Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 By Jessica Huff

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Ownership of Goods Goods in Transit Free on Board (FOB) shipping says that the goods are yours once another company ships them to you FOB destination means that the goods are yours when you receive them Consigned Goods These are goods that you are holding, but they are not yours You sell them for a fee/commission Antique dealers do this quite often

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Inventory Systems Perpetual- Perpetual systems keep track of inventory simultaneously An example would be a grocery store where every time an items crosses the scanner, it is taken off of inventory Periodic- Inventory is physically checked at certain times This could be a small business that cannot afford to have a perpetual system Many companies adopt both systems because even a computer can be wrong (theft is a good example of why it would be wrong)

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Solving Inventory Problems When doing inventory problems, you first need to think about the system that is being used Every company will begin with a certain amount, then make purchases and sell inventory in any given period FIFO will sell inventory starting with the beginning balance LIFO will sell inventory starting with the last purchase Weighted-Average will sell inventory in any order without giving preference

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Inventory Methods FIFO (First-in, First-out)- The goods that are received or made first will be sold first Most companies use this method Makes sense for things that expire because if you dont sell them now, they will go bad (milk, eggs, etc.) LIFO (Last-in, First-out)- The newest goods that are received or made will be sold first General Accepted Accounting Principles (GAAP) is doing away with this method Companies that dont have goods that expire can use this (tires, laundry detergent, etc.) Weighted-Average- The average unit cost is found and then everything is sold as a lump

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Formula Cost of Goods Available for Sale Less: Cost of Goods Sold = Ending Inventory Ending Inventory Add: Cost of Goods Sold = Cost of Goods Available for Sale Cost of Goods Available for Sale Less: Ending Inventory = Cost of Goods Sold It can also be written as: Cost of Goods Sold Add: Ending Inventory =Cost of Goods Available for Sale

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Formula, Continued The point of the different variations is to point out that there are many different ways to solve inventory problems Depending on what is easiest for you will dictate how to approach the problems Cost of Goods Available for Sale is almost always given What is important is calculating Cost of Goods Sold or Ending Inventory Problems will give one of these two to calculate the rest of the equation

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 FIFO Example Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Units sold during the year= 600

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Cost of Goods Available for Sale The Cost of Goods Available for Sale (COGAS) is calculated by taking the beginning inventory + any purchases made during the period being looked at Question: So, for this problem, what is the Cost of Goods Available for Sale?

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Cost of Goods Available for Sale Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Cost of Goods Available for Sale

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Calculating Ending Inventory The problem says that 600 units were sold during the period Question: What is the amount for Ending Inventory (EI)? Remember, were doing FIFO!!

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Ending Inventory Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Since were selling 600, were selling everything in red and part of the orange which leaves 100 units not sold 100*$6= $600 is the Ending Inventory

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Calculating Cost of Goods Sold The problem says that 600 units were sold during the period Question: What is the amount for Cost of Goods Sold (COGS)? Work it out not plugging into the formula

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Cost of Goods Sold Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Since were selling 600, were selling everything in red and part of the orange to make up the 600 $1,000+$400+$1,200+ (50*$6)= $2,900 is Cost of Goods Sold

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Checking Your Work Now, to check your work, you put the numbers into the equation Cost of Goods Available for Sale $3,500 Less: Cost of Goods Sold 2,900 Ending Inventory $600 Sure enough, the equation works out Another way of solving the problem is to figure out two parts of the equation and solve for the third This is where whats easiest for you comes in Since COGAS was given, you can calculated EI or COGS to get to the other answer instead of working it out by hand

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 LIFO Example- Same Problem Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Units sold during the year= 600

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Solving Question: What is the Cost of Goods Available for Sale? Question: What is the Ending Inventory? Remember: were doing LIFO!! Question: What is the Cost of Goods Sold? Dont plug it into the formula again

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Cost of Goods Available for Sale Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Cost of Goods Available for Sale Note: Its the same answer as before

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Ending Inventory Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Since were selling 600, were selling everything in red and part of the orange which leaves 100 units not sold 100*$5= $500 is the Ending Inventory

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Cost of Goods Sold Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Since were selling 600, were selling everything in red and part of the orange to make up the 600 $900+$1,200+$400+ (100*$5)= $3,000 is Cost of Goods Sold

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Checking Your Work Now, to check your work, you put the numbers into the equation Cost of Goods Available for Sale $3,500 Less: Cost of Goods Sold 3,000 Ending Inventory $500 Sure enough, the equation works out

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Weighted-Average- Same Problem Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Units sold during the year= 600

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Solving Question: What is the Cost of Goods Available for Sale? If you said $3,500, you are correct!! Question: What is the Ending Inventory? Remember: were doing Weighted-Average!! Question: What is the Cost of Goods Sold? Dont plug it into the formula again

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Ending Inventory Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Unit Cost= COGAS/Units= $3,500/700= $5 Since there are 100 units left 100*5=$500 is Ending Inventory

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Cost of Goods Sold Date Explanation Units Unit Cost Total Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Since were selling 600 units 600*5=$3,000 Cost of Goods Sold

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Checking Your Work Now, to check your work, you put the numbers into the equation Cost of Goods Available for Sale $3,500 Less: Cost of Goods Sold 3,000 Ending Inventory $500 Sure enough, the equation works out

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Income Statement Effects FIFO Average LIFO COGAS $3,500 $3,500 $3,500 COGS 2,900 3,000 3,000 EI Net Income Highest Medium Medium With the exception of this problem, Weighted-Average and LIFO do not usually come out equal LIFO has a higher COGS and lower EI LIFO will result in a lower Net Income than Weighted- Average

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Lower of Cost or Market This is used after an inventory method is chosen This replacement method is used when the value of inventory go down (is impaired) Basically, the company looks at if the cost is lower than the market or vice versa and takes that amount as the new value

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 Lower of Cost or Market Example Lower of Cost Market Cost or Market Books $3,000 $2,500 $2,500 Music 3,500 3,600 3,500 Movies 4,000 5,000 4,000 Total Inventory $10,500 $11,100 $10,000 So, you take the lower of the cost or market, and that becomes your new amount ($10,000)

Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 More Problems You can challenge yourself by coming up with different problems Once you understand the basics, these problems are very easy to do Work them as many ways as you can think of and remember to CHECK YOUR WORK!!