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Inventory Valuation
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Standards 0 BCS-PAI-4 d. Identify and explain the advantages and disadvantages of different types of accounting systems. 0 BCS-PAI-4 g. Analyze business transactions and their effect on the accounting equation.
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Objectives 0 Students will be able to explain the difference between the three cost assumption methods to value ending inventory. 0 Students will be able to value inventory using the LIFO, FIFO, and Average Cost methods.
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What is inventory? 0 Will eventually bring in revenue 0 Merchandise 0 Finished Goods 0 Work in process 0 Raw materials
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What determines how we value inventory? 0 What type of business we are in? 0 Retail, manufacturing 0 How much variance there is in the unit cost for purchases
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Ways to value inventory 0 Specific Identification 0 Identification by specific item, barcode, etc. 0 Ex. VIN # on car lots 0 Cost Flow assumptions 0 First–in-First-out 0 Last-in-First-out 0 Average Cost Method
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First-in-First-Out 0 Assumes that the first items in the door are the first items that will be sold 0 Assumes that ending inventory must consist of only the most recent purchases 0 Ending inventory is valued using the most recent purchases going backward.
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FIFO cont’d DateExplanationUnitsUnit CostTotal Cost Jan 1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr 10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec 1Purchases40301250 Total available for sale2005575 Ending Inventory30 Units Sold170
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FIFO cont’d 0 Ending Inventory 0 Total units *most recent prices Dec 1 Purchase price 30 * 30 = $900 *note use the price until you get the pricing on all of the units 0 Cost of Goods Sold Available for sale Less ending inventory 5575 -900 COGS $ 4625
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Last-in-First-Out 0 Assumes that the last items in the door are the first items that will be sold 0 Assumes that ending inventory must consist of oldest purchases 0 Ending inventory is valued using the oldest recent purchases going forward.
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LIFO cont’d DateExplanationUnitsUnit CostTotal Cost Jan 1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr 10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec 1Purchases40301250 Total available for sale2005575 Ending Inventory30 Units Sold170
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LIFO cont’d 0 Ending Inventory 0 Total units *oldest prices Beginning inventory $750 (25 units) Feb 1 purchase 5 units 5 * 25 = 125 750+ 125 = 875 0 Cost of Goods Sold Available for sale Less ending inventory 5575 -875 COGS $ 4700
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Average Cost Method 0 Assumes that the unit cost of inventory will remain basically the same throughout the period 0 Ending inventory is valued using the total value of units available during period divided by total units available. This gives you the average unit cost.
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Average cost cont’d DateExplanationUnitsUnit CostTotal Cost Jan 1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr 10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec 1Purchases40301250 Total available for sale2005575 Ending Inventory30 Units Sold170
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Average Cost Method cont’d 0 Ending Inventory Value of total available Inventory $5575 divided by Available units 200 Cost per unit 27.88 Times units in Ending inventory 30 Ending inventory $836.40 0 Cost of Goods Sold Available for sale Less ending inventory $ 5575.00 -836.40 COGS $ 4738.60
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Why do care how we value it? 0 We have to pay taxes on it 0 It affects cost of goods sold, which affects our profits
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QUIZ
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Which method assumes that the first items in the door are the first items that will be sold? 0 A. FIFO A. FIFO 0 C. LIFO C. LIFO 0 D. Specific Identification D. Specific Identification 0 B. Average Cost B. Average Cost
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Which method assumes that the unit cost of inventory will remain basically the same throughout the period? 0 A. FIFO A. FIFO 0 C. LIFO C. LIFO 0 D. Specific Identification D. Specific Identification 0 B. Average Cost B. Average Cost
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Which method assumes that ending inventory is valued using the most recent purchases going backward? 0 A. FIFO A. FIFO 0 C. LIFO C. LIFO 0 D. Specific Identification D. Specific Identification 0 B. Average Cost B. Average Cost
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Which is not a cost assumption valuation method? 0 A. FIFO A. FIFO 0 C. Specific Identification C. Specific Identification 0 B. LIFO B. LIFO 0 D. Average Cost Method D. Average Cost Method
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Which type of company would use specific identification to value inventory? 0 A. Retail A. Retail 0 C. Manufacturing C. Manufacturing 0 B. Car Dealership B. Car Dealership 0 D. Small Business D. Small Business
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Which is not something to consider when choosing a valuation method? 0 A. The way we have always done it A. The way we have always done it 0 C. How often the unit costs changes during the accounting period C. How often the unit costs changes during the accounting period 0 B. The type of business that we are in B. The type of business that we are in 0 D. Which gives a better representation of actual cost of the goods that were sold D. Which gives a better representation of actual cost of the goods that were sold
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The FIFO method assumes that the first items in the door are the first items that will be sold. 0 True True 0 False False
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The LIFO method assumes that ending inventory must consist of only the most recent purchases. 0 True True 0 False False
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There is only one appropriate way to value inventory? 0 True True 0 False False
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A company may change their valuation methods often so that they can show a profit? 0 True True 0 False False
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The end
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Correct! Great Job!!
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Sorry, incorrect! Try Again
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