Inventories: Measurement Sid Glandon, DBA, CPA Associate Professor of Accounting

Classification Merchandising Inventory –All costs of getting merchandise ready for sale Manufacturing Inventory –Raw materials –Work in process Raw materials Labor Overhead –Finished goods

Inventory Control Perpetual Inventory System –Merchandise inventory –Cost of goods sold Periodic Inventory System –Purchases –Purchase returns and allowances –Purchase discounts –Freight in

Perpetual Inventory System

Periodic Inventory System

Year-End Adjusting Journal Entry: Periodic Inventory System

Physical Goods in Inventory Goods in transit –f.o.b. shipping point –f.o.b. destination Consigned goods Sales returns –Sales with buyback agreement –Sales with high rates of return

Cost of Inventory Purchases Purchase returns Purchase discounts Gross method –Record discount when payment is made Net method –Assume discount will be taken –Record interest expense on discounts not taken Freight-in

Perpetual Inventory System: Partial Income Statement

Periodic Inventory System: Partial Income Statement

Cost Flow Assumptions Specific identification Average cost –Periodic, weighted average for period –Perpetual, moving weighted average FIFO (first-in, first-out) LIFO (last-in, first-out) –Periodic, based on cost flow during period –Perpetual, based on each transaction

Dollar-Value LIFO Measured in terms of dollar value, not physical quantity of goods All amounts are converted to base-year prices A layer is formed when –Ending inventory exceeds beginning inventory (at base-year prices)