1. Accounting for Inventories

2. All expenditures incurred
Inventory Costs
All expenditures incurred

3. All expenditures incurred to bring the item to its
Inventory Costs
All expenditures incurred to bring the item to its

4. Inventory Costs
All expenditures incurred to bring the item to its existing condition and location

5. Costs include Invoice cost Shipping Cash discounts
Purchases allowances

6. Inventory Systems - Periodic
Compute inventory balance at end of each accounting period
Compute cost of goods sold at accounting period end

7. Inventory Systems - Perpetual
Compute cost of goods sold at each sale
Compute new inventory balance at each sale

8. Cost Flow Assumptions
Only with specific identification do we attempt to match the actual movement of product through the business with the movement of costs through the accounting system

9. Cost Flow Assumptions
With other inventory cost methods, we make an assumption of the movement of costs through the accounting system.
This "flow" of costs through the system need not match the movement of product through the business.

10. Cost Flow Assumptions
First-In, First-Out

11. Cost Flow Assumptions First-In, First-Out
Earliest goods assumed to be first units sold

12. Cost Flow Assumptions First-In, First-Out
Earliest goods assumed to be first units sold
Inventory made up of latest goods acquired

13. Cost Flow Assumptions
Last-In, First-Out

14. Cost Flow Assumptions Last-In, First-Out
Newest goods assumed to be first units sold

15. Cost Flow Assumptions Last-In, First-Out
Newest goods assumed to be first units sold
Inventory made up of earliest goods acquired

16. Cost Flow Assumptions
Average cost

17. Cost Flow Assumptions Average cost
Cost of items sold is the weighted average of costs incurred

18. Cost Flow Assumptions Average cost
Cost of items sold is the weighted average of costs incurred
Inventory is the weighted average of costs incurred

19. Inventory Example Data
Jan. 1 Beg Inven. 200 $4.00 $ Apr. 10 Purchase , Oct. 23 Purchase , Available 1,300 $6, Merchandise Sales May Dec Total 800

20. First-In First-Out
Newest layer $6.00

21. First-In First-Out Newest layer 400 units @ $6.00 $2,400

22. First-In First-Out
Newest layer 400 $6.00 $2,400 Next newest layer $5.00

23. First-In First-Out
Newest layer 400 $6.00 $2,400 Next newest layer 100 $

24. First-In First-Out Newest layer 400 units @ $6.00 $2,400
Next newest layer 100 $
Total cost $2,900

25. First-In First-Out Cost of Goods Sold Beginning Inventory $ 800

26. First-In First-Out Cost of Goods Sold Beginning Inventory $ 800
Purchases 5,900
Cost of goods available
for sale $6,700

27. First-In First-Out Cost of Goods Sold Beginning Inventory $ 800
Purchases 5,900
Cost of goods available
for sale $6,700
Deduct: Ending Inventory 2,900
Cost of goods sold $3,800

28. First-In First-Out Oldest cost layer 200 units @ $4.00 $ 800
Proof of cost of goods sold:
Oldest cost layer
200 $4.00 $

29. First-In First-Out Oldest cost layer 200 units @ $4.00 $ 800
Proof of cost of goods sold:
Oldest cost layer
200 $4.00 $
Next oldest layer
600 $5.00 3,000
Total $3,800

30. Last-In First-Out
Oldest layer $4.00

31. Last-In First-Out Oldest layer 200 units @ $4.00 $ 800

32. Last-In First-Out
Oldest layer 200 $4.00 $ 800 Next oldest layer $5.00

33. Last-In First-Out
Oldest layer 200 $4.00 $ 800 Next oldest layer 300 $5.00 1,500

34. Last-In First-Out Total cost $2,300 Oldest layer
200 $4.00 $
Next oldest layer
300 $5.00 1,500
Total cost $2,300

35. Last-In First-Out LIFO Periodic Inventory Cost of goods sold:
Beginning inventory $

36. Last-In First-Out Cost of goods available $6,700 LIFO
Periodic Inventory
Cost of goods sold:
Beginning inventory $
Purchase 5,900
Cost of goods available $6,700

37. Last-In First-Out Cost of goods available $6,700
LIFO
Periodic Inventory
Cost of goods sold:
Beginning inventory $
Purchase 5,900
Cost of goods available $6,700
Deduct: Ending inventory 2,300
Cost of goods sold $4,400

38. Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold

39. Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold
Newest cost layer
400 $6.00 $2,400

40. Last-In First-Out Total cost $4,400 LIFO Periodic Inventory
Proof of Cost of Goods Sold
Newest cost layer
400 $6.00 $2,400
Next newest layer
400 $5.00 2,000
Total cost $4,400

41. Weighted Average Cost of goods available for sale $6,700
Periodic Inventory
Weighted average cost equals
Cost of goods available for sale $6,700
divided by
Total units available 1,300
equals
Weighted average cost per unit $5.1538

42. Weighted Average
Periodic Inventory December 31 Inventory 500 units x $ = $2,577

43. Weighted Average Periodic Inventory Cost of goods sold:

44. Weighted Average Periodic Inventory Cost of goods sold:
Beginning inventory $
Purchases 5,900
Cost of goods available $6,700

45. Weighted Average Periodic Inventory Cost of goods sold:
Beginning inventory $
Purchases 5,900
Cost of goods available $6,700
Deduct: Ending inventory 2,577
Cost of goods sold $4,123

46. Weighted Average
Periodic Inventory Proof of cost of goods sold 800 units x $ = $4,123

47. Income Statement Comparison
Periodic Inventory
FIFO LIFO WA
Sales $8,000 $8,000 $8,000
CGS 3,800 4,400 4,123
GM $4,200 $3,600 $3,877
Op. expense 1,000 1,000 1,000
Net income $3,200 $2,600 $2,877

48. Last-In First-Out LIFO - Perpetual Inventory 200 x $4 $800

49. Last-In First-Out LIFO - Perpetual Inventory
4/4 700 x $5 $ x $4 $800
700 x $ $4300

50. Last-In First-Out LIFO - Perpetual Inventory
4/4 700 x $5 $ x $4 $800
700 x $ $4300
5/ x $5 $ x $4 $800
200 x $ $1800

51. Last-In First-Out LIFO - Perpetual Inventory
4/4 700 x $5 $ x $4 $800
700 x $ $4300
5/ x $5 $ x $4 $800
200 x $ $1800
10/ x $6 $ x $4 $800
200 x $5 1000
400 x $ $4200

52. Last-In First-Out LIFO - Perpetual Inventory
4/4 700 x $5 $ x $4 $800
700 x $ $4300
5/ x $5 $ x $4 $800
200 x $ $1800
10/ x $6 $ x $4 $800
200 x $5 1000
400 x $ $4200
12/ x $6 $ x $4 $800
100 x $ $2400

53. Last-In First-Out LIFO - Perpetual Inventory
4/4 700 x $5 $ x $4 $800
700 x $ $4300
5/ x $5 $ x $4 $800
200 x $ $1800
10/ x $6 $ x $4 $800
200 x $5 1000
400 x $ $4200
12/ x $6 $ x $4 $800
100 x $ $2400
Cost of goods sold $4300

54. Lower of Cost or Market
Class A Cost Mkt LCM Item 1 $100 $120 Item Class B Item 6 $50 $65 Item

55. Lower of Cost or Market - By Item
Class A Cost Mkt LCM Item 1 $100 $120 $100

56. Lower of Cost or Market - By Item
Class A Cost Mkt LCM Item 1 $100 $120 $100 Item

57. Lower of Cost or Market - By Item
Class A Cost Mkt LCM Item 1 $100 $120 $100 Item Class B Item 6 $50 $65 50

58. Lower of Cost or Market - By Item
Class A Cost Mkt LCM Item 1 $100 $120 $100 Item Class B Item 6 $50 $65 50 Item Total $240

59. Lower of Cost or Market - By Class
Class A Cost Mkt LCM Item 1 $100 $120 Item Total $180 $190 $180

60. Lower of Cost or Market - By Class
Class A Cost Mkt LCM Item 1 $100 $120 Item Total $180 $190 $180 Class B Item 6 $50 $65 Item Total $90 $85 85 Total $265

61. Lower of Cost or Market- By Total
Class A Cost Mkt LCM Item 1 $100 $120 Item Class B Item Item Total $270 $275 $270

62. Gross Margin Method Logic of Income Statement
Net Sales $70 Cost of goods sold: Begin inv $ 5 Net purchases 50 Cost goods avail $55 End inv Gross margin $25

63. Gross Margin Method Inventory Estimation
Cost of goods available: Begin inv $ 20,000 Net purchases 135,000 Cost of goods available $155,000 Deduct cost of goods sold:

64. Gross Margin Method Inventory Estimation
Cost of goods available $155,000 Net sales $150,000 Multiply by (1 - Gross margin rate) ( ) x 0.70 Est cost of goods sold 105,000 Est ending inventory $ 50,000

65. Gross Margin Method Proof of Answer
Net sales $150,000 Cost of goods sold Begin inv $ 20,000 Net purchases 135,000 CGAS $155,000 End inv 50,000 Cost of goods sold 105,000 Gross margin $ 45,000

66. An error in the computation of inventory at the end of one period
Inventory Errors
An error in the computation of inventory at the end of one period

67. Inventory Errors
An error in the computation of inventory at the end of one period causes an error in assets and owner’s equity at the end of that period

68. Inventory Errors
An error in the computation of inventory at the end of one period causes an error in assets and owner’s equity at the end of that period and an error in income for two periods.

69. Effect of Inventory Errors
Overstatement of inventory at end of period 1
Causes an overstatement of net income for period 1

70. Effect of Inventory Errors
Overstatement of inventory at end of period 1
Causes an overstatement of net income for period 1
and an overstatement of assets and owner's equity at period 1 end

71. Effect of Inventory Errors
Overstatement of inventory at end of period 1
Causes an understatement of net income for period 2

72. Effect of Inventory Errors
Overstatement of inventory at end of period 1
Causes an understatement of net income for period 2
BUT assets and owner's equity at period 2 end will be correct

73. Effect of Inventory Errors
Understatement of inventory at end of period 1
Causes an understatement of net income for period 1

74. Effect of Inventory Errors
Understatement of inventory at end of period 1
Causes an understatement of net income for period 1
and an understatement of assets and owner's equity at period 1 end

75. Effect of Inventory Errors
Understatement of inventory at end of period 1
Causes an overstatement of net income for period 2

76. Effect of Inventory Errors
Understatement of inventory at end of period 1
Causes an overstatement of net income for period 2
BUT assets and owner's equity at period 2 end will be correct