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CHAPTER 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACH Sommers – ACCT 3311

Discussion Question Q8-6 (a)Goods out on approval to customers (b)Goods in transit that were recently purchased f.o.b. destination (c)Land held by a realty firm for sale (d)Raw Materials (e)Goods received on consignment (f)Manufacturing supplies Inventory Not Shown Inventory Inventory (disclosed as raw materials) Not Shown Inventory

A company should record purchases when it obtains legal title to the goods. Transfer of ownership

Discussion Question Q8-3 What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why? In a perpetual inventory system, data are available at any time on the quantity and dollar amount of each item of material or type of merchandise on hand. A physical inventory means that inventory is periodically counted (at least once a year) but that up-to-date records are not necessarily maintained. Discrepancies often occur between the physical count and the perpetual records because of clerical errors, theft, waste, misplacement of goods, etc.

Comparison of Inventory Systems

Periodic Inventory System We need the following adjusting entry to record cost of good sold. December 31, 2011 Cost of goods sold540,000 Inventory (ending)180,000 Inventory (beginning) 120,000 Purchases 600,000 To adjust inventory, close purchases, and record cost of goods sold.

Inventory Notation Beginning Balance Cost of Goods Available for Sale Cost of Goods Sold Ending Balance Purchases ??

Method adopted should be one that most clearly reflects periodic income. Cost Flow Assumption Adopted does not need to equal Physical Movement of Goods Cost Flow Assumption Adopted does not need to equal Physical Movement of Goods Specific Identification --- Average Cost LIFO --- FIFO Choosing a Cost Flow Assumption

Example 1: FIFO Periodic Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using FIFO, periodic system. Purchases DateUnitsUnit CostTotal Cost Jan 105,000$9$45,000 Jan 186, ,000 Totals11,000$105,000 Sales DateUnits Jan 53,000 Jan 122,000 Jan 204,000 Total9,000

Example 1: FIFO Periodic Cost of Goods Sold: 6,000 $8= $48,000 3,000 $9= 27,000 9,000 units= $75,000 Ending Inventory: 6,000 $10= $60,000 2,000 $9= 18,000 8,000 units= $78,000

Example 1: LIFO Periodic Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using LIFO, periodic system. Purchases DateUnitsUnit CostTotal Cost Jan 105,000$9$45,000 Jan 186, ,000 Totals11,000$105,000 Sales DateUnits Jan 53,000 Jan 122,000 Jan 204,000 Total9,000

Example 1: LIFO Periodic Cost of Goods Sold: 6,000 $10= $60,000 3,000 $9= 27,000 9,000 units= $87,000 Ending Inventory: 6,000 $8= $48,000 2,000 $9= 18,000 8,000 units= $66,000

Example 1: LIFO Perpetual Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using LIFO, perpetual system. Purchases DateUnitsUnit CostTotal Cost Jan 105,000$9$45,000 Jan 186, ,000 Totals11,000$105,000 Sales DateUnits Jan 53,000 Jan 122,000 Jan 204,000 Total9,000

Ex 1: LIFO Perpetual (January 5 th Sale) Available: Beg6,000 $8= $48,000 Ending Inventory: Beg3,000 $8= $24,000 Cost of Goods Sold: Beg3,000 $8= $24,000

Ex 1: LIFO Perpetual (January 12 th Sale) Available: Beg3,000 $8= $24,000 Jan 105,000 $9= 45,000 8,000 units $69,000 Ending Inventory: Beg3,000 $8= $24,000 Jan 103,000 $9= 27,000 6,000 units $51,000 Cost of Goods Sold: Jan 102,000 $9= $18,000

Ex 1: LIFO Perpetual (January 20 th Sale) Available: Beg 3,000 $ 8= $ 24,000 Jan 10 3,000 $ 9= 27,000 Jan 18 6,000 $10= 60,000 12,000 units $111,000 Ending Inventory: Beg 3,000 $ 8= $ 24,000 Jan 10 3,000 $ 9= 27,000 Jan 18 2,000 $10= 20,000 8,000 units $ 71,000 Cost of Goods Sold: Jan 18 4,000 $10= $ 40,000

Example 1: LIFO Perpetual (Summary) Ending Inventory: Beg 3,000 $ 8= $24,000 Jan 10 3,000 $ 9= 27,000 Jan 18 2,000 $10= 20,000 8,000 units $71,000 Cost of Goods Sold: Jan 53,000 units= $24,000 Jan 122,000 units= 18,000 Jan 204,000 units= 40,000 Total9,000 units= $82,000

Example 1: Average Cost, Periodic Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using Average Cost, Periodic. Purchases DateUnitsUnit CostTotal Cost Jan 105,000$9$45,000 Jan 186, ,000 Totals11,000$105,000 Sales DateUnits Jan 53,000 Jan 122,000 Jan 204,000 Total9,000

Example 1: Average Cost Periodic Cost of Goods Sold: 9,000 $9.00= $81,000 Ending Inventory: 8,000 $9.00= $72, ,000 / 17,000 = $9.00 Cost per unit

Example 1: Average Cost, Perpetual Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using Average Cost, Perpetual. Purchases DateUnitsUnit CostTotal Cost Jan 105,000$9$45,000 Jan 186, ,000 Totals11,000$105,000 Sales DateUnits Jan 53,000 Jan 122,000 Jan 204,000 Total9,000

Ex 1: Average Cost Perpetual (Jan 5 th Sale) Cost of Goods Sold: 3,000 $8.00= $24,000 Ending Inventory: 3,000 $8.00= $24,000 48,000 / 6,000 = $8.00 Cost per unit

Ex 1: Average Cost Perpetual (Jan 12 th Sale) Cost of Goods Sold: 2,000 $8.625= $17,250 Ending Inventory: 6,000 $8.625= $51,750 69,000 / 8,000 = $8.625 Cost per unit

Ex 1: Average Cost Perpetual (Jan 20 th Sale) Cost of Goods Sold: 4,000 $9.3125= $37,250 Ending Inventory: 8,000 $9.3125= $74, ,750 / 12,000 = $ Cost per unit

Ex 1: Average Cost Perpetual (Summary) Ending Inventory: 8,000 $9.3125= $74,500 Cost of Goods Sold: Jan 53,000 units= $24,000 Jan 122,000 units= 17,250 Jan 204,000 units= 37,250 Total9,000 units= $78,500

Example 1: Summary of Results Cost of Goods Sold Ending Inventory FIFO, Periodic$75,000$78,000 LIFO, Periodic87,00066,000 LIFO, Perpetual82,00071,000 Avg Cost, Periodic81,00072,000 Avg Cost, Perpetual78,50074,500

Supplemental LIFO Disclosures Tootsie Roll 2008 Balance Sheet Finished goods and work-in-process 34,862 37,031 Raw materials and supplies 20,722 20,371 Income Statement Product cost of goods sold333,314327,695 Footnote: Inventories are stated at cost, not to exceed market. The cost of substantially all of the Company’s inventories ($53,557 and $54,367 at December 31, 2008 and 2007, respectively) has been determined by the last-in, first-out (LIFO) method. The excess of current cost over LIFO cost of inventories approximates $12,432 and $11,284 at December 31, 2008 and 2007, respectively. The cost of certain foreign inventories ($2,027 and $3,036 at December 31, 2008 and 2007, respectively) has been determined by the first- in, first-out (FIFO) method. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases is reflected as a reduction in the cost of the related inventory item, and is therefore reflected in cost of sales when the related inventory item is sold.

Supplemental LIFO Disclosures Tootsie Roll 2008 Balance Sheet Finished goods and work-in-process 34,862 37,031 Raw materials and supplies 20,722 20,371 Total LIFO inventory 55,584 57,402 LIFO reserve 12,432 11,284 Total FIFO inventory 68,016 68,686 Income Statement Product cost of goods sold – LIFO333,314327,695 Product cost of goods sold – FIFO ? ?

LIFO to FIFO Conversion – Tootsie Roll 57, , , ,31455,584 LIFO 68, , , ,166 68,016 FIFO Inventory Turnover: LIFO: 333,314 / avg(57, ,584) = 5.90 FIFO: 332,166 / avg(68, ,016) = 4.86