 6 22$ 132

4/12 8 23$ 184 2 23$ 46Bal.

4/15 20 24$ 480 6 22$ 1322 23$ 4620 24$ 480

Bal.4/20 3 22$ 66 3 22$ 66

20 24$ 480 2 23$ 46Bal.

4/25 25 25$ 625 3 22$ 662 23$ 4625 25$ 625

Balance Forward

4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440

10 23$ 230Bal.

4/8 2 22$ 44 18 22$ 39610 23$ 230

Bal.12 22$ 264 6 22$ 132

4/12 8 23$ 184 2 23$ 46Bal.

4/15 20 24$ 480 6 22$ 1322 23$ 4620 24$ 480

Bal.4/20 3 22$ 66 3 22$ 66

20 24$ 480 2 23$ 46Bal.

4/25 25 25$ 625 3 22$ 662 23$ 4625 25$ 625

Balance Forward

Expenses

Equity

Objective 14.3: Compare periodic with perpetual

inventory systems

Perpetual –the inventory account is updated with each purchase, sale and return that affects inventory.

Periodic –the inventory account is updated only at the end of the fiscal period

Perpetual

•Inventory account updated with each transaction

•Cost of Goods Sold account is used

•Inventory account is used to record inventory purchases

Periodic

•Inventory account updated at the end of the fiscal period

•Cost of Goods Sold is not used, COGS is calculated

• Purchases account used to record inventory purchases

Perpetual vs Periodic

Why Periodic?

Before the technology advances of

computerization, the periodic method was a reliable and

simple method of calculating Cost of Goods Sold using the

following formula:

Beginning Inventory

Net PurchasesNet Purchases

Ending InventoryEnding

Inventory

Cost of GoodsSold

Goods Available For sale

Periodic formula

•Note the beginning inventory total

• Record purchases of inventory during the period

•Count the inventory remaining at the end of the period

Using Periodic formula

Beginning inventory + net purchases – ending inventory

= Cost of Goods Sold

Using Periodic formula

This allows the firm to simplify the tracking of inventory

changes during the period and rely on the ending count to

establish Cost of Goods Sold.14.3

Disadvantages of Periodic

•During the fiscal period, Cost of Goods Sold must be estimated

•Inventory management efforts may have limited day to day sales information

Expenses

Equity

Beginning Inventory

EndingInventory

Periodic Inventory System

Goods Available for Sale

Purchases

PIPELINE

Cost o

This amount must be

physically counted.

Periodic Inventory System

Angelo's Florist's SupplyIncome StatementFor the year ending 12/31/07

Sales $ 245,600 Less: Sales Discounts -1,950

Sales Returns and Allowances -3,140 Net Sales 240,510

Cost of Goods Sold:Beginning Inventory 1/1/07 84,320Purchases 76,860 Less: Purchase Discounts -1,104

Purchase Returns and Allowances -935 Net Purchases 74,821

Goods Available for Sale 159,141 Less: Ending Inventory -68,420Cost of Goods Sold 90,721

Gross Profit $ 149,789

Angelo's Florist's SupplyIncome StatementFor the year ending 12/31/07

Sales $ 245,600 Less: Sales Discounts -1,950

Sales Returns and Allowances -3,140 Net Sales 240,510

Cost of Goods Sold:Beginning Inventory 1/1/07 84,320Purchases 76,860 Less: Purchase Discounts -1,104

Purchase Returns and Allowances -935 Net Purchases 74,821

Goods Available for Sale 159,141 Less: Ending Inventory -68,420Cost of Goods Sold 90,721

Gross Profit $ 149,789

Using a Periodic Inventory System, the Cost of Goods Sold

is not an separate expense account, it is an amount that must be computed using the

COGS formula.

Income Statement –

Periodic System

The following methods can be used to estimate ending inventory:

•Gross Profit Method

•Retail Inventory Method

The following methods can be used to estimate ending inventory:

•Gross Profit Method

•Retail Inventory Method

Objective 14.4: Estimate ending inventory

These provide

estimates, not actual

ending inventory

totals

Gross Profit MethodThis method uses the firm’s historic gross profit percentage to estimate Cost of Goods Sold

This method uses the firm’s historic gross profit percentage to estimate Cost of Goods Sold

With Cost of Goods Sold (estimated), ending Inventory can also be estimated using the Periodic formula:

Ending Inventory = Beg Inv. + Purchases - COGS

With Cost of Goods Sold (estimated), ending Inventory can also be estimated using the Periodic formula:

Ending Inventory = Beg Inv. + Purchases - COGS

Lin's Hydraulic SupplyIncome StatementFor the month ending 3/31/07

%Sales 234,500 100%

Beginning Inventory 578,500Add: Net Purchases 145,000 Subtotal: Goods Avail for Sale 723,500Ending Inventory (est.) 559,350

Cost of Goods Sold (est.) 164,150 70%

Gross Profit 70,350 30%

Lin's Hydraulic SupplyIncome StatementFor the month ending 3/31/07

%Sales 234,500 100%

Beginning Inventory 578,500Add: Net Purchases 145,000 Subtotal: Goods Avail for Sale 723,500Ending Inventory (est.) 559,350

Cost of Goods Sold (est.) 164,150 70%

Gross Profit 70,350 30%This is our guess at what

the Gross Profit actually was:

.3 x$234,500 = $70,350.

Sales = COGS +

Gross Profit

We know what Beg. Inv. and Net

Purchases are.

Gross Profit

Method -

example

Historically, Lin’s Supply has experienced a Gross Profit percentage of 30%.

(est.) Ending Inventory = Goods Available for Sale

– (est.) Cost of Goods Sold or 723,500 - 164,150 = 559,35014.4

Retail Inventory MethodWith this method, Inventory is

recorded at expected retail sales price.

With this method, Inventory is recorded at expected retail sales

price.

Using the percentage gross profit used to “mark up” the inventory to retail,

Cost of Goods Sold can be estimated:

Cost of Goods Sold =

Sales x (1- % [expected]Gross Profit)

Using the percentage gross profit used to “mark up” the inventory to retail,

Cost of Goods Sold can be estimated:

Cost of Goods Sold =

Sales x (1- % [expected]Gross Profit)14.4

Retail Inventory Method1- % [expected]Gross Profit

Can be described as the Cost to Retail ratio.

1- % [expected]Gross Profit

Can be described as the Cost to Retail ratio.

If inventory records are maintained at the marked up retail price, we can divide the historic cost of the inventory by the retail values and arrive at the Cost to Retail ratio.

%COST TO RETAIL

$ COST OF PURCHASED INVENTORY

$STATED RETAIL VALUE OF INVENTORY

What we paid for it

For inventory sold when marked at retail, this

becomes the estimate of % Cost of

Goods Sold at retail.

Cost to Retail ratio

What we hope to sell

it for

Homer's Tool SupplyIncome StatementFor the month ending 7/31/07

Sales 956,700

At Cost At RetailBeginning Inventory 1,123,400 1,497,867Add: Net Purchases 621,500 887,857 Subtotal: Goods Avail for Sale 1,744,900 2,385,724Deduct: Sold Inventory at Retail 956,700Ending Inventory 1,429,024

Cost to Retail Ratio 73.1%(1,744,900 / 2,385,724)

Cost of Goods Sold (73.1% X Sales of $956,700) 699,723

Gross Profit 256,977

1045177

Homer's Tool SupplyIncome StatementFor the month ending 7/31/07

Sales 956,700

At Cost At RetailBeginning Inventory 1,123,400 1,497,867Add: Net Purchases 621,500 887,857 Subtotal: Goods Avail for Sale 1,744,900 2,385,724Deduct: Sold Inventory at Retail 956,700Ending Inventory 1,429,024

Cost to Retail Ratio 73.1%(1,744,900 / 2,385,724)

Cost of Goods Sold (73.1% X Sales of $956,700) 699,723

Gross Profit 256,977

1045177

We can simply convert Ending Inventory at Retail

to Ending Inventory at Cost by applying the Cost

to Retail ratio:73.1% x 1,429,024 =

1,045,177

Retail Method

-exampl

Retail Inventory MethodAlthough this is an effective method for internal use, it is not acceptable

under GAAP

Although this is an effective method for internal use, it is not acceptable

under GAAP

Objective 14.5: Calculate & explain inventory turnover and days sales in inventory

Inventory turnover answers the following question:How many times did the firm sell their average inventory during the year?

Inventory Turnover

Average Inventor

yInventory Turnover

Remember to use the Average

Inventory

Days Sales in Inventory answers the following question:How many days sales of inventory remain in the present balance of inventory?

Days Sales in Inventory

Ending Inventor

Days Sales in

Inventory

Remember to use the ending Inventory

Assets 2007 2008 Liabilities 2007 2008 Cash 9,000 10,000 Accounts Payable 45,000 41,500 Accounts receivable 75,000 81,000 Inv. Loan 18,000 14,400 Alllowance for Uncol. Accounts (2,500) (2,600) Total liabilities 63,000 55,900

Inventory 151,000 164,000 Equity Total assets 232,500 252,400 Owner, Capital 169,500 196,500

Sales 654,000

Cost of Goods Sold 490,500 Average Inventory 157,500Wages expense 61,000 (Inventory for years 2007 +2008) / 2Uncollectible account Inventory turnover 3.1 expense 2,000 (COGS / Avg. Inv.)Miscellaneous expense 73,500 Days' Sales In Inventory 122.0

Net Profit 27,000 (365 x Inv. / COGS)

Income StatementFor the year ended 12/31/08

Balance Sheet -April's GiftsAs of 12/31 2007 and 2008

Example –Inventory ratios

End Unit 14

©CourseCollege.com 1 14 Inventory Inventory held for sale by retailers, manufacturers and wholesalers. Learning Objectives 1.Identify all costs and apply.

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