Lifo Periodic 200 units @ $9 Jan. 1 Beginning Inventory 300 units @ $10 Mar. 10 Purchase 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year Using lifo, the most recent batch purchased is considered the first batch of merchandise sold.

Assume again that 700 units were sold during the year. Lifo Periodic 200 units @ $9 Jan. 1 Beginning Inventory Assume again that 700 units were sold during the year. 300 units @ $10 Mar. 10 Purchase 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year

Lifo Periodic 200 units @ $9 = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 Sold 200 of these 300 units @ $10 100 units @ $10 1,000 Sold these 400 400 units @ $11 Sold these 100 100 units @ $12 1,000 units available for sale during year Ending Inventory $2,800 $10,400

Lifo Periodic Cost of merchandise available for sale $10,400 Less ending inventory 2,800 Cost of merchandise sold $ 7,600

Cost of Merchandise Sold Summary of Lifo Periodic Cost of Merchandise Sold Merchandise Available for Sale Purchases $1,800 200 units at $9 $1,800 Jan. 1 200 units at $9 $1,000 100 units at $10 $1,800 $2,800 300 units Mar. 10 300 units at $10 $3,000 Cost of Merchandise Sold Sep. 21 400 units at $11 $4,400 $2,000 200 units at $10 Nov. 18 100 units at $12 $1,200 $4,400 400 units at $11 1,000 units $10,400 $1,200 100 units at $12 $7,600 700 units

Average Cost Periodic 200 units @ $9 Jan. 1 Beginning Inventory The average cost periodic method is based on the average cost of identical units. 300 units @ $10 Mar. 10 Purchase 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year

Average Cost Periodic 200 units @ $9 = $ 1,800 1,000 units available for sale during year $10,400 Cost of merchandise available for sale

Average Cost Periodic Cost of Merchandise Available for Sale = Average Unit Cost Units Available for Sale During Year $10,400 1,000 Units = $10.40 per Unit

Average Cost Periodic Cost of merchandise available for sale $10,400 Less ending inventory ($10.40 x 300) 3,120 Cost of merchandise sold $ 7,280 To verify this amount, multiply 700 units sold times $10.40 to get the same $7,280.

Valuation of Inventory at Lower-of-Cost-or-Market Unit Unit Inventory Cost Market Total Total Lower Item Quantity Price Price Cost Market C or M $ 3,800 2,700 4,650 3,920 Total $15,520 $15,472 $15,070 A 400 $10.25 $ 9.50 $ 4,100 $ 3,800 B 120 22.50 24.10 2,700 2,892 C 600 8.00 7.75 4,800 4,650 D 280 14.00 14.75 3,920 4,130 The market decline based on individual items ($15,520 – $15,070) = $450

Metro-Arts Balance Sheet December 31, 2007 Presentation of Merchandise Inventory on the Balance Sheet Metro-Arts Balance Sheet December 31, 2007 Assets Current assets: Cash $ 19 400 00 Accounts receivable $80 000 00 Less allowance for doubtful accounts 3 000 00 77 000 00 Merchandise inventory at lower of cost (first-in, first-out method) or market 216 300 00

Estimating Inventory Cost

Retail Method of Estimating Inventory Cost Retail method is based on relationship between cost of merchandise available for sale and the retail price. Retail prices of all merchandise must be accumulated and totaled. Inventory at retail is calculated at retail price of merchandise available for sale less net sales at retail. Ratio is calculated as cost divided by retail price. Inventory at retail price times cost ratio equals estimated cost of inventory.

Retail Inventory Method Cost Retail Merchandise inventory, Jan. 1 $19,400 $ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale $62,000 $100,000 $62,000 $100,000 Ratio of cost to retail price = = 62% Step 1: Determine the ratio of cost to the retail price.

Retail Inventory Method Cost Retail Merchandise inventory, Jan. 1 $19,400 $ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale $62,000 $100,000 Sales for January (net) 70,000 Merchandise inventory, January 31, at retail $ 30,000 Step 2: Determine the ending inventory at retail.

Retail Inventory Method Sales for January (net) 70,000 Merchandise inventory, January 31, at retail $ 30,000 Cost Retail Merchandise inventory, Jan. 1 $19,400 $ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale $62,000 $100,000 Merchandise inventory, January 31, at cost ($30,000 x 62%) $18,600 Step 3: Calculate the estimated inventory at cost.

Gross Profit Method of Estimating Inventory Cost 1. A gross profit percentage rate is estimated based on previous experience adjusted for known changes. 2. Estimated gross profit is calculated by multiplying the estimated gross profit rate times the actual net sales. 3. Estimated cost of merchandise sold is calculated by subtracting the gross profit from actual sales. 4. The cost of merchandise sold estimate is deducted from actual merchandise available for sale to determine the estimated cost of merchandise inventory.

Gross Profit Method Merchandise inventory, January 1 $ 57,000 Purchases in January (net) 180,000 Merchandise available for sale Sales in January (net) $250,000 Less: Estimated gross profit Estimated cost of merchandise sold Estimated merchandise inventory, January 31 $237,000 ($250,000 x 30%) 75,000 175,000 $ 62,000 The gross profit method is useful for estimating inventories for monthly or quarterly financial statements in a periodic inventory system.

Inventory Turnover SUPERVALU Zale Cost of merchandise sold $15,620,127,000 $ 737,188,000 Inventories: Beginning of year $1,115,529,000 $478,467,000 End of year 1,067,837,000 571,669,000 Total $2,183,366,000 $1,050,136,000 Average $1,091,683,000 $525,068,000 Inventory turnover 14.3 times 1.4 times Use: Inventory turnover measures the relationship between the volume of goods sold and the amount of inventory carried during the period.

Number of Days’ Sales in Inventory SUPERVALU Zale Average daily cost of merchandise sold: $15,620,127,000/365 $42,794,868 $737,188,000/365 $2,019,693 Ending inventory $1,067,837,000 $571,669,000 Average selling period 25 days 283 days Use: To assess the efficiency in the management of inventory

Chapter 9 The End