Inventories: Measurement8Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights pptx

sold, on account, inventory with a retail price of $820,000 and a cost basis 8-9Periodic Cost of Goods Sold Equation Beginning Inventory + Net Purchases Cost of Goods Available for Sale

Copyright © 2007 by The McGraw-Hill Companies, Inc All rights reserved

Inventories:

Measurement

8

8-2Inventory

Those assets that a company:

2 Has in production (work in

process) for future sale.

1 Intends to sell in the normal

course of business

3 Uses currently in the production

of goods to be sold (raw materials).

8-3Types of Inventories

•Raw Materials

•Work-in-Process

•Finished GoodsTypes of Inventory

Inventory Cost Flows

Raw

Materials

(1) $XX $XX (4)

Work in Process

Finished Goods

Cost of Good Sold

(3) $XX $XX (6)

(1) Raw materials purchased

(2) Direct labor incurred

(3) Manufacturing overhead incurred

(4) Raw materials used

(5) Direct labor applied

(6) Manufacturing overhead applied

(7) Work in process transferred to finished goods

(8) Finished goods sold

8-5Learning Objective

Explain the difference between aperpetual inventory system and a

periodic inventory system

8-6Inventory Methods

The inventory account is adjusted at the end

of a reporting cycle.

Two accounting systems are used to record

transactions involving inventory:

Perpetual Inventory System

Matrix, Inc purchases on account $600,000

of merchandise for resale to customers.

Returns of inventory are credited to the inventory account.

Discounts on inventory purchases can be recorded using the

gross or net method.

8-8Perpetual Inventory System

Matrix, Inc sold, on account, inventory with a

retail price of $820,000 and a cost basis

8-9Periodic Cost of Goods Sold Equation

Beginning Inventory + Net Purchases Cost of Goods Available for Sale

- Ending Inventory

= Cost of Goods Sold

Periodic Inventory System

Matrix, Inc purchases on account $600,000

of merchandise for resale to customers.

Discounts on inventory purchases can be recorded using the

gross or net method.

8-11Periodic Inventory System

Matrix, Inc sold on account, inventory with a

retail price of $820,000 and a cost basis

No entry is made to record Cost of Good Sold Assuming Beginning

Inventory of $120,000 A physical count of Ending Inventory shows

a balance of $180,000 Let’s calculate Cost of Goods Sold at

the end of the accounting period.

8-12Periodic Inventory System

Beginning inventory $ 120,000

Plus: Purchases 600,000

Cost of goods available for sale 720,000

Less: Ending inventory (180,000)

Cost of goods sold $ 540,000

Calculation of Cost of Goods Sold

Date Description Debit Credit

12/31/06 Cost of goods sold 540,000

Comparison of Inventory Systems

Transaction or

Event

Periodic Inventory

Perpetual Inventory

Routine purchases of

various inventory items

Costs debited to purchases account

Costs debited to inventory account

Sale of inventory No accounting

entries made

Debit Cost of goods sold and credit inventory

End-of-period

accounting entries and

related activities

Physical count of inventory to determine cost of good sold

No separate determination of cost

of goods sold necessary

8-14Learning Objective

Explain which physical quantities of goods

should be included in inventory

8-15What is Included in Inventory?

General RuleAll goods owned by the company on the inventory

date, regardless of their location.

Consignment Depends on FOB

shipping terms.

Learning Objective

Determine the expenditures that should

be included in the cost of inventory

8-17Expenditures Included in Inventory

Purchase Discounts

8-18Purchase Discounts

Date Description Debit Credit

Net Method Using Perpetual and Periodic

Matrix, Inc purchased on account $6,000 of

merchandise for resale to customers The merchandise

was purchased subject to a cash discount of 2/10, n/30

The company incurred $160 in freight-in on the

merchandise Upon inspection, the company found that

$200 of merchandise was damaged and the seller

agreed to accept the merchandise return and credit the

account of the company The inventory was sold for

$8,300 on account Let’s look at the journal entries

under both the perpetual and periodic accounting

system assuming Matrix uses the net method to record

merchandise purchases.

8-20 Net Method Using Perpetual and Periodic

Description Debit Credit

Inventory 5,880

Accounts payable 5,880

Inventory 160

Cash 160

Accounts payable 200

Inventory 200

Accounts receivable 8,300 Sales revenue 8,300 Cost of goods sold 5,840 Inventory 5,840 Purchases 5,880 Accounts payable 5,880 Freight-in 160

Cash 160

Accounts payable 200

Purchase returns 200

Accounts receivable 8,300 Sales revenue 8,300 Periodic Inventory Method Perpetual Inventory Method Beginning inventory $

-Purchases $ 5,880 Less: Returns (200)

Plus: Freight-in 160

Net purchases 5,840 Cost of goods available for sale 5,840 Less: Ending inventory -Cost of goods sold $ 5,840

8-21 Learning Objective

Differentiate between the specific identification,

FIFO, LIFO, and average cost methods used

to determine the cost of ending inventory and

cost of goods sold

Inventory Cost Flow Methods

pSpecific cost identification

pFirst-in, first-out (FIFO)

pLast-in, first-out (LIFO)

8-23

pThe specific cost of each inventory item must be known.

pBy selecting specific items from inventory

at the time of sale, income can be manipulated.

Specific Cost Identification

pItems are added to

inventory at cost when

they are purchased.

pCOGS for each sale is

based on the specific

cost of the item sold.

8-24Average Cost Method

÷

Quantity available for sale

Periodic average cost uses a

weighted-average unit cost:

Perpetual average cost uses a moving

average unit cost that is recomputed

each time a new purchase is made.

Weighted-Average Periodic System

The following schedule shows the frame

inventory for Yore Frame, Inc for September.

The physical inventory count at September 30

shows 600 frames in ending inventory

Use the periodic weighted weighted average method to average method to

determine:

((1 1) Ending inventory cost ) Ending inventory cost.

((2 2) Cost of goods sold ) Cost of goods sold.

8-26Weighted-Average Periodic System

Yore Frame, Inc.

Now, we have to assign costs to ending

inventory and cost of goods sold.

Ending Inventory (600 units)

Goods Sold (1,350)

$47,650 ÷ 1,950 = $24.4359

weighted-average per unit cost

Weighted-Average Periodic System

Yore Frame, Inc.

The following schedule shows the Frame

inventory for Yore Frame, Inc for September.

The physical inventory count at September 30

shows 600 frames in ending inventory

Use the perpetual weighted weighted average method to average method to

determine:

((1 1) Ending inventory cost ) Ending inventory cost.

((2 2) Cost of goods sold ) Cost of goods sold.

Cost of Goods Sold 1,350

Moving-Average Perpetual System

Date Sa les Units 9/1 600 9/10 300 9/30 450

Moving-Average Perpetual System

Moving-Average Perpetual System

Cost of Goods Sold in Septembe r

Sale Date Units Cost/Unit Total

when goods are sold

pThe cost of the oldest inventory items are charged to COGS when goods are sold

pThe cost of the newest inventory items remain in ending inventory.

Even though the periodic

and the perpetual

approaches differ in the

timing of adjustments to

inventory

COGS and Ending

Inventory Cost are the

same under both

approaches.

FIFO - Periodic System

The following schedule shows the frame

inventory for Yore Frame, Inc for September.

The physical inventory count at September 30

shows 600 frames in ending inventory

Use the periodic FIFO method to determine:

((1 1) Ending inventory cost ) Ending inventory cost.

((2 2) Cost of goods sold ) Cost of goods sold.

Cost of Goods Sold 1,350

FIFO - Periodic System

These are the 600 most recently acquired units.

Cost of Goods Sold 1,350

Yore Frame, Inc.

Cost of Goods Sold 1,350

FIFO - Periodic System

Yore Frame, Inc.

Cost of Goods Sold 1,350

FIFO - Periodic System

These are the first 1,350 units acquired.

Cost of Goods Sold 1,350

Yore Frame, Inc.

Cost of Goods Sold 1,350 $ 31,050.00

FIFO - Periodic System

8-42FIFO - Perpetual System

The following schedule shows the frame

inventory for Yore Frame, Inc for September.

The physical inventory count at September 30

shows 600 frames in ending inventory

Use the perpetual FIFO method to determine:

((1 1) Ending inventory cost ) Ending inventory cost.

((2 2) Cost of goods sold ) Cost of goods sold.

FIFO - Perpetual System

Yore Frame, Inc.

Cost of Goods Sold 1,350

Date Sa les Units 9/1 600 9/10 300 9/30 450

8-44FIFO - Perpetual System

The ending inventory on

The ending inventory on 9 9//1 1 consists of: consists of:

200

200 units from beginning inventory @ $ units from beginning inventory @ $22 22 00 00

8-45FIFO - Perpetual System

The ending inventory on

The ending inventory on 9 9//3 3 consists of: consists of:

FIFO - Perpetual System

Beg Inv 800 x 22.00 = 17,600 $ 17,600.00

1-Sep 600 x 22.00 = 13,200.00 4,400.00

3-Sep 300 x 24.00 = 7,200 11,600.00

10-Sep (remaining from Beg Inv) 200 x 22.00 = 4,400.00 7,200.00

(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00

200

The ending inventory on

The ending inventory on 9 9//10 10 consists of: consists of:

200

200 units from the units from the 9 9//3 3 purchase @ $ purchase @ $24 24 00 00

8-47FIFO - Perpetual System

Beg Inv 800 x 22.00 = 17,600 $ 17,600.00

1-Sep 600 x 22.00 = 13,200.00 4,400.00

3-Sep 300 x 24.00 = 7,200 11,600.00

10-Sep (remaining from Beg Inv) 200 x 22.00 = 4,400.00 7,200.00

(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00

15-Sep 250 x 25.00 = 6,250 11,050.00

The ending inventory on

The ending inventory on 9 9//15 15 consists of: consists of:

Beg Inv 800 x 22.00 = 17,600 $ 17,600.00

1-Sep 600 x 22.00 = 13,200.00 4,400.00

3-Sep 300 x 24.00 = 7,200 11,600.00

10-Sep (remaining from Beg Inv) 200 x 22.00 = 4,400.00 7,200.00

(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00

15-Sep 250 x 25.00 = 6,250 11,050.00

21-Sep 200 x 27.00 = 5,400 16,450.00

The ending inventory on

The ending inventory on 9 9//21 21 consists of: consists of:

FIFO - Perpetual System

Beg Inv 800 x 22.00 = 17,600 $ 17,600.00

1-Sep 600 x 22.00 = 13,200.00 4,400.00

3-Sep 300 x 24.00 = 7,200 11,600.00

10-Sep (remaining from Beg Inv) 200 x 22.00 = 4,400.00 7,200.00

(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00

15-Sep 250 x 25.00 = 6,250 11,050.00

21-Sep 200 x 27.00 = 5,400 16,450.00

29-Sep 400 x 28.00 = 11,200 27,650.00

The ending inventory on

The ending inventory on 9 9//29 29 consists of: consists of:

Beg Inv 800 x 22.00 = 17,600 $ 17,600.00

1-Sep 600 x 22.00 = 13,200.00 4,400.00

3-Sep 300 x 24.00 = 7,200 11,600.00

10-Sep (remaining from Beg Inv) 200 x 22.00 = 4,400.00 7,200.00

(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00

15-Sep 250 x 25.00 = 6,250 11,050.00

21-Sep 200 x 27.00 = 5,400 16,450.00

29-Sep 400 x 28.00 = 11,200 27,650.00

30-Sep (remaining from 9/3 layer) 200 x 24.00 = 4,800.00 22,850.00

(from the 9/15 layer) 250 x 25.00 = 6,250.00 16,600.00

31,050.00

Cost of Goods Sold =

The ending inventory on

The ending inventory on 9 9//30 30 consists of: consists of:

Beg Inv 800 x 22.00 = 17,600 $ 17,600.00

1-Sep 600 x 22.00 = 13,200.00 4,400.00

3-Sep 300 x 24.00 = 7,200 11,600.00

10-Sep (remaining from Beg Inv) 200 x 22.00 = 4,400.00 7,200.00

(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00

15-Sep 250 x 25.00 = 6,250 11,050.00

21-Sep 200 x 27.00 = 5,400 16,450.00

29-Sep 400 x 28.00 = 11,200 27,650.00

30-Sep (remaining from 9/3 layer) 200 x 24.00 = 4,800.00 22,850.00

(from the 9/15 layer) 250 x 25.00 = 6,250.00 16,600.00

31,050.00

Last-In, First-Out

Any questions before we run into LIFO?

8-53Last-In, First-Out

pThe cost of the newest inventory items are charged to COGS when goods are sold

pThe cost of the oldest inventory items remain in inventory.

The LIFO

method

assumes that

the newest

items are sold

first, leaving the

older units in

inventory.

8-54Last-In, First-Out

Unlike FIFO, using

the LIFO method

may result in COGS

and Ending

Inventory Cost that

periodic and

perpetual

approaches

The following schedule shows the frame

inventory for Yore Frame, Inc for September.

The physical inventory count at September 30

shows 600 frames in ending inventory

Use the periodic LIFO method to determine:

((1 1) Ending inventory cost ) Ending inventory cost.

((2 2) Cost of goods sold ) Cost of goods sold.

LIFO - Periodic System

Cost of Goods Sold 1,350

LIFO - Periodic System

These are the 600 oldest units in inventory.

Cost of Goods Sold 1,350

LIFO - Periodic System

200

600 x $22.00

Yore Frame, Inc.

Cost of Goods Sold 1,350

LIFO - Periodic System

600 x $22.00

These are the most recently acquired 1,350 units.

Cost of Goods Sold 1,350 $ 34,450.00

LIFO - Periodic System

$

$44,,400400+ $30,050

200

8-60LIFO - Perpetual System

The following schedule shows the frame

inventory for Yore Frame, Inc for September.

The physical inventory count at September 30

shows 600 frames in ending inventory

Use the perpetual LIFO method to determine:

((1 1) Ending inventory cost ) Ending inventory cost.

((2 2) Cost of goods sold ) Cost of goods sold.

LIFO - Perpetual System

Yore Frame, Inc.

Cost of Goods Sold 1,350

Date Sa les Units 9/1 600 9/10 300 9/30 450

LIFO - Perpetual System

In LIFO, we assume that we sell the

newest units in inventory first

In this case, the 600 “ newest ” units

come from beginning inventory,

leaving 200 units in the beginning

LIFO - Perpetual System

The ending inventory on 9/3 consists of:

200 units from beginning inventory @ $22.00

300 units from the 9/3 purchase @ $24.00

200

LIFO - Perpetual System

For the 9/10 sale, we must identify the 300 newest

units They all come from the September 3

purchase

Note that all of the

Note that all of the 9 9//3 3 units have been “sold” and units have been “sold” and

Cost of Goods Sold =

LIFO - Perpetual System

The ending inventory on 9/15 consists of:

200 units from beginning inventory @ $22.00

250 units from the 9/15 purchase @ $25.00

Cost of Goods Sold =

LIFO - Perpetual System

The ending inventory on 9/21 consists of:

200 units from beginning inventory @ $22.00

250 units from the 9/15 purchase @ $25.00

200 units from the 9/21 purchase @ $27.00

200