Inventories
H0032
* Property of STI
Page 1 of 16
INVENTORIES
Inventory Items
Flow of Inventory Costs
Cost of Goods
Available for
Sale
Ending
Inventory
Cost of
Goods Sold
Beginning
Inventory
Purchases
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H0032
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Inventory Items
(Amounts in
millions)
Beginning Inventory P 276
+ Net purchases 1,348
= Cost of goods available for sale 1,624
- Ending inventory 317
= Cost of goods sold P 1,307
Types of companies
o Merchandising company
o Manufacturing company
o Service organization
Inventories
H0032
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Page 3 of 16
Cost of Inventory
1. Determining the Quantity of Inventory
o FOB (Free on Board)
FOB Shipping Point
FOB Destination
o Consigned Goods
2. Determining the Unit Cost of Inventory
Figuring the Cost of Inventory
Inventories
H0032
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Inventory Costing Methods
1. Specific Unit Cost
2. Average Costs Method
3. First-in, First-out Cost
4. Last-in, First-out Cost
Inventory & Cost of Goods Sold under Average,
FIFO & LIFO Inventory Costing Methods
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H0032
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Inventory Costing Methods
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H0032
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Inventory Costing Methods
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H0032
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Eff
ect
of
FIF
O,
LIF
O a
nd A
vera
ge C
ost
on Incom
e &
Incom
e
Tax
Eff
ect
on
Incom
e
Inventories
H0032
* Property of STI
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Eff
ect
of
FIF
O,
LIF
O a
nd A
vera
ge C
ost
on Incom
e &
Incom
e
Tax
Eff
ect
on
Incom
eTax
Inventories
H0032
* Property of STI
Page 9 of 16
Sam
ple
Pro
ble
m
Inventories
H0032
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Accounting Conservatism
Lower-of-Cost or Market (LCM) Effects
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H0032
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Lower-of-Cost
orMarket(LCM)Effects
Accounti
ng C
onse
rvati
sm
Inventories
H0032
* Property of STI
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Eff
ect
of
Invento
ry E
rrors
Inventories
H0032
* Property of STI
Page 13 of 16
Methods of Estimating Inventory
1. Gross Margin (Gross Profit) Method
Beginning inventory
+ Net purchases
= Cost of goods available for sale
- Cost of goods sold
= Ending inventory
Gross Margin Method of Estimating Inventory
(amounts assumed)
Beginning inventory ……………………………. P 140,000
Net purchases ……………………………………… 660,000
Cost of goods available for sale …………. 800,000
Cost of goods sold:
Net sales revenue…………………………….. P 1,000,000
Less estimated gross margin of 40%... 400,000
Estimated cost of goods sold …………… 600,000
Estimated cost of ending inventory ……. P 200,000
Inventories
H0032
* Property of STI
Page 14 of 16
Methods of Estimating Inventory
2.Retail Method
Retail Method of Estimating Inventory (amounts
assumed)
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H0032
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Periodic and Perpetual Inventory System
Periodic Inventory System
Perpetual Inventory System
Inventories
H0032
* Property of STI
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Internal Control over Inventory
1. Physically counting inventory at least once a
year.
2. Maintaining efficient purchasing, receiving &
shipping procedures.
3. Storing inventory to prevent against theft,
damage & decay.
4. Limiting access to personnel.
5. Keeping perpetual inventory records for high-
unit-cost merchandise.
6. Purchasing inventory in economical quantities.
7. Keeping enough inventories on hand.
8. Avoid tying up money in items that are not
needed.
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