1. BUA111
Chp. 7: Inventory
Dr. K. Moon

2. Inventory Theory
Effect on financial statements: flow of goods Actual v. hypothetical flow of goods Methods: Specific ID, Ave. Cost, FIFO, LIFO
Dr. K. Moon

3. The Calculations
We will (initially) use 2 “Practice Problems” to illustrate the calculations for the various methods.
Dr. K. Moon

4. Practice Problem 1: Periodic Inventory Methods
EX 7-8: Periodic inventory by three methods The units of an item available for sale during the year were as follows: Jan.1 Inventory 9 units at $360 Feb. 17 Purchase 18 units at $414 July 21 Purchase 21 units at $468 Nov. 23 Purchase 12 units at $495 There are 16 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the ending inventory cost and the COGS by (a) the first-in, first-out method, (b) the last-in, first-out method, and (c) the average cost method.
Dr. K. Moon

5. Solution: Practice Problem 1
Note Price Trend first: prices are rising Cost of merchandise available for sale: 9 units at $360 $3, units at $414 7, units at $468 9, units at $495 5, units (at average cost of $441) COGAS $26,460
Dr. K. Moon

6. Methods
Do Part (C) Average Cost first and set up your answer summary table with labels as to which COGS is highest, lowest, and in the middle
Dr. K. Moon

7. Practice Problem 1: In-Class
Ex. 7–8 a. $7,812 (12 units at $495 plus 4 units at $468) = $5,940 + $1,872 b. $6,138 (9 units at $360 plus 7 units at $414) = $3,240 + $2,898 c. $7,056 (16 units at $441; $26,460/60 units = $441)
Dr. K. Moon

8. Answer Summary Table answers should look like this when done
Method EI COGS
FIFO lowest
C. Average Cost middle
b. LIFO highest
Dr. K. Moon

9. Average Cost Calculations
c. EI = $7,056 (16 units at $441; $26,460/60 units = $441) COGS = 26,460 COGAS - 7,056 EI 19,404 COGS *Place results in answer table summary
Dr. K. Moon

10. FIFO Calculations
EI =$7,812 (12 units at $495 plus 4 units at $468) = $5,940 + $1,872 COGS = 18,648 (26,460 COGAS-7,812EI)
Dr. K. Moon

11. LIFO Calculations
EI + $6,138 (9 units at $360 plus 7 units at $414) = $3,240 + $2,898 COGS = 20,322 (26,640 COGAS-6,138 EI)
Dr. K. Moon

12. Answer Summary Table: Practice Problem 1
Method EI COGS
FIFO 7,812 lowest
18,648
C. Average Cost middle
7, ,404
b. LIFO 6,138 highest
20,322
Dr. K. Moon

13. Periodic Inventory Methods: Practice Problem 2
EX 7-9: Periodic inventory by three methods; cost of merchandise sold The units of an item available for sale during the year were as follows: Jan.1 Inventory 21 units at $180 Mar. 10 Purchase 29 units at $195 Aug. 30 Purchase 10 units at $204 Dec. 12 Purchase 15 units at $210 There are 24 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost and the cost of merchandise sold by three methods, presenting your answers in the following form: Cost Inventory Method Merchandise Inventory (EI) Merchandise Sold (COGS) a. First-in, first-out $ $ b. Last-in, first-out c. Average cost
Dr. K. Moon

14. Solution:Practice Problem 2
Cost of merchandise available for sale: 21 units at $180 $ 3, units at $195 5, units at $204 2, units at $210 3, Total units (at average cost of $195) $14,625 COGAS
Dr. K. Moon

15. Solution:Practice Problem 2
a. First-in, first-out: Merchandise inventory: 15 units at $210 $3,150 9 units at $204 1, units $4,986 EI Merchandise sold: COGAS - EI = COGS $14,625 – $4,986 $9,639
Dr. K. Moon

16. Solution:Practice Problem 2
b. Last-in, first-out: Merchandise inventory: 21 units at $180 $3,780 3 units at $ units $4,365 EI Merchandise sold: $14,625 – $4,365 $10,260 COGS
Dr. K. Moon

17. Solution:Practice Problem 2
c. Average cost: Merchandise inventory: 24 units at $195 ($14,625/75 units) $4,680 EI Merchandise sold: $14,625 – $4,680 $9,945 COGS
Dr. K. Moon

18. Solution: Practice Problem 2 ANSWER SUMMARY TABLE
Inventory Method EI COGS a. FIFO $ 4,986 $ 9,639 b. LIFO 4,365 10,260 c. Average cost 4,680 9,945
Dr. K. Moon

19. Lower-of-Cost-or-Market Method: (“U. S
Lower-of-Cost-or-Market Method: (“U.S. Rule” for “Market Value” used here)
Lower-of-Cost-or-Market (LCM) Rule
Rule that merchandise inventory should be reported in the financial statements at whichever is lower—its historical cost or its market value.
For inventories, market value generally means the current replacement cost (that is, the cost to replace the inventory on hand). If the replacement cost of inventory is less than its historical cost, the business must adjust the inventory value.
Dr. K. Moon

20. Next Topic Inventory Turnover and Number of Days Sales in Inventory
Dr. K. Moon

21. Next (Final) Topic
Financial Statement Effects/Comparisons using the Various Inventory Methods
Dr. K. Moon