Inventories

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7

InventoriesInventories


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210

7-2Inventory Costing Methods


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7-2

(Continued)


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412

7-2

(Continued)


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513

7-2

(Concluded)


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614

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130

FIFO LIFO Average cost

Inventory Costing Methods 7-2

Number of firms (> $1B Sales)


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7

7-2-

Example Exercise 7-1

The three identical units of Item QBM are purchased during February, as shown below.

Feb. 8 Purchase 1 $ 4515 Purchase 1 4826 Purchase 1 51

15

Item QBM Units Cost

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.

Total 3 $144 Average cost per unit $48 ($144 ÷ 3 units)


8

818

On January 1, the firm had 100 units of Item 127B that cost $20 per unit.

7-3FIFO Perpetual

Item 127B

Units Cost

Jan. 1 Inventory 100

$20

Item 127B

Units Cost


$20


9

919

7-3FIFO Perpetual

On January 4, the firm sold 70 units of 127B at $30 each.

Item 127B

Units Cost


$204 Sale 70

Item 127B

Units Cost


$204 Sale 70


10

10

7-3FIFO Perpetual

On January 22, the firm sold twenty units at $30.

4 Accounts Receivable 2 100 00

Sales 2 100 00

4 Cost of Merchandise Sold 1 400 00

Merchandise Inventory 1 400 00


20


11

1121

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

4 70 20 1,400 30 20 600

7-3FIFO Perpetual

Jan. 1 100 20 2,000


12

1222

On January 10, the firm purchased 80 units at $21 each.

7-3FIFO Perpetual

Item 127B

Units Cost


$204 Sale 70

10 Purchase 80 21

Item 127B

Units Cost


$204 Sale 70

10 Purchase 80 21


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1323

10 Merchandise Inventory 1 680 00

Accounts Payable 1 680 00


7-3FIFO Perpetual


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1424

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 60080 21 1,680

7-3FIFO Perpetual


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1525

On January 22, the firm sold 40 units for $30 each.

7-3FIFO Perpetual

Item 127B

Units Cost


$204 Sale 70

10 Purchase 80 2122 Sale 40

Item 127B

Units Cost


$204 Sale 70



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16

7-3FIFO Perpetual



Sales 1 200 00

22 Cost of Merchandise Sold 810 00

Merchandise Inventory 810 00


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17

1727

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 60080 21 1,680

22 30 20 60010 21 210 70 21 1,470

7-3FIFO Perpetual

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.


18

18

On January 28, the firm sold 20 units at $30 each.

7-3FIFO Perpetual

Item 127B

Units Cost


$204 Sale 70


28 Sale 20

Item 127B

Units Cost


$204 Sale 70


28 Sale 20 28


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1929

7-3FIFO Perpetual

28 Accounts Receivable 600 00

Sales 600 00





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2030

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 60080 21 1,680

22 30 20 60010 21 210 70 21 1,470

28 20 21 420 50 21 1,050

7-3FIFO Perpetual


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2131

Item 127B

Units Cost


$204 Sale 70


28 Sale 20

30 Purchase 100 22

Item 127B

Units Cost


$204 Sale 70


28 Sale 20

30 Purchase 100 22

7-3FIFO Perpetual

On January 30, purchased ten additional units of Item 127B at $22 each.


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2232

On January 30, purchased ten additional units of Item 127B at $22 each.

7-3FIFO Perpetual




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2333

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 60080 21 1,680

22 30 20 60010 21 210 70 21 1,470

28 20 21 420 50 21 1,05030 100 22 2,200 50 21 1,050

100 222,200

7-3FIFO Perpetual


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2434

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 60080 21 1,680

22 30 20 60010 21 210 70 21 1,470

28 20 21 420 50 21 1,05030 100 22 2,200 50 21 1,050

100 222,200

7-3FIFO Perpetual

Cost of merchandise sold for January is $2,630.

Cost of merchandise sold for January is $2,630.


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25

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 60080 21 1,680

22 30 20 60010 21 210 70 21 1,470

28 20 21 420 50 21 1,05030 100 22 2,200 50 21 1,050

100 222,200

7-3FIFO Perpetual

January 31, inventory is $3,250 ($1,050 + $2,200)

January 31, inventory is $3,250 ($1,050 + $2,200)

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26

7-3-


Beginning inventory, purchases, and sales for Item ER27 are as follows:

Nov. 1 Inventory 40 units at $55 Sale 32 units

11 Purchase 60 units at $721 Sale 45 units

36

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.


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2738

On January 1, the firm had 100 units of Item 127B that cost $20 per unit.

7-3LIFO Perpetual

Item 127B

Units Cost


$20

Item 127B

Units Cost


$20


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2839

7-3LIFO Perpetual


Item 127B

Units Cost


$204 Sale 70

Item 127B

Units Cost


$204 Sale 70


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29

7-3LIFO Perpetual



Sales 2 100 00

4 Cost of Merchandise Sold 1 400 00

Merchandise Inventory 1 400 00


40


30

3041

Item 127B



4 70 20 1,400 30 20 600

7-3LIFO Perpetual

Jan. 1 100 20 2,000


31

3142


7-3LIFO Perpetual

Item 127B

Units Cost


$204 Sale 70

10 Purchase 80 21

Item 127B

Units Cost


$204 Sale 70

10 Purchase 80 21


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3243




7-3LIFO Perpetual


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3344

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 60080 21 1,680

7-3LIFO Perpetual


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3445


7-3LIFO Perpetual

Item 127B

Units Cost


$204 Sale 70


Item 127B

Units Cost


$204 Sale 70



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35

7-3LIFO Perpetual



Sales 1 200 00




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36

3647

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 60080 21 1,680

22 40 21 840 30 20 60040 21 840

7-3LIFO Perpetual

All of the 40 sold are considered to be from the January 10 purchase.


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37


7-3LIFO Perpetual

48

Item 127B

Units Cost


$204 Sale 70


28 Sale 20

Item 127B

Units Cost


$204 Sale 70


28 Sale 20


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3849

7-3LIFO Perpetual

28 Accounts Receivable 600 00

Sales 600 00





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3950

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

28 20 21 420 30 20 60020 21 420

7-3LIFO Perpetual

22 40 21 840 30 20 60040 21 840

10 80 21 1,680 30 20 60080 21 1,680

All of the 20 sold are considered to be from the January 22 purchase.


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4051

Item 127B

Units Cost


$204 Sale 70


28 Sale 20

30 Purchase 100 22

Item 127B

Units Cost


$204 Sale 70


28 Sale 20

30 Purchase 100 22

7-3LIFO Perpetual

On January 30, the firm purchased one hundred additional units of Item 127B at $22 each.


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4152

On January 30, the firm purchased one hundred additional units of Item 127B at $22 each.

7-3LIFO Perpetual




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4233

7-3LIFO Perpetual

53

Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

28 20 21 420 30 20 60020 21 420

7-3LIFO Perpetual

22 40 21 840 30 20 60040 21 840

10 80 21 1,680 30 20 60080 21 1,680

30 100 22 2,200 30 20 60020 21 420

100 22 2,200


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4333

7-3LIFO Perpetual

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Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

28 20 21 420 30 20 60020 21 420

7-3LIFO Perpetual

22 40 21 840 30 20 60040 21 840

10 80 21 1,680 30 20 60080 21 1,680

30 100 22 2,200 30 20 60020 21 420

100 22 2,200

Cost of merchandise sold $2,660Cost of merchandise sold $2,660


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4433

7-3LIFO Perpetual

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Item 127B



Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

28 20 21 420 30 20 60020 21 420

7-3LIFO Perpetual

22 40 21 840 30 20 60040 21 840

10 80 21 1,680 30 20 60080 21 1,680

30 100 22 2,200 30 20 60020 21 420

100 22 2,200

January 31, inventory….. $3,220January 31, inventory….. $3,220


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45

7-3-


Beginning inventory, purchases, and sales for Item ER27 are as follows:

Nov. 1 Inventory 40 units at $55 Sale 32 units

11 Purchase 60 units at $721 Sale 45 units

56

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.


46

46

Using FIFO, the earliest batch purchased is

considered the first batch of merchandise sold. The

physical flow does not have to match the

accounting method chosen.

7-4FIFO Periodic


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4760

= $2,000

= 1,680

= 2,200

Cost of merchandise available for sale

7-4FIFO Periodic

100 units @ $20100 units @ $20

80 units @ $2180 units @ $21

100 units @ $22100 units @ $22

280 units available for sale during year

Jan. 1

Jan. 10

Jan. 30

$5,880


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4861

7-4FIFO Periodic

The physical count on January 31 shows that 150 units are on hand (conclusion: 130 units were

sold). What is the cost of the ending inventory?

= $ 0

= 1,050

= 2,200

100 units @ $20100 units @ $20

80 units @ $2180 units @ $21

100 units @ $22100 units @ $22

Jan. 1

Jan. 10

Jan. 30

Sold these

Sold 30 of these

50 units @ $2150 units @ $21

100 units @ $22100 units @ $22

Ending inventory

$3,250


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49

7-4FIFO Periodic

Now we can calculate the cost of goods sold as follows:

Beginning inventory, January 1 (Slide 60) $2,000Purchases ($1,680 + $2,200) 3,880Cost of merchandise available for sale $5,880Ending inventory, January 31(Slide 61) 3,250Cost of merchandise sold $2,630

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50

50

Using LIFO, the most recent batch purchased is considered the first batch of

merchandise sold. The actual flow of goods does not have to be LIFO. For example, a

store selling fresh fish would want to sell the oldest fish first (which is FIFO) even though

LIFO is used for accounting purposes.

7-4LIFO Periodic


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51

7-4LIFO Periodic

64

= $2,000

= 1,680

= 2,200

Cost of merchandise available for sale

100 units @ $20100 units @ $20

80 units @ $2180 units @ $21

100 units @ $22100 units @ $22

280 units available for sale during year

Jan. 1

Jan. 10

Jan. 30

$5,880


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5265

7-4LIFO Periodic

Assume again that the physical count on January 31 is 150 units (and that 130 units were sold).

What is the cost of the ending inventory?

= $2,000

= 1, 680

= 2,200

100 units @ $20100 units @ $20

80 units @ $2180 units @ $21

100 units @ $22100 units @ $22

Jan. 1

Jan. 10

Jan. 30 Sold these

Sold 30 of these50 units @ $2150 units @ $21

= 0

= 1,050

Ending inventory

$3,050


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5366

7-4LIFO Periodic




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54

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.

7-4Average Cost


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55

7-4Average Cost

$5,880

= $2,000

= 1,680

= 2,200

100 units @ $20100 units @ $20

80 units @ $2180 units @ $21

100 units @ $22100 units @ $22

280

Jan. 1

Jan. 10

Jan. 30

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

100 units @ $22100 units @ $22


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5669

7-4



Average Cost


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57

7-4-


The units of an item available for sale during the year were as follows:

Jan. 1 Inventory 6 units @ $50 $ 300Mar. 20 Purchase 14 units @ $55 770Oct. 30 Purchase 20 units @ $62 1,240 Available for sale 40 units $2,310

70

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.


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5873

7-5Partial Income Statements

Net sales $3,900Cost of merchandise sold:

Beginning inventory $2,000Purchases 3,880Merchandise available for sale $5,880Less ending inventory 3,250 Cost of merchandise sold 2,630

Gross profit $1,270

First-In, First-Out


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5974




Gross profit $1,170

Average Cost


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6075




Gross profit $1,070

Last-In, First-Out


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61

7-5Recap

Weighted FIFO LIFO Average

Ending inventory $3,250 $3,150 $3,050

Cost of merchandise sold $2,630 $2,730 $2,830

Gross profit $1,270 $1,170 $1,070


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62

7-6

Merchandise that is out of date, spoiled, or damaged should be

written down to its net realizable value. This is the estimated

selling price less any direct cost of disposal, such as sales

commissions.


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63

7-6Merchandise Inventory on the Balance Sheet

Merchandise inventory is usually presented in the Current Assets

section of the balance sheet, following receivables.


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64

7-6

The method of determining the cost of inventory (FIFO, LIFO,

or weighted average) should be shown.


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65

The retail inventory method of estimating inventory cost is based on

the relationship of the cost of merchandise available for sale to the retail price of the same merchandise.

7-7Retail Inventory Method


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6691

7-7Determining Inventory by the Retail Method


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67

The gross profit method uses the estimated gross profit for the

period to estimate the inventory at the end of the period.

6161

7-7Gross Profit Method


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6894

7-7Estimating Inventory by Gross Profit Method


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69

The gross profit method is useful for estimating inventories for monthly or

quarterly financial statements in a periodic inventory system.

7-7


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70

7-7


Based on the following data, estimate the cost of ending merchandise inventory:

Sales (net) $1,250,000Estimated gross profit rate 40%

Beginning merchandise inventory $100,000Purchases (net) 800,000Merchandise available for sale $900,000

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