1. 0 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Unit 5 Accounting for Special Procedures Chapter 22Cash Funds Chapter 23Plant Assets and Depreciation Chapter 24Uncollectible Accounts Receivable Chapter 25Inventories Chapter 26Notes Payable and Receivable

2. 1 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 25 Inventories What You’ll Learn  Explain the importance of maintaining accurate inventory records.  Explain the difference between a periodic and a perpetual inventory system.  Take a physical inventory count and record inventories.  Determine the cost of merchandise inventory using the specific identification; first-in, first-out; last-in, first-out; and weighted average cost methods.  Assign a value to merchandise inventory using the lower-of-cost-or-market rule.

3. 2 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 25 Inventories What You’ll Learn  Explain the accounting principles of consistency and conservatism.  Define the accounting terms introduced in this chapter.

4. 3 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 25, Section 1 Determining the Quantity of Inventories What Do You Think? What methods have you seen being used to take inventory in retail stores?

5. 4 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Two methods of tracking merchandise are the perpetual inventory system and the periodic inventory system. You Will Learn  how businesses use inventory control information.  how businesses keep track of inventory. Determining the Quantity of Inventories SECTION 25.1

6. 5 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  perpetual inventory system  point-of-sale terminal (POS)  online  periodic inventory system Determining the Quantity of Inventories SECTION 25.1

7. 6 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Merchandise Inventory To maintain control over inventory, a business establishes a system of inventory-tracking procedures. The Merchandise Inventory account shows the cost of goods purchased for resale and is the only account reported on both the balance sheet and the income statement. Determining the Quantity of Inventories SECTION 25.1

8. 7 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Methods of Tracking Inventory There are two methods to track merchandise:  the perpetual inventory system  the periodic inventory system Determining the Quantity of Inventories SECTION 25.1

9. 8 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Perpetual Inventory System The perpetual inventory system allows management to obtain real-time inventory information.perpetual inventory system Computers update a perpetual inventory system through electronic cash registers, or point-of-sale terminals, that are online (linked to a central computer system).point-of-sale terminalsonline Determining the Quantity of Inventories SECTION 25.1

10. 9 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Periodic Inventory System The periodic inventory system is one in which inventory records are updated only after a physical count of merchandise on hand is made. This system is generally used by small businesses.periodic inventory system Determining the Quantity of Inventories SECTION 25.1

11. 10 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Physical Inventory Count A business takes a physical count of its merchandise at least once a year. This is a time consuming process and is usually done at the end of a peak selling period. Determining the Quantity of Inventories SECTION 25.1

12. 11 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  perpetual inventory system An inventory system that keeps a constant, up-to- date record of the amount of merchandise on hand.  point-of-sale terminal (POS) An electronic cash register.  online The link of a terminal or cash register to a centralized computer system. Determining the Quantity of Inventories SECTION 25.1

13. 12 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  periodic inventory system An inventory system which requires a physical count of the merchandise on hand to update inventory records. Determining the Quantity of Inventories SECTION 25.1

14. 13 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 25, Section 2 Determining the Cost of Inventories What Do You Think? Why are there four methods to determine inventory cost?

15. 14 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Businesses can choose one of four methods to assign cost values to inventories. You Will Learn  why determining inventory costs can be difficult.  the methods for assigning costs to inventory. Determining the Cost of Inventories SECTION 25.2

16. 15 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  specific identification method  first-in, first-out method (FIFO)  last-in, first-out method (LIFO)  weighted average cost method Determining the Cost of Inventories SECTION 25.2

17. 16 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Inventory Costs Purchased merchandise is recorded in the accounting records at cost. Determining the Cost of Inventories SECTION 25.2

18. 17 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Methods of Assigning Costs to Inventories There are four methods used to determine inventory cost:  specific identification  first-in, first-out (FIFO)  last-in, first-out (LIFO)  weighted average cost Determining the Cost of Inventories SECTION 25.2

19. 18 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Specific Identification Costing Method With the specific identification method, the exact cost of each item is determined and assigned to that item. This method is most often used by businesses that sell a small number of items with high unit prices.specific identification method Determining the Cost of Inventories SECTION 25.2

20. 19 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The First-In, First-Out Costing Method The first-in, first-out method (FIFO) assumes the first items purchased are the first items sold, and the most recently purchased items are the ones on hand at the end of the period.first-in, first-out method (FIFO) Determining the Cost of Inventories SECTION 25.2

21. 20 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Last-In, First-Out Costing Method The last-in, first-out method (LIFO) assumes the last items purchased are the first items sold, and the items purchased first are still on hand at the end of the period.last-in, first-out method (LIFO) The earliest costs are the ones used to assign a cost to the inventory. Determining the Cost of Inventories SECTION 25.2

22. 21 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. The Weighted Average Costing Method The weighted average cost method assigns the average cost to each unit in inventory. To calculate the average costweighted average cost method  add the number of units on hand at the beginning of the period and the number of units purchased,  add the cost of the units on hand at the beginning of the period and the cost of units purchased, and then  divide the total cost by the total number of units. Determining the Cost of Inventories SECTION 25.2

23. 22 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  specific identification method An inventory costing method in which the exact cost of each item in inventory is determined and assigned; used most often by businesses that have a low unit volume of merchandise with high unit prices.  first-in, first-out method (FIFO) An inventory costing method that assumes that the first items purchased (first in) were the first items sold (first out). Determining the Cost of Inventories SECTION 25.2

24. 23 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  last-in, first-out method (LIFO) An inventory costing method that assumes that the last items purchased (last in) are the first items sold (first out).  weighted average cost method An inventory costing method in which all purchases of an item are added to the beginning inventory of that item; the total cost is then divided by the total units to obtain the average cost per unit. Determining the Cost of Inventories SECTION 25.2

25. 24 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 25, Section 3 Choosing an Inventory Costing Method What Do You Think? Why is the choice of inventory costing method important?

26. 25 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Apply consistency and conservatism when reporting merchandise inventory on the financial statements. You Will Learn  about the consistency principle and inventory costing methods.  how the inventory costing method affects the reported gross profit.  about the conservatism principle and the lower-of- cost-or-market rule. Choosing an Inventory Costing Method SECTION 25.3

27. 26 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  consistency principle  lower-of-cost-or-market rule  market value  conservatism principle Choosing an Inventory Costing Method SECTION 25.3

28. 27 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Consistency and Inventory Costing When a business applies the same accounting methods in the same way from one period to the next, the GAAP consistency principle is being applied. The costing methods can be changed, but must be declared. consistency principle Choosing an Inventory Costing Method SECTION 25.3

29. 28 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Comparison of the Four Inventory Costing Methods When deciding on an inventory costing method, the owner compares the four methods. The owner or manager should consider  the present economic conditions,  the future economic outlook, and  whether the prices and demand for the product will remain stable, increase, or decrease. Choosing an Inventory Costing Method SECTION 25.3

30. 29 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Conservatism and the Lower-of-Cost-or- Market Rule Inventory might be worth less than its cost. The lower- of-cost-or-market rule requires that the cost of ending inventory on the financial statements is the lower of its cost or its market value.lower- of-cost-or-market rule market value The lower-of-cost-or-market rule is a conservative rule. The GAAP conservatism principle states it is best to present amounts that are least likely to result in an overstatement of income or assets.conservatism principle Choosing an Inventory Costing Method SECTION 25.3

31. 30 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  consistency principle Accounting principle requiring a business to apply the same accounting methods in the same way from one period to the next.  lower-of-cost-or-market rule The requirement that ending merchandise inventory be stated at the lesser of cost (calculated using one of the four inventory costing methods) or market value.  market value The current price that is charged for a similar item of merchandise in the market. Choosing an Inventory Costing Method SECTION 25.3

32. 31 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  conservatism principle Accounting principle requiring that when there is a choice, accountants choose the safer or more conservative method that is least likely to result in an overstatement of income or assets. Choosing an Inventory Costing Method SECTION 25.3

33. 32 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 1 Using the information in the following table, calculate the value of the ending inventory using the LIFO method assuming that 42 units remain. Chapter 25 Review CHAPTER 25

34. 33 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 1 Using the LIFO method, assume that all from the July 2 beginning inventory remain: 15  $145 = $2,175 42 – 15 = 27 more units remain Assume that all 25 from the July 31 purchase remain: 25  $148 = $3,700 You have now accounted for 40 of the 42 units. Thus, 2 units from the August 15 purchase remain: 2  $150 = $300 $2,175 + $3,700 + $300 = $6,175 ending LIFO value Chapter 25 Review CHAPTER 25

35. 34 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Question 2 In an economy that is experiencing inflation, which method of costing inventory results in the highest gross profit on sales? Chapter 25 Review CHAPTER 25

36. 35 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Answer 2 FIFO. If costs are rising, the FIFO method assumes that the merchandise sold represents the oldest, or least expensive, units. If this method is used, the business will report the lowest cost of merchandise sold and, thus, the result will be the highest gross profit on sales. Chapter 25 Review CHAPTER 25

37. 36 Glencoe Accounting Unit 5 Chapter 25 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Resources Glencoe Accounting Online Learning Center English Glossary Spanish Glossary