Professor Eric Carstensen Inventory Professor Eric Carstensen MiraCosta College http://www.miracosta.edu/instruction/accounting/index.html

Considerations For Merchandisers, Inventory can account for 80% or more of Assets – proper valuation and management is critical Ownership Goods In Transit Goods on Consignment Damaged / Obsolete Goods

Inventory Relationship Beginning + Purchases Inventory Cost of Goods Available for Sale COGS Ending Cost of Goods Available - Ending Inventory = COGS

Inventory Valuation Methods (also called Cost-Flow Assumptions) First In, First Out (FIFO) Last In, First Out (LIFO) Weighted Average Specific Identification

Valuation Example - Transactions 4/1 beginning inventory = 100 units @ $10 per unit 4/3 purchase 200 units @ $12 per unit 4/10 issue 200 units for sale * 4/20 purchase 200 units @ $14 per unit 4/27 issue 300 units for sale ** * for specific identification, assume 50 units from beginning inventory and 150 units from the April 3rd purchase were issued ** for specific identification, assume 150 units from beginning inventory and 150 units from the April 10th purchase were issued

Valuation Example – Initial Calculations beginning 200 units @ $10 per unit = 1,000 4/3 units @ $12 per unit 2,400 4/20 units @ $14 per unit 2,800 available 600 6,200 4/10 4/27 300 sales 500 units available units sold units in ending inventory 100

Valuation Example - FIFO Date Purchases  Sales    Inventory Balance units cost extended cost beg 200 12 2,400 4/3 14 2,800 subtotal 400 5,200 4/10 4/20 16 3,200 6,000 4/27 100 1,600 4/30 ending inv.

Valuation Example - LIFO Date Purchases  Sales   Inventory Balance  units cost extended cost beg 200 12 2,400 4/3 14 2,800 subtotal 400 5,200 4/10 4/20 16 3,200 5,600 4/27 100 1,200 4/30 ending inv.

Valuation Example – Weighted Average Date Purchases Sales    Inventory Balance units cost extended cost beg 200 12.00 2,400 4/3 14.00 2,800 subtotal 400 13.00 5,200 4/10 1,600 2,600 4/20 16.00 3,200 14.50 5,800 4/27 300 4,350 100 1,450 4/30 ending inv.

Valuation example – Specific Identification Date Purchases Sales    Inventory Balance  units cost extended cost beg 200 12.00 2,400 4/3 14.00 2,800 subtotal 400 5,200 4/10 50 600 150 1,800 2,100 700 4/20 16.00 3,200 5,700 4/27 800 ending inv. 100 1,500

Comparison of Methods FIFO LIFO W.A. S.I. Cost of Goods Available 6,200 Ending Inventory 1,600 1,200 1,450 1,500 Cost of Goods Sold 4,600 5,000 4,750 4,700

Lower of Cost or Market (LCM) Units Cost Per Market Extended Lower Unit Per Unit Cost Pants 20 44 48 880 960 Shirts 25 35 36 875 900 Belts 18 17 360 306 Socks 30 13 14 390 420 Hats 22 15 12 330 264 Totals 2,835 2,850 2,715 In order to bring the amount of inventory on the books in line with LCM, we need to do an adjustment of 135 (= 2,850 - 2,715): debit Cost of Goods Sold 135 credit Inventory