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Chapter 8: Chapter 8: Inventory ValuationInventory Valuation

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Class ProblemDallas Company had the following inventory

transactions at the end of 2012. Indicate whether Dallas should show the inventory in its financials as of 12/31/12.

1. On 12/28, purchased inventory, FOB Destination. Shipped 12/28, did not arrive until Jan. 2.

Not part of Dallas inventory

2. On Dec. 29, purchased inventory, FOB Shipping Point. Shipped 12/29, did not arrive until Jan. 2Part of Dallas inventory

3. On 12/28, sold inventory to Houston Company, FOB Destination. Shipped 12/28; Houston received on Jan. 2.Part of Dallas inventory

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Class Problem

4. On 12/28, sold inventory to Amarillo Company, FOB Shipping Point. Shipped 12/28; Amarillo received on Jan. 2.

Not part of Dallas inventory.

5. On 12/28, sold inventory to Amarillo Company, FOB Shipping Point. Shipped 12/28; Amarillo received on Dec. 29. This inventory included a buyback agreement available for 60 days.

Still part of Dallas inventory.

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Class Problem

Analysis (O = overstated, U = understated): BI + P - EI = COGS NI A = L + SE

14: 9u 9o 9u 9u 9u15: 9u 9u 9o X X

Why no effect on 2015 ending SE?NI 2014 understated by $9,000NI 2015 overstated by $9,000

Both closed to RE, so no net effect at end.

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Journal Entries - ExampleJournal Entries - ExampleExample - assume the following balance in the

Unadjusted Trial Balance of Raider Co.:DR CR

Merch. Inv. (1/1/14) 2,600Purchases 12,000Freight-in 500

Purchase Discounts 900Purchase R & A 1,400

At the end of 2014, Raider calculated its ending inventory to be $1,900, based on the FIFO technique.

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Journal Entries - Periodic SystemJournal Entries - Periodic SystemPart 1: What is the value of Cost of Goods Sold?

BI + P (net) - EI = COGS2,600 + [12,000 +500 -900 -1,400] - 1,900 = COGS

10,900 = COGS Part 2, AJE:Cost of Goods Sold 10,900Inventory-Ending 1,900Purchase Discounts 900Purchase Rt. & Allow. 1,400

Purchases 12,000Transportation-in 500Inventory-Beginning 2,600

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Class Problem - Cost FlowsGiven the following activity for January: Cost Total

Units per Unit CostBegin Inventory 20 $ 9.00 $180Purchase 1/10 40 10.00 400Purchase 1/22 30 11.00 330Total available 90 units $910

Sales on Jan. 12 30 unitsSales on Jan. 24 25 units

Total units sold: 55Total units in EI 35

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Periodic FIFO(LISH)FIFO for COGS (top down)

55 units20 @ $9 = $18035 @ $10 = $350

Total = $530LISH for EI (bottom up)

35 units30 @ $11 = $330 5 @ $10 = $ 50

Total $380

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Periodic LIFO(FISH)LIFO for COGS (bottom up)

55 units30 @ $11 = $33025 @ $10 = $250

Total = $580FISH for EI (top down)

35 units20 @ $ 9 = $18015 @ $10 = $150

Total = $330

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Average PeriodicAverage PeriodicFirst calculate average: Goods available cost = $910 Goods available units = 90 units Avg. = $10.11 per unitNow COGS:

55 units x $10.11 per unit = $ 556Now EI:

35 units x $10.11 per unit = $354

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Comparison of FIFO, LIFO, and Comparison of FIFO, LIFO, and AverageAverage

In times of rising prices:highest COGS:lowest COGShighest EIlowest EIhighest Net Incomelowest Net Income

LIFO

LIFO

LIFO

FIFOFIFO

FIFO