1. ACCOUNTING FOR MERCHANDISE INVENTORY
CHAPTER NINETEEN
ACCOUNTING FOR MERCHANDISE INVENTORY

2. INVENTORY ERRORS Errors in inventory will cause errors on:
Income Statement, Statement of Owner’s Equity and Balance Sheet
For the current and the next year

3. EFFECT OF INVENTORY ERRORS
INCOME STATEMENT
20-1
20-2
Sales 80
Cost of Goods Sold:
Beginning Merch. Inventory 20
Add Purchases (net) 40
Cost of Goods Available for Sale 60
Less: Ending Merch. Inventory 20
Let’s first look at the Income
Statement with the ending inventory
correctly stated at $20.

4. EFFECT OF INVENTORY ERRORS
INCOME STATEMENT
20-1
20-2
Sales 80
Cost of Goods Sold:
Beginning Merch. Inventory 20
Add Purchases (net) 40
Cost of Goods Available for Sale 60
Less: Ending Merch. Inventory 20
Cost of Goods Sold
(40)
Gross Profit 40
Operating Expenses
(10)
Net Income 30
Now let’s look at the other financial statements.

5. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
Net Income 30
Erv Bultman, capital, December 31
130
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory 20
Owner’s Equity:
Erv Bultman, Capital
130

6. EFFECT OF INVENTORY ERRORS
INCOME STATEMENT
20-1
20-2
Sales 80 80
Cost of Goods Sold:
Beginning Merch. Inventory 20 20
Add Purchases (net) 40
Cost of Goods Available for Sale 60
Less: Ending Merch. Inventory 20
Cost of Goods Sold
(40)
Gross Profit 40
Operating Expenses
20-1’s ending inventory becomes
20-2’s beginning inventory.
(10)
Net Income 30

7. EFFECT OF INVENTORY ERRORS
INCOME STATEMENT
20-1
20-2
Sales 80 80
Cost of Goods Sold:
Beginning Merch. Inventory 20 20
Add Purchases (net) 40 40
Cost of Goods Available for Sale 60 60
Less: Ending Merch. Inventory 20 20
Cost of Goods Sold
(40)
(40)
Gross Profit 40 40
Operating Expenses
(10)
(10)
Net Income 30 30

8. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
130
Net Income 30 30
Erv Bultman, capital, December 31
130
160
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory 20 20
Owner’s Equity:
Erv Bultman, Capital
130
160

9. EFFECT OF INVENTORY ERRORS
What would be the effect on the financial statements for 20-1 & 20-2 if the 12/31/-1 inventory was reported as $15 instead of $20?
Ending inventory 20-1
& Beginning inventory 20-2
UNDERSTATED

10. EFFECT OF INVENTORY ERRORS
INCOME STATEMENT
20-1
20-2
Sales 80
Cost of Goods Sold:
Beginning Merch. Inventory 20
Add Purchases (net) 40
Cost of Goods Available for Sale 60
Less: Ending Merch. Inventory 15
Cost of Goods Sold
(45)
Gross Profit 35
Operating Expenses
(10)
Net Income 25
Understated Ending Inventory results in understated Net Income.

11. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
Net Income 25
Erv Bultman, capital, December 31
125
BALANCE SHEET (partial)
Understated Net Income results in
understated Owner’s Equity.
Current Assets:
Merchandise Inventory
Owner’s Equity:
Erv Bultman, Capital

12. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
Net Income 25
Erv Bultman, capital, December 31
125
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory 15
Owner’s Equity:
Erv Bultman, Capital
125
Assets and Owner’s Equity will be understated.

13. EFFECT OF INVENTORY ERRORS
INCOME STATEMENT
20-1
20-2
Sales 80 80
Cost of Goods Sold:
Beginning Merch. Inventory 20 15
Add Purchases (net) 40 40
Cost of Goods Available for Sale 60 55
Less: Ending Merch. Inventory 15 20
Cost of Goods Sold
(45)
(35)
Gross Profit 35 45
Operating Expenses
(10)
(10)
Net Income 25 35
Understated Beginning Inventory results in overstated Net Income.

14. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
125
Net Income 25 35
Erv Bultman, capital, December 31
125
160
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory 15
Owner’s Equity:
Erv Bultman, Capital
125
Owner’s Equity is correct by the end of 20-2.

15. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
125
Net Income 25 35
Erv Bultman, capital, December 31
125
160
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory 15 20
Owner’s Equity:
Erv Bultman, Capital
125
160
Assets and Owner’s Equity
will be correct.

16. EFFECT OF INVENTORY ERRORS
What would be the effect on the financial statements for 20-1 & 20-2 if the 12/31/-1 inventory was reported as $25 instead of $20?
Ending inventory 20-1
& Beginning inventory 20-2
OVERSTATED

17. EFFECT OF INVENTORY ERRORS
INCOME STATEMENT
20-1
20-2
Sales 80
Cost of Goods Sold:
Beginning Merch. Inventory 20
Add Purchases (net) 40
Cost of Goods Available for Sale 60
Less: Ending Merch. Inventory 25
Cost of Goods Sold
(35)
Gross Profit 45
Operating Expenses
(10)
Net Income 35
Overstated Ending Inventory results in overstated Net Income.

18. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
Net Income 35
Erv Bultman, capital, December 31
135
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory
Overstated Net Income results in
overstated Owner’s Equity.
Owner’s Equity:
Erv Bultman, Capital

19. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
Net Income 35
Erv Bultman, capital, December 31
135
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory 25
Owner’s Equity:
Erv Bultman, Capital
135
Assets and Owner’s Equity will be overstated.

20. EFFECT OF INVENTORY ERRORS
INCOME STATEMENT
20-1
20-2
Sales 80 80
Cost of Goods Sold:
Beginning Merch. Inventory 20 25
Add Purchases (net) 40 40
Cost of Goods Available for Sale 60 65
Less: Ending Merch. Inventory 25 20
Cost of Goods Sold
(35)
(45)
Gross Profit 45 35
Operating Expenses
(10)
(10)
Net Income 35 25
Overstated Beginning Inventory results in understated Net Income.

21. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
135
Net Income 35 25
Erv Bultman, capital, December 31
135
160
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory 25
Owner’s Equity:
Erv Bultman, Capital
135
Owner’s Equity is correct by the end of 20-2.

22. EFFECT OF INVENTORY ERRORS
STMT OF OWNER’S EQUITY
20-1
20-2
Erv Bultman, capital, January 1
100
135
Net Income 35 25
Erv Bultman, capital, December 31
135
160
BALANCE SHEET (partial)
Current Assets:
Merchandise Inventory 25 20
Owner’s Equity:
Erv Bultman, Capital
135
160
Assets and Owner’s Equity
will be correct.

23. RECORDING PURCHASES PERIODIC METHOD PERPETUAL METHOD
Merch. Inv. account balance = most recent physical inventory
Purchases account used for all merchandise purchases
Current inventory and cost of goods sold only computed at end of period
PERPETUAL METHOD
Merch. Inv. Account reflects current inventory
Purchases are debited to Merch. Inv., cost of sales are credited to Merch. Inv.
Generally no need for end of year adjustments

24. COMPARING ENTRIES UNDER PERIODIC AND PERPETUAL SYSTEMS
Example: Purchased $100 of merchandise on account

25. PERIODIC SYSTEM Purchases Accts Payable Periodic system uses a
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Purchases 2
Accts Payable 3 4
Periodic system uses a
“Purchases” account. 5 6 7 8 9 10 11

26. PERPETUAL SYSTEM Merchandise Inventory Accts Payable
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Merchandise Inventory 2
Accts Payable 3 4
Perpetual system records purchases
directly in the Merchandise Inventory account. 5 6 7 8 9 10 11

27. COMPARING ENTRIES UNDER PERIODIC & PERPETUAL SYSTEMS
Example: Paid freight charges $30

28. Periodic system separates freight charges in to their own account.
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Frieight-In
30 00 2
Cash
30 00 3 4 5
Periodic system separates
freight charges in to their own account. 6 7 8 9 10 11

29. PERPETUAL SYSTEM Merchandise Inventory Cash
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Merchandise Inventory
30 00 2
Cash
30 00 3 4 5
Perpetual system considers freight charges
part of the cost of merchandise
and includes them in the inventory account. 6 7 8 9 10 11

30. COMPARING ENTRIES UNDER PERIODIC & PERPETUAL SYSTEMS
Example: Sold merchandise on account, $80. The cost of the merchandise was $50.

31. PERIODIC SYSTEM Accounts Receivable Sales
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Accounts Receivable
80 00 2
Sales
80 00 3 4 5
Periodic system only records the selling
price of merchandise sold.
No attempt is made to reduce the
inventory account for items sold. 6 7 8 9 10 11

32. Perpetual system also records the selling price of merchandise sold.
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Accounts Receivable
80 00 2
Sales
80 00 3 4 5
Perpetual system also records
the selling price of merchandise sold. 6 7 8 9 10 11

33. PERPETUAL SYSTEM Accounts Receivable Sales Cost of Goods Sold
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Accounts Receivable
80 00 2
Sales
80 00 3 4
Cost of Goods Sold
50 00
Merchandise Inventory 5
50 00 6
In addition, the perpetual system removes
the cost of merchandise sold from inventory. 7 8 9 10 11

34. COMPARING ENTRIES UNDER PERIODIC & PERPETUAL SYSTEMS
Example: Merchandise costing $10 was returned to the supplier.

35. Periodic system maintains a separate account for returns.
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Accounts Payable
10 00 2
Purchases Ret. & Allow.
10 00 3 4 5
Periodic system maintains a
separate account for returns. 6 7 8 9 10 11

36. PERPETUAL SYSTEM Accounts Payable Merchandise Inventory
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Accounts Payable
80 00 2
Merchandise Inventory
80 00 3 4 5
Since the merchandise was recorded
in the inventory account when purchased,
it is removed from the account when returned. 6 7 8 9 10 11

37. COMPARING ENTRIES UNDER PERIODIC & PERPETUAL SYSTEMS
Example: Customers returned merchandise sold for $20. The cost of the merchandise was $15.

38. Periodic system maintains a separate account for returns.
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Sales Returns & Allow.
20 00 2
Accounts Receivable
20 00 3 4 5
Periodic system maintains a
separate account for returns. 6 7 8 9 10 11

39. PERPETUAL SYSTEM Sales Returns & Allow. Accounts Receivable
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Sales Returns & Allow.
20 00 2
Accounts Receivable
20 00 3 4 5
Perpetual system records the returned sale.
It also must adjust the “Cost of Goods Sold”
and “Merchandise Inventory” accounts. 6 7 8 9 10 11

40. PERPETUAL SYSTEM Sales Returns & Allow. Accounts Receivable
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Sales Returns & Allow.
20 00 2
Accounts Receivable
20 00 3 4
Merchandise Inventory
15 00
Cost of Goods Sold 5
15 00 6 7 8 9 10 11

41. COMPARING ENTRIES UNDER PERIODIC & PERPETUAL SYSTEMS
Example: Paid for merchandise costing $100. The supplier granted a 2% discount for prompt payment.

42. Discounts are recorded in a
PERIODIC SYSTEM
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Accounts Payable 2
Purchases Discounts
2 00 3
Cash
98 00 4
Discounts are recorded in a
separate account. 5 6 7 8 9 10 11

43. PERPETUAL SYSTEM Sales Returns & Allow. Accounts Receivable
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Sales Returns & Allow.
20 00 2
Accounts Receivable
20 00 3 4 5
Perpetual system records the returned sale.
It also must adjust the “Cost of Goods Sold”
and “Merchandise Inventory” accounts. 6 7 8 9 10 11

44. COMPARING ENTRIES UNDER PERIODIC & PERPETUAL SYSTEMS
Example: Adjusting entries made at the end of the accounting period.

45. Removing the old balance from the inventory account
PERIODIC SYSTEM
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Income Summary XX 2
Merchandise Inventory XX 3 4
Removing the old balance
from the inventory account 5 6 7 8 9 10 11

46. in the inventory account
PERIODIC SYSTEM
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Income Summary XX 2
Merchandise Inventory XX 3 4
Merchandise Inventory XX 5
Income Summary XX 6 7
Recording new balance
in the inventory account 8 9 10 11

47. No entry needed if physical inventory agrees with amount reported
PERPETUAL SYSTEM
DATE
DESCRIPTION
DEBIT PR
CREDIT 1 2 3
No entry needed if physical inventory
agrees with amount reported
in inventory account. 4 5 6 7 8 9 10 11

48. TAKING A PHYSICAL INVENTORY
Counting the goods on hand at the end of the period
used in the PERIODIC system to allocate merchandise costs between sold and unsold goods
in the PERPETUAL system it is compared to the accounting records to determine if what is actually held agrees with the records
done after regular business hours
ideally when inventory on hand is at its lowest level
fiscal year that starts and ends when inventory is at its lowest level is called “natural business year”

49. TAKING A PHYSICAL INVENTORY
Two special situations:
Goods held for sale on CONSIGNMENT
Goods held on consignment remain the property of the shipper (Consignor)
Goods in TRANSIT
if FOB Shipping point - goods belong to the BUYER while in transit
if FOB Destination- goods belong to the SELLER while in transit

50. COMPUTING THE COST OF ENDING INVENTORY
EXAMPLE: A physical inventory found 50 bicycles (Model ZX007) on hand. All of this model bicycle were purchased for $60 each.
Number of bikes on hand
Cost per unit
Ending Inventory X = 50
$60 =
$3000 X
Computing ending inventory is simple
if all purchases were made at the same price.

51. COMPUTING THE COST OF ENDING INVENTORY
What if each time we restocked this bicycle the price had changed?
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
Cost of these 200 sold?
No. of units sold during period
200

52. COMPUTING THE COST OF ENDING INVENTORY
What if each time we restocked this bicycle the price had changed?
Units
Unit Price
Total Cost
Depends on inventory
method used
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

53. Let’s apply this method
INVENTORY METHODS
Method #1 - Specific Identification Method
Used when each unit of inventory can be specifically identified
examples: cars, motorcycles, furniture, appliances, fine jewelry
Only practical for businesses in which sales volume is low and inventory unit value is high
Let’s apply this method
to the bicycle example.

54. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the Specific Identification Method. The 200 bikes sold are as follows:
Units
Unit Price
Total Cost
30 of these were sold
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

55. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the Specific Identification Method. The 200 bikes sold are as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
50 of these were sold
1st purchase 60 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

56. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the Specific Identification Method. The 200 bikes sold are as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60
60 of these were sold 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

57. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the Specific Identification Method. The 200 bikes sold are as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900
2nd purchase 80
60 of these were sold 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

58. COMPUTING THE COST OF GOODS SOLD
Units Sold
Unit Price
Total Cost
From beginning inventory 30
$62
$1,860
1st purchase 50 65
3,250
2nd purchase 60 67
4,020
3rd purchase 60 68
4,760
Total
200
$13,210
Cost of goods (the 200 bikes) sold

59. COMPUTING THE ENDING INVENTORY
Units Remaining
Unit Price
Total Cost
From beginning inventory 10
$62
$620
1st purchase 10 65
650
2nd purchase 20 67
1,340
3rd purchase 10 68
680
Total 50
$3,290
This ending inventory will be
reported on the Income Statement
and the Balance Sheet.

60. Let’s apply this method
INVENTORY METHODS
Method #2 - First-In, First-Out (FIFO) Method
Assumes the first goods purchased were the first goods sold
Leaving the most recently purchased goods in ending inventory
Follows the natural flow of goods
especially true of grocery stores, fresh fruit stands, and computer software businesses
Let’s apply this method
to the bicycle example.

61. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the FIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
All of these - assumed sold
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

62. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the FIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
All of these - assumed sold
1st purchase 60 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

63. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the FIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60
All of these - assumed sold 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

64. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the FIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period: 40
1st purchase 60 65
3,900 60
2nd purchase 80 67
5,360 80
3rd purchase
180
considered 70 68
4,760
sold so far
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

65. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the FIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900
2nd purchase 80
20 of these - assumed sold 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

66. COMPUTING THE COST OF GOODS SOLD
Units Sold
Unit Price
Total Cost
All of the beginning inventory 40
$62
$2,480
All of the 1st purchase 60 65
3,900
All of the 2nd purchase 80 67
5,360
3rd purchase 20
The remaining units from this
purchase are the 50 units in
ending inventory.

67. COMPUTING THE COST OF GOODS SOLD
Units Sold
Unit Price
Total Cost
All of the beginning inventory 40
$62
$2,480
All of the 1st purchase 60 65
3,900
All of the 2nd purchase 80 67
5,360
3rd purchase 20 68
1,360
Total
200
$13,100
Cost of goods (the 200 bikes) sold

68. COMPUTING THE ENDING INVENTORY
Units Remaining
Unit Price
Total Cost
From beginning inventory
$62 $
1st purchase 65
2nd purchase 67
3rd purchase 50 68
3,400
Total 50
$3,400
This ending inventory will be
reported on the Income Statement
and the Balance Sheet.

69. Let’s apply this method
INVENTORY METHODS
Method #3 - Weighted -Average Method
Computes an average cost per unit using the following formula:
Total cost of units available for sale divided by the units available for sale
Let’s apply this method
to the bicycle example.

70. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the Weighted-Average method.
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
$16,500
= $66/unit
No. of units sold during period
200
250

71. WEIGHTED-AVERAGE METHOD
Cost of goods sold
200
$66 =
$13,200
Ending Inventory 50
$66 =
3,300
One of the advantages of the
Weighted-Average method
is its simplicity.

72. INVENTORY METHODS Method #4 - Last-In, First-Out Method
Assumes that the sales in the period were made from the most recently purchased goods.
While oldest goods remain in inventory
Use of this method is justified because:
LIFO is the actual physical flow of goods in some businesses
it matches the most current costs of items purchased against the current sales revenue

73. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the LIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900
2nd purchase 80
All of these - assumed sold 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

74. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the LIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60
All of these - assumed sold 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

75. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the LIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
1st purchase 60 65
3,900 70
2nd purchase 80 67
5,360 80
3rd purchase 70 68
4,760
150
considered
No. of units available for sale
250
$16,500
On hand at end of period
sold so far 50
No. of units sold during period
200

76. COMPUTING THE COST OF GOODS SOLD
Inventory was maintained using the LIFO method. The identity of the 200 bikes sold is as follows:
Units
Unit Price
Total Cost
On hand at start of period 40
$62
$2,480
Purchased during period:
50 of these - assumed sold
1st purchase 60 65
3,900
2nd purchase 80 67
5,360
3rd purchase 70 68
4,760
No. of units available for sale
250
$16,500
On hand at end of period 50
No. of units sold during period
200

77. COMPUTING THE COST OF GOODS SOLD
Units Sold
Unit Price
Total Cost
None of the beginning inventory
$62 $
1st purchase 50 65
3,250
All of the 2nd purchase 80 67
5,360
All of the 3rd purchase 70 68
4,760
200
$13,370

78. COMPUTING THE ENDING INVENTORY
Units Remaining
Unit Price
Total Cost
From beginning inventory 40
$62
$2,480
1st purchase 10 65
650
2nd purchase 67
3rd purchase 68
Total 50
$3,130
This ending inventory will be
reported on the Income Statement
and the Balance Sheet.

79. COMPARISON OF METHODS
Assumed cost flows (FIFO, Weighed-Average, and LIFO) do not have to match the actual physical movement of goods.
Any one of the methods may be used under any set of physical flow conditions.

80. Specific Identification Goods Available for Sale is the same
COMPARISON OF METHODS
Specific Identification
FIFO
Sales
$18,000
$18,000
Cost of Goods Sold:
Beg. Inventory
$ 2,480
$ 2,480
Purchases
14,020
14,020
Goods Avail. for Sale
$16,500
$16,500
Goods Available for Sale is the same
for all four methods!

81. COMPARISON OF METHODS FIFO Weigthed-Average LIFO $18,000 $18,000
$ 2,480
$ 2,480
$ 2,480
14,020
14,020
14,020
$16,500
$16,500
$16,500

82. COMPARISON OF METHODS Ending Inventory & Cost of Goods Sold
Specific Identification
FIFO
Sales
$18,000
$18,000
Cost of Goods Sold:
Beg. Inventory
$ 2,480
$ 2,480
Purchases
14,020
14,020
Goods Avail. for Sale
$16,500
$16,500
Less ending inventory
3,290
3,400
Cost of goods sold
13,210
13,100
Ending Inventory & Cost of Goods Sold
differ with each method.

83. COMPARISON OF METHODS FIFO Weigthed-Average LIFO $18,000 $18,000
$ 2,480
$ 2,480
$ 2,480
14,020
14,020
14,020
$16,500
$16,500
$16,500
3,400
3,300
3,130
13,100
13,200
13,370

84. Specific Identification
COMPARISON OF METHODS
Specific Identification
FIFO
Sales
$18,000
$18,000
Cost of Goods Sold:
Beg. Inventory
$ 2,480
$ 2,480
Purchases
14,020
14,020
Goods Avail. for Sale
$16,500
$16,500
Less ending inventory
3,290
3,400
Cost of goods sold
13,210
13,100
Gross Profit
$ 4,790
$ 4,900

85. COMPARISON OF METHODS When prices are rising (as with the bikes)
FIFO
Weigthed-Average
LIFO
$18,000
$18,000
$18,000
$ 2,480
$ 2,480
$ 2,480
14,020
14,020
14,020
$16,500
$16,500
$16,500
3,400
3,300
3,130
13,100
13,200
13,370
$ 4,900
$ 4,800
$ 4,630
When prices are rising (as with the bikes)
FIFO results in the largest Gross Profit.

86. COMPARISON OF METHODS LIFO results in the smallest Gross Profit,
FIFO
Weigthed-Average
LIFO
$18,000
$18,000
$18,000
$ 2,480
$ 2,480
$ 2,480
14,020
14,020
14,020
$16,500
$16,500
$16,500
3,400
3,300
3,130
13,100
13,200
13,370
$ 4,900
$ 4,800
$ 4,630
LIFO results in the smallest Gross Profit,
therefore creating the smallest tax liability.

87. PERPETUAL SYSTEM Merchandise Inventory is a controlling account.
Subsidiary ledger maintained for each product
Costs can be assigned on a FIFO, moving-average or LIFO basis.

88. There were 40 bicycles in inventory at the beginning of the year.
PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
Jan. 1 (BI)
There were 40 bicycles in inventory
at the beginning of the year.

89. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(1) 40
$62
$2,480
$2,480
Each of the 40 units were
purchased at $62.

90. The 30 bikes sold came from the $62 bikes in beginning inventory.
PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
Jan. 1 (BI)
Feb. 15 30
$ 62
The 30 bikes sold came from the
$62 bikes in beginning inventory.

91. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
Jan. 1 (BI)
Feb. 15 30
$ 62
$ 1,860
$ 1,860

92. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(1) 40
$62
$2,480
$2,480
(1) 30
$ 62
$ 1,860
$ 1,860 10
$62
620
$ 620

93. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
Jan. 1 (BI)
Feb. 15 30
$ 62
$ 1,860
$ 1,860
Mar. 1 60
$ 65
$ 3,900

94. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(1) 40
$62
$2,480
$2,480
(1) 30
$ 62
$ 1,860
$ 1,860 10
$62
620
$ 620
(1) 10
$62
620
(2) 60 65
3,900
$4,520
Now there are two layers in inventory…
10 bikes from the beginning inventory
and the 60 bikes just purchased.

95. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
Jan. 1 (BI)
Feb. 15 30
$ 62
$ 1,860
$ 1,860
Mar. 1 60
$ 65
$ 3,900
April 1
On April 1, 40 units
were sold.

96. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(1) 40
$62
$2,480
$2,480
(1) 30
$ 62
$ 1,860
$ 1,860 10
$62
620
$ 620
(1) 10
$62
620
(2) 60 65
3,900
$4,520
FIFO assumes the first-in are the first sold….
40 sold = 10 from the beginning inventory
and the 30 from the 3/1 purchase.

97. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
Jan. 1 (BI)
Feb. 15 30
$ 62
$ 1,860
$ 1,860
Mar. 1 60
$ 65
$ 3,900
April 1 10
$ 62 $ 30 65
1,950
$ 4,430

98. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(1) 40
$62
$2,480
$2,480
(1) 30
$ 62
$ 1,860
$ 1,860 10
$62
620
$ 620
(1) 10
$62
620
(2) 60 65
3,900
$4,520 10
$ 62 $
(2) 30
$65
1,950 30 65
1,950
$ 4,430
$1,950

99. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
Jan. 1 (BI)
Feb. 15 30
$ 62
$ 1,860
$ 1,860
Mar. 1 60
$ 65
$ 3,900
April 1 10
$ 62 $ 30 65
1,950
$ 4,430
May15 80
$ 67
$ 5,360

100. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(1) 40
$62
$2,480
$2,480
(1) 30
$ 62
$ 1,860
$ 1,860 10
$62
620
$ 620
(1) 10
$62
620
(2) 60 65
3,900
$4,520 10
$ 62 $
(2) 30
$65
1,950 30 65
1,950
$ 4,430
$1,950
(2) 30
$65
1,950
(3) 80 67
5,360
$7,310

101. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
May 15 80
$ 67
$ 5,360
June 30
On June 30, 90 units were sold.

102. 90 bikes sold = 30 (layer 2) + 60 (layer 3)
PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(2) 30
$65
1,950
(3) 80 67
5,360
$7,310
90 bikes sold = 30 (layer 2) + 60 (layer 3)

103. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
May 15 80
$ 67
$ 5,360
June 30 30
$65
1,950 60 67
4,020
$ 10,400

104. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(2) 30
$65
1,950
(3) 80 67
5,360
$7,310 30
$65
1,950
(3) 20 67
1,340 60 67
4,020
$ 10,400
$1,340

105. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
May 15 80
$ 67
$ 5,360
June 30 30
$65
1,950 60 67
4,020
$ 10,400
Aug. 28 70
$ 68
$ 4,760

106. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(2) 30
$65
1,950
(3) 80 67
5,360
$7,310 30
$65
1,950
(3) 20
$67
1,340 60 67
4,020
$ 10,400
$1,340
(3) 20
$67
1,340
(4) 70 68
4,760
$6,100

107. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
May 15 80
$ 67
$ 5,360
June 30 30
$65
1,950 60 67
4,020
$ 10,400
Aug. 28 70
$ 68
$ 4,760
Oct. 30
40 units were sold on Oct. 30.

108. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(2) 30
$65
1,950
(3) 80 67
5,360
$7,310 30
$65
1,950
(3) 20
$67
1,340 60 67
4,020
$ 10,400
$1,340
(3) 20
$67
1,340
(4) 70 68
4,760
$6,100
40 units sold =
20 (layer 3) + 20 (layer 4)

109. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Date
Purchases
Cost of Goods Sold
Cost/
Cost/
Cumulative
Units
Unit
Total
Units
Unit
CGS
CGS
May 15 80
$ 67
$ 5,360
June 30 30
$65
$1,950 60 67
4,020
$ 10,400
Aug. 28 70
$ 68
$ 4,760
Oct. 30 20
$67
$1,340 20 68
1,360
$ 13,100

110. Cost of Goods Sold for the year
PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(2) 30
$65
1,950
(3) 80 67
5,360
$7,310 30
$65
1,950
(3) 20
$67
1,340 60 67
4,020
$ 10,400
$1,340
(3) 20
$67
1,340
(4) 70 68
4,760
$6,100 20
$67
$1,340
(4) 50
$68
3,400 20 68
1,360
$ 13,100
$3,400
Cost of Goods Sold for the year

111. PERPETUAL FIFO METHOD
Let’s return to the example of the 200 bicycles sold.
Cost of Goods Sold
Inventory on Hand
Cost/
Cumulative
Cost/
Layer
Units
Unit
CGS
CGS
Layer
Units
Unit
Cost
Total
(2) 30
$65
1,950
(3) 80 67
5,360
$7,310 30
$65
1,950
(3) 20
$67
1,340 60 67
4,020
$ 10,400
$1,340
(3) 20
$67
1,340
(4) 70 68
4,760
$6,100 20
$67
$1,340
(4) 50
$68
3,400 20 68
1,360
$ 13,100
$3,400
Ending Inventory

112. PHYSICAL INVENTORY
Perpetual system does not eliminate the need for a physical inventory.
Records are compared with the physical inventory.
If a difference is found, an adjusting entry must be prepared
differences are recorded in “Inventory Short and Over” account

113. PHYSICAL INVENTORY $130 short
Example: A physical inventory shows $3,710 worth of merchandise, but the inventory account has a balance of $3,840.
$130 short

114. GENERAL JOURNAL If physical count had shown $3,900… $60 overage DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Dec 31
Inventory Short and Over
130 2
Merchandise Inventory
130 3
To adjust inventory per 4
physical count 5
If physical count had
shown $3,900…
$60 overage 6 7 8 9 10 11

115. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Dec 31
Merchandise Inventory 60 2
Inventory Short and Over 60 3
To adjust inventory per 4
physical count 5 6 7 8 9 10 11

116. CONSERVATISM PRINCIPLE
Assets that increase in value while being held….
No formal entry of the gain is made until asset is sold
Assets that decrease in value while being held….
An entry is made to recognize the loss
We never anticipate gains, but we should always anticipate and account for losses.

117. LOWER OF COST OR MARKET
If the value of inventory declines while it is being held, the loss should be recognized in the period of the decline.
“Cost”
the dollar amount calculated using one of the four costing methods
“Market”
the cost to replace the inventory

118. This company sells three products.
LOWER OF COST OR MARKET
Recorded Purchase Cost
End-of-Period Market Value
Lower-of-Cost-or-Market
Item 1 2 3
This company sells three products.

119. The inventory of product #1
LOWER OF COST OR MARKET
Recorded Purchase Cost
End-of-Period Market Value
Lower-of-Cost-or-Market
Item 1
$ 8,000 2 3
The inventory of product #1
cost $8,000.

120. But the price has fallen, it now could be replaced
LOWER OF COST OR MARKET
Recorded Purchase Cost
End-of-Period Market Value
Lower-of-Cost-or-Market
Item 1
$ 8,000
$ 7,000 2 3
But the price has fallen,
it now could be replaced
for $7,000.

121. LOWER OF COST OR MARKET 1 $ 8,000 $ 7,000 $ 7,000 2 3
Recorded Purchase Cost
End-of-Period Market Value
Lower-of-Cost-or-Market
Item 1
$ 8,000
$ 7,000
$ 7,000 2 3
“Market” is the lowest

122. Lower-of-Cost-or-Market
Recorded Purchase Cost
End-of-Period Market Value
Lower-of-Cost-or-Market
Item 1
$ 8,000
$ 7,000
$ 7,000 2
9,000
10,000
9,000 3
7,000
6,500
6,500
$24,000
$23,500
$22,500
Two ways to calculate
Lower-of-Cost-or-Market

123. LOWER OF COST OR MARKET 1 $ 8,000 $ 7,000 $ 7,000 2 9,000 10,000 9,000
Recorded Purchase Cost
End-of-Period Market Value
Lower-of-Cost-or-Market
Item 1
$ 8,000
$ 7,000
$ 7,000 2
9,000
10,000
9,000 3
7,000
6,500
6,500
$24,000
$23,500
$22,500
#1 - Applied to Total Inventory
The lower of all items at their
cost or all items at their market value

124. lowest amount is selected for each item
LOWER OF COST OR MARKET
Recorded Purchase Cost
End-of-Period Market Value
Lower-of-Cost-or-Market
Item 1
$ 8,000
$ 7,000
$ 7,000 2
9,000
10,000
9,000 3
7,000
6,500
6,500
$24,000
$23,500
$22,500
#2 - Applied to Each Item
Each item is evaluated,
lowest amount is selected for each item

125. LOWER OF COST OR MARKET 1 $ 8,000 $ 7,000 $ 7,000 2 9,000 10,000 9,000
Recorded Purchase Cost
End-of-Period Market Value
Lower-of-Cost-or-Market
Item 1
$ 8,000
$ 7,000
$ 7,000 2
9,000
10,000
9,000 3
7,000
6,500
6,500
$24,000
$23,500
$22,500
Let’s assume it was applied to Total Inventory.
A journal entry is needed to reduce
Merchandise Inventory to $23,500.

126. GENERAL JOURNAL Expense DATE DESCRIPTION DEBIT PR CREDIT 1
Loss on Write-Down of Inventory
500 2
Merchandise Inventory
500 3
To recognize loss in value of 4
inventory held 5 6 7 8 9 10 11

127. ESTIMATING INVENTORY Not needed under Perpetual system
Used in a Periodic system when a physical inventory is not practical
monthly, quarterly financial statements
Two Methods
Gross Profit method
Retail Inventory method

128. GROSS PROFIT METHOD 3 steps
A business’s normal gross profit (Net Sales - Cost of Goods Sold) is used to estimate the cost of goods sold and ending inventory.
3 steps

129. GROSS PROFIT METHOD
Example:
Inventory, start of period
$80,000
Net Purchases, first month
$70,000
Net Sales, first month
$110,000
Normal gross profit as a percentage of sales
40%
Step #1 Compute the cost of goods available for sale.
Inventory, start of period
$80,000
Net Purchases, first month
70,000
Cost of Goods Available for Sale
$150,000

130. GROSS PROFIT METHOD
Example:
Inventory, start of period
$80,000
Net Purchases, first month
$70,000
Net Sales, first month
$110,000
Normal gross profit as a percentage of sales
40%
Step #2 Estimate cost of goods sold by deducting the normal gross profit from net sales.
Net Sales
$110,000
Normal Gross Profit
44,000
$110,000 x 40%

131. GROSS PROFIT METHOD
Example:
Inventory, start of period
$80,000
Net Purchases, first month
$70,000
Net Sales, first month
$110,000
Normal gross profit as a percentage of sales
40%
Step #2 Estimate cost of goods sold by deducting the normal gross profit from net sales.
Net Sales
$110,000
Normal Gross Profit
44,000
Estimated cost of goods sold
66,000

132. GROSS PROFIT METHOD
Example:
Inventory, start of period
$80,000
Net Purchases, first month
$70,000
Net Sales, first month
$110,000
Normal gross profit as a percentage of sales
40%
Step #3 Estimate the ending inventory by deducting cost of goods sold from the cost of goods available for sale.
Cost of goods available for sale
$150,000
Estimated cost of goods sold
66,000
$ 84,000
Estimated end-of-month inventory

133. RETAIL INVENTORY METHOD
Used by many retail businesses. Requires keeping records of both the cost and selling (retail) prices of all goods purchased.
5 steps

134. GROSS PROFIT METHOD
Step #1 Compute the cost of goods available for sale at cost and retail.
COST
RETAIL
Inventory, start of period
$ 60,000
$ 85,000
Net purchases during period
126,000
163,000
Goods available for sale
$ 186,000
$ 248,000

135. GROSS PROFIT METHOD
Step #2 Compute the ending inventory at retail by subtracting sales at retail from goods available for sale at retail.
COST
RETAIL
Inventory, start of period
$ 60,000
$ 85,000
Net purchases during period
126,000
163,000
Goods available for sale
$ 186,000
$ 248,000
Less net sales for period
180,000
Inventory, end of period, at retail
$ 68,000

136. GROSS PROFIT METHOD
Step #3 Compute the cost-to-retail ratio by dividing the cost of goods available for sale by retail value of goods available for sale.
COST
RETAIL
Inventory, start of period
$ 60,000
$ 85,000
Net purchases during period
126,000
163,000
Goods available for sale
$ 186,000
$ 248,000
Less net sales for period
180,000
Inventory, end of period, at retail
$ 68,000
Ratio ($186,000 ÷ $248,000)
75%

137. GROSS PROFIT METHOD
Step #4 Estimate the cost of ending inventory by multiplying the ending inventory at retail by the cost-to-retail ratio.
COST
RETAIL
Inventory, start of period
$ 60,000
$ 85,000
Net purchases during period
126,000
163,000
Goods available for sale
$ 186,000
$ 248,000
Less net sales for period
180,000
Inventory, end of period, at retail
$ 68,000
Ratio ($186,000 ÷ $248,000)
75%
Inventory, end of period,
at cost ($68,000 x 75%)
$ 51,000

138. GROSS PROFIT METHOD
Step #5a Estimate cost of goods sold by multiplying sales at retail by the cost-to-retail ratio.
COST
RETAIL
Inventory, start of period
$ 60,000
$ 85,000
Net purchases during period
126,000
163,000
Goods available for sale
$ 186,000
$ 248,000
Less net sales for period
180,000
Inventory, end of period, at retail
$ 68,000
Ratio ($186,000 ÷ $248,000)
75%
Inventory, end of period,
at cost ($68,000 x 75%)
$ 51,000
Estimated cost of goods sold
$ 135,000

139. GROSS PROFIT METHOD
Step #5b Estimate cost of goods sold by subtracting the estimated ending inventory from the cost of goods available for sale.
COST
RETAIL
Inventory, start of period
$ 60,000
$ 85,000
Net purchases during period
126,000
163,000
Goods available for sale
$ 186,000
$ 248,000
Less net sales for period
180,000
Inventory, end of period, at retail
$ 68,000
Ratio ($186,000 ÷ $248,000)
75%
Inventory, end of period,
at cost ($68,000 x 75%)
$ 51,000
Estimated cost of goods sold
$ 135,000