1. Acct Class 12
Chapter 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACH Sommers – ACCT 3311
Chapter 1: Environment and Theoretical Structure of Financial Accounting.

2. Discussion Question Q8-6 Goods out on approval to customers
Goods in transit that were recently purchased f.o.b. destination
Land held by a realty firm for sale
Raw Materials
Goods received on consignment
Manufacturing supplies

3. Transfer of ownership
A company should record purchases when it obtains legal title to the goods.

4. Discussion Question
Q8-3 What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?

5. Comparison of Inventory Systems
This chart summarizes all the differences between periodic and perpetual inventory systems, and will certainly help you understand the differences between the two methods.

6. Periodic Inventory System
We need the following adjusting entry to record cost of good sold.
December 31, 2011
To adjust inventory, close purchases, and record cost of goods sold.
Part I
Here is a typical calculation of cost of goods sold. Let’s assume a beginning inventory of $120,000 and net purchases of $600,000. Cost of goods available for sale would be $720,000. Now we subtract ending inventory of $180,000 to arrive at cost of goods sold of $540,000.
Part II
Under the periodic inventory system, we need to prepare an adjusting entry to determine cost of goods sold. The entry at the end of 2011 will be to debit cost of goods sold for $540,000, debit inventory for $180,000 (our ending inventory), credit inventory for $120,000 (our beginning inventory), and finally credit purchases for $600,000.
This entry has determined cost of goods sold for the income statement and has established the value of ending inventory on the balance sheet at $180,000.

7. Cost of Goods Available for Sale
Inventory Notation
Beginning
Balance
Purchases
Cost of Goods Available for Sale
Ending
Balance
Cost of Goods Sold ? ?

8. Specific Identification --- Average Cost
Choosing a Cost Flow Assumption
Specific Identification Average Cost
LIFO FIFO
Cost Flow Assumption Adopted
does not need to equal
Physical Movement of Goods
Method adopted should be one that most clearly reflects periodic income.

9. Example 1: FIFO Periodic
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using FIFO, periodic system.
Purchases
Date
Units
Unit Cost
Total Cost
Jan 10
5,000 $9
$45,000
Jan 18
6,000 10
60,000
Totals
11,000
$105,000
Sales
Date
Units
Jan 5
3,000
Jan 12
2,000
Jan 20
4,000
Total
9,000

10. Example 1: FIFO Periodic
Units
Dollars
Cost of Goods Sold:
Ending Inventory:

11. Example 1: LIFO Periodic
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using LIFO, periodic system.
Purchases
Date
Units
Unit Cost
Total Cost
Jan 10
5,000 $9
$45,000
Jan 18
6,000 10
60,000
Totals
11,000
$105,000
Sales
Date
Units
Jan 5
3,000
Jan 12
2,000
Jan 20
4,000
Total
9,000

12. Example 1: LIFO Periodic
Units
6,000
11,000
17,000
8,000
9,000
Dollars
48,000
105,000
153,000
Old Stuff
New Stuff
Cost of Goods Sold:
Ending Inventory:

13. Example 1: LIFO Perpetual
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using LIFO, perpetual system.
Purchases
Date
Units
Unit Cost
Total Cost
Jan 10
5,000 $9
$45,000
Jan 18
6,000 10
60,000
Totals
11,000
$105,000
Sales
Date
Units
Jan 5
3,000
Jan 12
2,000
Jan 20
4,000
Total
9,000

14. Ex 1: LIFO Perpetual (January 5th Sale)
Units
Dollars
Available:
Cost of Goods Sold:
Ending Inventory:

15. Ex 1: LIFO Perpetual (January 12th Sale)
Units
Dollars
Available:
Cost of Goods Sold:
Ending Inventory:

16. Ex 1: LIFO Perpetual (January 20th Sale)
Units
6,000
12,000
8,000
4,000
Dollars
51,000
60,000
111,000
Old Stuff
New Stuff
Available:
Beg 3,000 $ 8 = $ 24,000
Jan ,000 $ 9 = ,000
Jan ,000 $10 = ,000
12,000 units $111,000
Cost of Goods Sold:
Jan ,000 $10 = $ 40,000
Ending Inventory:
Beg 3,000 $ 8 = $ 24,000
Jan ,000 $ 9 = ,000
Jan ,000 $10 = ,000
8,000 units $ 71,000

17. Example 1: LIFO Perpetual (Summary)
Cost of Goods Sold:
Jan 5 3,000 units = $24,000
Jan 12 2,000 units = 18,000
Jan 20 4,000 units = 40,000
Total 9,000 units = $82,000
Ending Inventory:
Beg 3,000 $ 8 = $24,000
Jan ,000 $ 9 = 27,000
Jan ,000 $10 = 20,000
8,000 units $71,000

18. Example 1: Average Cost, Periodic
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using Average Cost, Periodic.
Purchases
Date
Units
Unit Cost
Total Cost
Jan 10
5,000 $9
$45,000
Jan 18
6,000 10
60,000
Totals
11,000
$105,000
Sales
Date
Units
Jan 5
3,000
Jan 12
2,000
Jan 20
4,000
Total
9,000

19. Example 1: Average Cost Periodic
Units
Dollars
Cost of Goods Sold:
Ending Inventory:

20. Example 1: Average Cost, Perpetual
Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using Average Cost, Perpetual.
Purchases
Date
Units
Unit Cost
Total Cost
Jan 10
5,000 $9
$45,000
Jan 18
6,000 10
60,000
Totals
11,000
$105,000
Sales
Date
Units
Jan 5
3,000
Jan 12
2,000
Jan 20
4,000
Total
9,000

21. Ex 1: Average Cost Perpetual (Jan 5th Sale)
Units
Dollars
Cost of Goods Sold:
Ending Inventory:

22. Ex 1: Average Cost Perpetual (Jan 12th Sale)
Units
Dollars
Cost of Goods Sold:
Ending Inventory:

23. Ex 1: Average Cost Perpetual (Jan 20th Sale)
Units
6,000
12,000
8,000
4,000
Dollars
51,750
60,000
111,750 ?
111,750 / 12,000 = $ Cost per unit
Cost of Goods Sold:
4,000 $ = $37,250
Ending Inventory:
8,000 $ = $74,500

24. Ex 1: Average Cost Perpetual (Summary)
Cost of Goods Sold:
Jan 5 3,000 units = $24,000
Jan 12 2,000 units = 17,250
Jan 20 4,000 units = 37,250
Total 9,000 units = $78,500
Ending Inventory:
8,000 $ = $74,500

25. Example 1: Summary of Results
Cost of
Goods Sold
Ending
Inventory
FIFO, Periodic
$75,000
$78,000
LIFO, Periodic
87,000
66,000
LIFO, Perpetual
82,000
71,000
Avg Cost, Periodic
81,000
72,000
Avg Cost, Perpetual
78,500
74,500

26. Supplemental LIFO Disclosures
Tootsie Roll 2008 Balance Sheet Finished goods and work-in-process 34,862 37,031 Raw materials and supplies 20,722 20,371 Income Statement Product cost of goods sold 333, ,695 Footnote: Inventories are stated at cost, not to exceed market. The cost of substantially all of the Company’s inventories ($53,557 and $54,367 at December 31, 2008 and 2007, respectively) has been determined by the last-in, first-out (LIFO) method. The excess of current cost over LIFO cost of inventories approximates $12,432 and $11,284 at December 31, 2008 and 2007, respectively. The cost of certain foreign inventories ($2,027 and $3,036 at December 31, 2008 and 2007, respectively) has been determined by the first-in, first-out (FIFO) method. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases is reflected as a reduction in the cost of the related inventory item, and is therefore reflected in cost of sales when the related inventory item is sold.

27. Supplemental LIFO Disclosures
Tootsie Roll 2008 Balance Sheet Finished goods and work-in-process 34,862 37,031 Raw materials and supplies 20,722 20,371 Total LIFO inventory 55,584 57,402 LIFO reserve 12,432 11,284 Total FIFO inventory 68,016 68,686 Income Statement Product cost of goods sold – LIFO 333, ,695 Product cost of goods sold – FIFO ? ?

28. LIFO to FIFO Conversion – Tootsie Roll
Inventory Turnover:
LIFO:
FIFO: