© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Chapter 8
Inventory:
Measurement
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-2
Inventory
Those assets that a company:
2. Has in production for future sale.2. Has in production for future sale.
1. Intends to sell in the normalcourse of business.
1. Intends to sell in the normalcourse of business.
3. Uses currently in the productionof goods to be sold.
3. Uses currently in the productionof goods to be sold.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-3
Types of Inventories
Merchandise Inventory
Merchandise Inventory
Goods acquired for resale
Goods acquired for resale
Manufacturing Inventory
Manufacturing Inventory
•Raw Materials•Work-in-process•Finished Goods
•Raw Materials•Work-in-process•Finished Goods
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-4
Inventory Methods
Perpetual Inventory System
Perpetual Inventory System
The inventory account is
continuously updated as
purchases and sales are made.
The inventory account is
continuously updated as
purchases and sales are made.
Periodic Inventory System
Periodic Inventory System
The inventory The inventory account is adjusted account is adjusted
at the end of a at the end of a reporting cycle.reporting cycle.
The inventory The inventory account is adjusted account is adjusted
at the end of a at the end of a reporting cycle.reporting cycle.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-5 Accounting Entries in a Perpetual
System
Returns of inventory are credited to the inventory account.
Discounts on inventory purchases can be recorded using the gross or net method.
Returns of inventory are credited to the inventory account.
Discounts on inventory purchases can be recorded using the gross or net method.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-6 Accounting Entries in a Perpetual
System
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-7 Periodic Cost of Goods Sold
Equation
Beginning Inventory+ Net Purchases
Cost of Goods Available for Sale
- Ending Inventory= Cost of Goods Sold
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-8 Accounting Entries in a Periodic
System
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-9 Accounting Entries in a Periodic
System
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-10 Accounting Entries in a Periodic
System
In addition to Purchases, the contra-purchase accounts are also closed to
COGS at the end of the period:Purchases Discounts
Purchase Returns and Allowances
In addition to Purchases, the contra-purchase accounts are also closed to
COGS at the end of the period:Purchases Discounts
Purchase Returns and Allowances
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-11 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
Items removed from inventory for use in
production
No accounting entries made
Debit WIP inventory and credit Raw
Materials inventory account
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
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-12
What is Included in Inventory?
General RuleAll goods owned by the company on the inventory
date, regardless of their location.
General RuleAll goods owned by the company on the inventory
date, regardless of their location.
Goods in TransitGoods in Transit Goods on Consignment
Goods on Consignment
Depends on FOB shipping terms.
Depends on FOB shipping terms.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-13 Expenditures Included in
Inventory
Invoice Price
Invoice Price
Freight-in on
Purchases
Freight-in on
Purchases
+
Purchase Returns
Purchase Returns
Purchase Discounts
Purchase Discounts
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-14
Inventory Cost Flow Methods
Specific cost identification
Average cost
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Specific cost identification
Average cost
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-15
The specific cost of each inventory item must be known.
By selecting specific items from inventory at the time of sale, income can be manipulated.
The specific cost of each inventory item must be known.
By selecting specific items from inventory at the time of sale, income can be manipulated.
Specific Cost Identification
Items are added to inventory at cost when they are purchased.
COGS for each sale is based on the specific cost of the item sold.
Items are added to inventory at cost when they are purchased.
COGS for each sale is based on the specific cost of the item sold.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-16
Average Cost Method
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-17 Weighted-Average
Periodic Example
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-average method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
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-average method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-18 Weighted-Average
Periodic Example
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 ?Cost of Goods Sold 1,350 ?
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-19 Weighted-Average
Periodic Example
Now, we have to assign costs to ending inventory and cost of goods sold.
Beginning Inventory (800 units)
Purchases (1,150 units)
Beginning Inventory (800 units)
Purchases (1,150 units)
Available for Sale
(1,950 units)
Available for Sale
(1,950 units)
Ending Inventory(600 units)
Ending Inventory(600 units)
Goods Sold(1,350)
Goods Sold(1,350)
$47,650 ÷ 1,950 = $24.4359 weighted-average per unit cost
$47,650 ÷ 1,950 = $24.4359 weighted-average per unit cost
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-20 Weighted-Average
Periodic Example
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 24.4359 14,661.54 Cost of Goods Sold 1,350 24.4359 32,988.46$
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-21 Moving-Average
Perpetual Example
The following schedule shows the Frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the perpetual weighted-average method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
The following schedule shows the Frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the perpetual weighted-average method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-22
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 Ending Inventory 600 Cost of Goods Sold 1,350
Moving-AveragePerpetual Example
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-23 Moving-Average
Perpetual Example
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-24 Moving-Average
Perpetual Example
$11,600.00 ÷ (800-600+300) = $23.200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-25 Moving-Average
Perpetual Example
$27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-26 Moving-Average
Perpetual Example
Su
m
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-27
First-In, First-Out
The cost of the oldest inventory items are charged to COGS when goods are sold.
The cost of the newest inventory items remain in ending inventory.
The cost of the oldest inventory items are charged to COGS when goods are sold.
The cost of the newest inventory items remain in ending inventory.
The FIFO method
assumes that items are sold
in the chronological order of their acquisition.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-28
First-In, First-Out
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.
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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-29
FIFO - Periodic Example
The following schedule shows the frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the periodic FIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
The following schedule shows the frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the periodic FIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-30
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 Cost of Goods Sold 1,350
FIFO - Periodic Example
These are the 600 most recently
acquired units.
These are the 600 most recently
acquired units.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-31
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 Cost of Goods Sold 1,350
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 16,600.00 Cost of Goods Sold 1,350
FIFO - Periodic Example
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-32
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 16,600.00 Cost of Goods Sold 1,350
FIFO - Periodic Example
These are the first 1,350 units acquired.
These are the first 1,350 units acquired.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-33
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 16,600.00 Cost of Goods Sold 1,350
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 16,600.00 Cost of Goods Sold 1,350 31,050.00$
FIFO - Periodic Example
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-34
FIFO - Perpetual Example
The following schedule shows the frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the perpetual FIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
The following schedule shows the frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the perpetual FIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-35
FIFO - Perpetual Example
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 Ending Inventory 600 Cost of Goods Sold 1,350
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-36
FIFO - Perpetual Example200
The ending inventory on 9/1 consists of:The ending inventory on 9/1 consists of: 200 units from beginning inventory @ $22.00200 units from beginning inventory @ $22.00
The ending inventory on 9/1 consists of:The ending inventory on 9/1 consists of: 200 units from beginning inventory @ $22.00200 units from beginning inventory @ $22.00
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-37
FIFO - Perpetual Example200
The ending inventory on 9/3 consists of:The ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00200 units from beginning inventory @ $22.00
300 units from the 9/3 purchase @ $24.00300 units from the 9/3 purchase @ $24.00
The ending inventory on 9/3 consists of:The ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00200 units from beginning inventory @ $22.00
300 units from the 9/3 purchase @ $24.00300 units from the 9/3 purchase @ $24.00
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-38
FIFO - Perpetual Example
200
The ending inventory on 9/10 consists of:The ending inventory on 9/10 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00
The ending inventory on 9/10 consists of:The ending inventory on 9/10 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-39
FIFO - Perpetual Example
The ending inventory on 9/15 consists of:The ending inventory on 9/15 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00
The ending inventory on 9/15 consists of:The ending inventory on 9/15 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-40
FIFO - Perpetual Example
The ending inventory on 9/21 consists of:The ending inventory on 9/21 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00
The ending inventory on 9/21 consists of:The ending inventory on 9/21 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-41
FIFO - Perpetual Example
The ending inventory on 9/21 consists of:The ending inventory on 9/21 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00400 units from the 9/29 purchase @ $28.00400 units from the 9/29 purchase @ $28.00
The ending inventory on 9/21 consists of:The ending inventory on 9/21 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00400 units from the 9/29 purchase @ $28.00400 units from the 9/29 purchase @ $28.00
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-42
FIFO - Perpetual Example
The ending inventory on 9/30 consists of:The ending inventory on 9/30 consists of: 200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00
400 units from the 9/29 purchase @ $28.00.400 units from the 9/29 purchase @ $28.00.
The ending inventory on 9/30 consists of:The ending inventory on 9/30 consists of: 200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00
400 units from the 9/29 purchase @ $28.00.400 units from the 9/29 purchase @ $28.00.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-43
FIFO - Perpetual Example
Note that this is the same COGS computed using the Periodic
approach.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-44
Last-In, First-Out
Any questions before we run into
LIFO?
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-45
Last-In, First-Out
The cost of the newest inventory items are charged to COGS when goods are sold.
The cost of the oldest inventory items remain in inventory.
The cost of the newest inventory items are charged to COGS when goods are sold.
The 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.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-46
Last-In, First-Out
Unlike FIFO, using the LIFO method may
result in COGS and Ending Inventory Cost
that differ under the periodic and perpetual
approaches.
Unlike FIFO, using the LIFO method may
result in COGS and Ending Inventory Cost
that differ under the periodic and perpetual
approaches.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-47
The following schedule shows the frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the periodic LIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
The following schedule shows the frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the periodic LIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
LIFO - Periodic Example
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-48
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 Cost of Goods Sold 1,350
LIFO - Periodic Example
These are the 600 oldest units in
inventory.
These are the 600 oldest units in
inventory.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-49
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 13,200.00 Cost of Goods Sold 1,350
LIFO - Periodic Example
200
600 x $22.00
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-50
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 13,200.00 Cost of Goods Sold 1,350
LIFO - Periodic Example
600 x $22.00
These are the most recently acquired 1,350
units.
These are the most recently acquired 1,350
units.
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-51
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 13,200.00 Cost of Goods Sold 1,350 34,450.00$
LIFO - Periodic Example
$4,400 + $30,050
200 x $22.00
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-52
LIFO - Perpetual Example
The following schedule shows the frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the perpetual LIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
The following schedule shows the frame inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30 shows 600 mouse pads in ending inventory.
Use the perpetual LIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-53
LIFO - Perpetual Example
Yore Frame, Inc.Frame Inventory
Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00
Goods Available for Sale 1,950 Ending Inventory 600 Cost of Goods Sold 1,350
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-54
LIFO - Perpetual Example
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 inventory layer.
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 inventory layer.
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-55
LIFO - Perpetual Example
The ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00
300 units from the 9/3 purchase @ $24.00
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
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-56
LIFO - Perpetual Example
For the 9/30 sale, we must identify the 300 newest units. They all come from the September 3
purchase.
Note that all of the 9/3 units have been “sold” and only 200 of the beginning inventory units remain.
For the 9/30 sale, we must identify the 300 newest units. They all come from the September 3
purchase.
Note that all of the 9/3 units have been “sold” and only 200 of the beginning inventory units remain.
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-57
LIFO - Perpetual Example
The ending inventory on 9/15 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00
The ending inventory on 9/15 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-58
LIFO - Perpetual Example
The ending inventory on 9/21 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00
The ending inventory on 9/21 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-59
LIFO - Perpetual Example
The ending inventory on 9/29 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00
400 units from the 9/29 purchase @ $28.00.
The ending inventory on 9/29 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00
400 units from the 9/29 purchase @ $28.00.
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-60
LIFO - Perpetual Example
150
For the 9/30 sale, we must identify the 450 newest For the 9/30 sale, we must identify the 450 newest units. 400 of them come from the 9/29 purchase. units. 400 of them come from the 9/29 purchase.
The other 50 come from the 9/21 purchase. The other 50 come from the 9/21 purchase.
For the 9/30 sale, we must identify the 450 newest For the 9/30 sale, we must identify the 450 newest units. 400 of them come from the 9/29 purchase. units. 400 of them come from the 9/29 purchase.
The other 50 come from the 9/21 purchase. The other 50 come from the 9/21 purchase.
200
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-61
LIFO - Perpetual Example
150
200
The ending inventory on 9/30 consists of:The ending inventory on 9/30 consists of: 200 units from beginning inventory @ $22.00200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00
150 units from the 9/21 purchase @ $27.00.150 units from the 9/21 purchase @ $27.00.
The ending inventory on 9/30 consists of:The ending inventory on 9/30 consists of: 200 units from beginning inventory @ $22.00200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00
150 units from the 9/21 purchase @ $27.00.150 units from the 9/21 purchase @ $27.00.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-62
When Prices Are Rising . . .
LIFOMatches high (newer) costs with current (higher) sales.Inventory is valued based on low (older) cost basis.Results in lower taxable income.Is not officially endorsed by the IASC.
LIFOMatches high (newer) costs with current (higher) sales.Inventory is valued based on low (older) cost basis.Results in lower taxable income.Is not officially endorsed by the IASC.
FIFOMatches low (older) costs with current (higher) sales.Inventory is valued approximates replacement cost.Results in higher taxable income.
FIFOMatches low (older) costs with current (higher) sales.Inventory is valued approximates replacement cost.Results in higher taxable income.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-63
Decision Makers’ PerspectiveWhat factors motivate companies to
select one inventory method over another?
How accurate are the timing of
reported incomeand income taxes?
How accurate are the timing of
reported incomeand income taxes?
How closely do reported
costs reflect actualflow of inventory?
How closely do reported
costs reflect actualflow of inventory?
How well are costs matched against
related revenues?
How well are costs matched against
related revenues?
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-64
LIFO Liquidation
LIFO inventory costs on the balance sheet are “out of date” because they reflect
old purchase transactions.
LIFO inventory costs on the balance sheet are “out of date” because they reflect
old purchase transactions.
When prices rise . . .
If inventory declines, these “out of date” costs
may be charged to current earnings.
If inventory declines, these “out of date” costs
may be charged to current earnings.
This LIFOliquidation results in
“paper profits.”
This LIFOliquidation results in
“paper profits.”
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-65
LIFO Inventory Pools
Inventory Pools consist of inventory units grouped according to similarities.
Inventory Pools consist of inventory units grouped according to similarities.
For example, all similar units
purchased at the same time can be “pooled”
and assigned an average unit cost.
For example, all similar units
purchased at the same time can be “pooled”
and assigned an average unit cost.
Using Inventory Pools with LIFO simplifies
record keeping.
Using Inventory Pools with LIFO simplifies
record keeping.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-66
Example
The replacement inventory differs from the old inventory on
hand. We just create a new layer.
Example
The replacement inventory differs from the old inventory on
hand. We just create a new layer.
Dollar-Value LIFO (DVL)
DVL inventory pools are viewed as layers of value, rather than layers of similar units.DVL inventory pools are viewed as layers
of value, rather than layers of similar units.
DVL simplifies LIFO record-keeping.
DVL simplifies LIFO record-keeping.
DVL minimizes the probability of layer
liquidation.
DVL minimizes the probability of layer
liquidation.
At the end of the period, we determine if a new inventory layer
was added by comparing ending
inventory to beginning inventory.
At the end of the period, we determine if a new inventory layer
was added by comparing ending
inventory to beginning inventory.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-67
Dollar-Value LIFO (DVL)
We need to determine if the increase in ending inventory over beginning inventory was due to a price increase or an increase
in inventory.
We need to determine if the increase in ending inventory over beginning inventory was due to a price increase or an increase
in inventory.
1a. Compute a Cost Index for the
year.
1a. Compute a Cost Index for the
year.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
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Dollar-Value LIFO (DVL)
1b. Deflate the ending
inventory value using
the cost index.
1b. Deflate the ending
inventory value using
the cost index.
1c. Compare ending
inventory (at base year cost) to
beginning inventory.
1c. Compare ending
inventory (at base year cost) to
beginning inventory.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-69
Dollar-Value LIFO (DVL)
Next, identify the layers in ending inventory and the years they were created.
Next, identify the layers in ending inventory and the years they were created.
Sum all the layers to arrive at Ending Inventory at DVL
cost.
Sum all the layers to arrive at Ending Inventory at DVL
cost.
Convert each layer’s base year cost to layer
year cost by multiplying times the
cost index.
Convert each layer’s base year cost to layer
year cost by multiplying times the
cost index.
© 2004 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin
Slide8-70
End of Chapter 8
It’s Over
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