1. Chapter 5
Inventory
Chapter 5

2. Chapter 5: Objectives Account for common inventory transactions.
Use the four major inventory costing methods to calculate ending inventory and cost of goods sold.
Apply the lower-of-cost-or-market rule to inventory.
Determine the effects of inventory errors on the financial statements.
Use ratios and other analysis techniques to make decisions about inventory.
Chapter 5

3. Comparison of Methods Periodic
Uses Temporary accounts for purchases, freight, etc.
Does not keep track of the Cost of Goods Sold during the period.
Inventory levels are determined solely by ending physical count.
Perpetual
Uses the inventory account for all transactions.
Keeps a running balance in the Cost of Goods Sold account.
Inventory balance is kept current throughout the period and adjusted based on a physical count.
Chapter 5

4. Inventory Accounting Terms
Sales
Sales Returns and Allowances
Sales Discounts
Purchase Returns and Allowances
Purchase Discounts
Freight-In
Delivery Expense(Freight-out)
Cost of Goods Sold
Chapter 5

5. Shipping Terms
FOB Shipping Point: Buyer pays to get the goods to the destination.
FOB Destination: Seller pays to get the goods to the destination.
Chapter 5

6. Inventory Cost Flow Methods
Specific Identification
First In First Out
Last In First Out
Weighted Average
Chapter 5

7. Cost Flow Example
The operations of University Bookstore are used to explore the topic of inventory costing. Following are inventory data for January for a Principles of Marketing textbook. The text is a paperback version and, thus, there are no used copies of the text available for sale. To simplify the example, it is assumed that University Bookstore is only open two days in January; all sales, therefore, occur on those two days.
1/ 1 Beginning inventory 100 $30 each $ 3,000
1/ 8 Purchased $35 each ,000
1/14 Sold copies
1/18 Purchased $39 each ,730
1/22 Sold copies
Chapter 5

8. Purchases Sold Balance
Item: Principles of Marketing, Perpetual Inventory Record, FIFO Method
Purchases
Sold
Balance
Date #
Unit
Cost
Total
Unit Cost
Jan. 1
100
$30
$3,000
Jan. 8
400
$35
14,000
500 35
$ 3,000
$17,000
Jan. 17
260
$9,100
140
$4,900
Jan. 18 70
$39
$2,730
210 39
2,730
$7,630
Jan. 22 40
$4,900 $1,560 30
$1,170
Chapter 5

9. Item: Principles of Marketing, Perpetual LIFO
Purchases
Sold
Balance
Date #
Unit
Cost
Total
Unit Cost
Jan. 1
100
$30
$3,000
Jan. 8
400
$35
$14,000
 100
500 35
 $ 3,000
14,000
$17,000
Jan. 17
360
$12,600 40
$ 3,000
1,400
$4,400
Jan. 18 70
$39
$2,730
210
 $30 39
2,730
$7,130
Jan. 22 30
1, ,100
 30 $
Chapter 5

10. Purchases Sold Balance Date
Item: Principles of Marketing, Perpetual Inventory Record, Moving Average Method
Purchases
Sold
Balance
Date #
Unit
Cost
Total
Unit Cost
Jan. 1
100
$30
$ 3,000
Jan. 8
400
$35
$14,000
500
$17,000
Jan. 17
360
$34
$12,240
140
$ 4,760
Jan. 18 70
$39
$2,730
210
$ 7,490
Jan. 22
180
$35.67
$6,420 30
$ 1,070
Chapter 5

11. Cost Flow Gross Profit and Inventory Amounts EXHIBIT 5-6
Specific Weighted
Identification FIFO LIFO Average
Sales $50) $27,000 $27, $27, $27,000
Cost of Goods Sold , , , ,860
Gross Profit $ 8,310 $ 8, , ,140
Inventory, 1/31 $ 1, $ 1, $ $ 1,070
Chapter 5

12. Lower of Cost or Market Total Market 540 340 1000 560 2440 Replacement18 17 20 14
Total Cost
420
480
750
720
2370*
LCM
420
340
750
560
2070**
ITEM
727 Jeans
757 Jeans
Tank tops
Pullovers
Quantity 30 20 50 40
Unit Cost 14 24 15 18
*Applying LCM on a total inventory basis
**Applying LCM on an Item by Item basis
Chapter 5

13. Chapter 5

14. Relevant Ratios Age of Inventory = 360 days ÷ Inventory Turnover Ratio
Cost of Goods Sold ÷ Average Inventory
The inventory turnover ratio indicates the number of times that a company sells or "turns over" its inventory each year.
Age of Inventory =
360 days ÷ Inventory Turnover Ratio
Inventory age indicates the average period required to sell an item of inventory.
Chapter 5