2. Intermediate Financial Accounting I Inventories: Measurement

3. 2 Objectives of this Chapter 1.Discuss the importance of inventory valuation. 2.Study perpetual and periodic inventory systems and the ending period adjustments for inventory. 3.Study and compare the inventory cost flow assumptions. 4.Explain the effect of LIFO liquidations.

4. Inventories: Measurement3 Objectives of this Chapter (contd.) 5.Identify the items that should be included in the inventory count. 6.Discuss the lower of cost or market (LCM) rule. 7.Study the accounting treatment of changing to LIFO cost flow assumption and the use of LIFO reserve account. 8.LIFO Inventory Pools 9.Dollar-value LIFO technique.

5. Inventories: Measurement4 1. Inventories: the Importance of Inventory Valuation n How would the valuation and cost flow assumptions of inventory affect the income measurement? u Valuation Methods: Historical Cost, Current Exist Value, Current Entry Value, Present Value, LCM. u Cost Flow Assumptions: LIFO, FIFO, Average, Specific Identification. u CGS = Beginning Inventory + Net Purchase - Ending Inventory

6. Inventories: Measurement5 Inventories: the Importance of Inventory Valuation (contd.) n Different valuation methods and different cost flow assumptions will result in different cost of ending inventories and therefore different cost of goods sold.

7. Inventories: Measurement6 The Impact of Valuation of Ending Inventory on The CGS & Income Year 1 IncomeCGS= Beg. Inv. + Net Pur. - End. Inv. underoverunder a overunderover b Year 2 overunderunder underoverover a. either understating the units or the value b. either overstating the units or the value

8. Inventories: Measurement7 Impact on Omitting Goods from Purchases CGS = Beg. Inventory + N.P. - End. Inventory B/S I/S Ending Inv.understatedPurchaseunderstated R/Eno effectCGSno effect A/PunderN/Ino effect Working Capitalno effectInventory (End.)understated Current Ratiooverstating a a. When CA > CL

9. Inventories: Measurement8 Defining Inventory 1. Assets held for resale purpose in a normal course of business 2. Assets used to produce products for resale purpose u Merchandising Firms: Merchandise u Manufacturing Firms: Raw materials Work-in-process Finished Goods

10. Inventories: Measurement9 How to Determine Inventory Value Presented on the Balance Sheet? n Applying either the periodic inventory system or the perpetual inventory system and select a cost flow assumption to determine the value of inventories. n Both inventory systems require a physical count of inventory at the end of a period to determine the units which can be included in the inventory account.

11. Inventories: Measurement10 2. Inventory Systems and Ending Period Adjustments n Types of Inventory Systems u A. Perpetual Inventory System u B. Periodic Inventory System

12. Inventories: Measurement11 A. Perpetual Inventory System n Purchase: Inventoryxxx A/Pxxx n Sale: CGSxxx Inventoryxxx A/Rxxx Salesxxx

13. Inventories: Measurement12 Perpetual Inventory System (contd.) n Inventory account is used for the purchase and sale transactions. n CGS account is used to record the CGS of a sale. Therefore, the CGS is also known at all time. n CGS is determined by selecting a cost flow assumption.

14. Inventories: Measurement13 Perpetual Inventory System Example a. Sales price is $10 per unit. b. Sales price is $11 per unit.

15. Inventories: Measurement14 Example (contd.) - Journal Entries (Perpetual vs. Periodic) 3/5 Inventory9003/5 Purchases900 Cash900Cash900 3/7 Cash2,0003/7 Cash2,000 Sales Rev.2,000Sales Rev.2,000 CGS1,100 Inventory1,100 3/14 Inventory7003/14 Purchases700 Cash700Cash700 3/28 Cash330 Cash330 Sales Rev.330Sales Rev.330 CGS180 Inventory180 Perpetual (FIFO) Periodic

16. Inventories: Measurement15 Perpetual Inventory System Example (contd.) Inventory (WA) 500 1120 900 195.9 700 784.1 Inventory a (FIFO) B.B.500 1100 900 180 700 E.B.820 Inventory (LIFO) 500 1150 900 210 700 740 a. The balance of inventory is known at all time under the perpetual inventory system.

17. Inventories: Measurement16 Perpetual Inventory System Example (contd.) CGS (W-A) 1120 195.9 1315.9 CGS (FIFO) 3/7...1100 3/28...180 1280 CGS (LIFO) 1150 210 1360 The balance of cost of goods sold account 1 : 1.The balance of inventory is known at all time under the perpetual inventory system.

18. Inventories: Measurement17 Ending Period Adjustments Perpetual Inventory System a. Adjustments for lost units. b. Adjustments for LCM valuation.

19. Inventories: Measurement18 a. Adjustments for Lost Units (Perpetual Inventory System) Assuming ending units = 110 units. On 3/31, the lost units = 10. Cost of 10 lost units =>$6 x 10 = $60 (FIFO) $7 x 10 = $70 (LIFO) $6.53 x 10 = 65.3 (W-A) Adjusting Entry: 3/31 Loss on Inventory Units a 60 Inventory60 a. or use the account of Inventory over and short

20. Inventories: Measurement19 b. Adjustments for LCM Valuation (Perpetual Inventory System) Inventory (FIFO) B.B 5001,100 900180 700 82060-- 3/31 (Adj. for lost units) 760 LCM =$600 Ending Inv. Cost (on 3/31, FIFO) = $760 Assuming market price = $600 LCM = $600

21. Inventories: Measurement20 Adjustments for LCM Valuation (contd.) n Adjusting entry => Given that Allowance for Declining in Market Value of inventory has a beginning balance of zero: Allowance3/31 0 -- 3/1Loss Due to Market Value 160 Decline of Inventory160 160 -- 3/31 Allowance to Reduce Inventory to Market160 B/S (3/31) Inventory 760 Allowance (160) Inv. At LCM 600

22. An Alternative of LCM Adjustment  Many companies (i.e., Cisco Systems, inc. 2001, source: Spiceland, etc.)record the adjustment of LCM follows:  Cost of Goods Sold 160  Inventory 160  Note: Recording the loss as an increase in CGS will have the same impact on earnings as reporting it as a loss from value decline in the holding inventory. However, this treatment will distort the gross profit. Inventories: Measurement21

23. Inventories: Measurement22 Adjustments for LCM Valuation (contd.) n If the allowance account had a beginning balance of $20, the adjusting entry would be: Allowance 20 -- 3/1Loss140 140Allowance140 160 -- 3/31

24. Inventories: Measurement23 Adjustments for LCM Valuation (contd.) n If the Allowance account had a beginning balance of 200, the adjusting entry would be: AllowanceAllowance40 40200Gain from Recovery 160 of M.V. of Inventory40

25. Inventories: Measurement24 B. Periodic Inventory System n At the end of an accounting period, the following steps must be followed to determine the cost of ending inventory and cost of goods sold: 1. Do an inventory count. 2. Applying a cost flow assumption to determine the cost of ending inventory. 3. Determine the cost of goods sold using: CGS = Beg. Inv. + Net Pur. - Ending Inv. a a. No adjusting entries are required.

26. Inventories: Measurement25 Periodic Inventory System a Example n Using the example on Page 10 and assuming the physical count of inventory indicates 105 units on hand on 3/31, the cost of ending inventory (105 units) would be (given a FIFO cost flow assumption): $7  100 + $6  5 = $730 a. For journal entries, see page 14.

27. Inventories: Measurement26 Periodic Inventory System Example (contd.) Inventory Data: UnitsCost 3/1 (B.B)100 $5 3/5 Pur.150 $6 3/14 Pur.100 $7 The CGS under FIFO is: $500 + 1,600 - 730 = $1,370. If a LIFO assumption is used, the cost of end. Inv. is: $5 x 100 + $6 x 5 = $530. The CGS is: $500 + 1600 - 530 = $1,570.

28. Inventories: Measurement27 Ending Period Adjustments (Periodic Inventory System) 1. No adjustment is needed for lost units (because the cost of lost units is embedded in the CGS).

29. Inventories: Measurement28 Ending Period Adjustments (Periodic Inventory System) 2.Adjustment for the LCM valuation assuming FIFO: Cost of E.I. = $730 LCMAllowance Market = $600 = $6000 -- 3/1 (assumed) 130 130 --3/31 Adjusting entry: Loss Due to Market Decline of Inv.130 Allowance to Reduce Inv. to Market130

30. Inventories: Measurement29 3. Comparison of FIFO vs. LIFO During an Inflation Period

31. Inventories: Measurement30 Survey: (Source: Accounting Trends & Techniques) a, b,c YearlFirmsLIF1OFIFOW-AOthers 19841061 100% 408 38% 366 30% 225 22% 52 5% 19881038 100% 379 36.5% 396 38% 213 20.5% 50 5% 19911032 100% 361 35% 421 41% 200 19% 50 5% 2000887 100% 283 32% 386 44% 180 20% 38 4% 2006802 100% 228 28% 385 48% 159 20% 30 4% 2010666d 100% 176 26.4% 325 49% 147 22% 18 2.6%

32. Inventories: Measurement31 Survey: (Source: Accounting Trends & Techniques) (contd.) a. Sample firms are 600 firms. Most companies adopt more than one inventory method. b. Due to low inflation, the number of firms adopting LIFO has declined since mid-1980s. c. IAS No. 2 does not permit LIFO, and therefore, multinational companies use LIFO for all or most of their domestic inventories while use FIFO or average cost for their foreign subsidiaries. d. The number of disclosures.

33. Inventories: Measurement32 Switching to LIFO During an Inflation Period n Reason of switching to LIFO: Tax savings.

34. Inventories: Measurement33 Income Manipulation When LIFO Is Used (assuming price is rising) 1. To increase income (by decreasing CGS): u Strategy: 2.To decrease income (by increasing CGS): u Strategy:

35. Inventories: Measurement34 Advantages of FIFO a. Less likely to be subject to management manipulation; b. Produce higher income during an inflation period; c. Inventory cost reported on the B/S is close to the replacement cost.

36. Inventories: Measurement35 Disadvantage of FIFO a. Bad matches of sales revenue and CGS; match current sales revenue with old costs; b. Producing higher income during an inflation period results in paying more income tax.

37. Inventories: Measurement36 Advantages of LIFO a. Good match of sales revenue with CGS. b. Produce lower income during an inflation period; result in tax savings.

38. Inventories: Measurement37 Disadvantages of LIFO a. Inventory cost presented on the B/S is not fair. b. Subject to management manipulation. Note: International Accounting Standard No. 2 does not allow LIFO.

39. Inventories: Measurement38 IRS 1. Does not allow firms to use LCM if firms are using LIFO. 2. LIFO conformity rule. The non-LIFO income numbers are allowed on the supplementary reports since 1981.

40. Inventories: Measurement39 IRS (contd.) 3. LIFO is not acceptable by the IRS till 1939.

41. Inventories: Measurement40 4. LIFO Liquidations n A LIFO Liquidation profit can occur when units purchased are less than units sold in the period.

42. Inventories: Measurement41 An Example of LIFO Liquidation Profit 20x5 Beg. Inv.400$5 Pur.300$6 Pur.500$7 Pur.600$8 During 20x5, 1,700 units were sold. What is the LIFO liquidation profit? Total purchases of 20x5 are 1,400 units. The LIFO liquidationprofit is: (1,700-1,400) x ($8-$5) = $900

43. Inventories: Measurement42 Choice of Inventory Cost-Flow Assumptions and Conversion of FIFO to LIFO for Comparison Purposes a. Choice of inventory cost-flow assumptions. b. Inventory Management (JIT system, Inventory turnover rate, etc.): the example of Dell Inc. c. Adjustment of inventory cost-flow assumption on the same basis before making comparison of financial statements.

44. Inventories: Measurement43 Adjustment of Inventory Cost-Flow Assumption – An Example Information: ABC is currently adopting FIFO assumption. IF LIFO were adopted, cost of ending inventory would be $1,000 and $3,000 lower for x1 and x2, respectively. Question: How much would the CGS and income be different when LIFO is adopted rather than FIFO?

45. Inventories: Measurement44 Adjustment of Inventory Cost-Flow Assumption- An Example (contd.) CGS = Beg. Inv. + Net Pur. – End. Inv. Impact => -1000 -3000 of LIFO (LIFO Reserve) Thus, CGS should be increased by $2,000 and income before tax would be decreased by $2,000.

46. Inventories: Measurement45 LIFO Reserve: An Account Used to Adjust Ending Inventory Value from FIFO to LIFO n The difference in the value of inventory between the inventory method used for internal reporting purposes (i.e., FIFO) and LIFO is referred to as LIFO Reserve or the Allowance to Reduce Inventory to LIFO. n The change in the balance of LIFO Reserve from one period to another is referred as the LIFO Effect (i.e.,impact on income).

47. Inventories: Measurement46 LIFO Reserve - Example n Assume Acme Boot Company uses the FIFO method for internal reporting purposes and LIFO for external reporting purposes. On 12/31/x5, the LIFO Reserve balance was $20,000. However, the value of ending inventory on 12/31/x6 under LIFO is $50,000 less than that of FIFO. n Inventory on 12/31/x5 at FIFO = $320,000 n Inventory on 12/31/x6 at FIFO =$360,000

48. Inventories: Measurement47 LIFO Reserve – Example (contd.) (Inventory Disclosure, note D) 12/31/x6 12/31/x5 n Inventory at FIFO $360,000 $320,000 n LIFO Reserve (50,000) (20,000) n Inventory at LIFO $310,000 $300,000 n n Thus, $30,000 should be added to the LIFO Reserve account. The LIFO effect (impact on income) for 20x6 is $30,000.

49. Inventories: Measurement48 LIFO Reserve - Example (contd.) J.E. to adjust inventory from FIFO to LIFO: Cost of Goods Sold30,000 LIFO Reserve a 30,000 (or Allowance to Reduce Inventory to LIFO) a. reported as a contra account to inventory or a deduction from inventory

50. Inventories: Measurement49 Inventory Presentation and Footnote Disclosure Inventories, net of adjustment to LIFO Reserve (Note D)$310,000 Note D (contd.): Inventories. Inventories are valued at the lower of cost or market determined principally by the LIFO method. If the FIFO cost method had been used, inventories would have been $50,000 higher.

51. Inventories: Measurement50 5. Items to Be Included in Inventory n Any goods with the legal title transferred to the buyer should be included in the inventory of the buyer (including goods in transit with a F.O.B. shipping point term).

52. Inventories: Measurement51 Special Cases a. Consigned Goods: Legal title remained with the consignor (manufacturers). b. Sales with High Sales Returns (conditional sale): c. Sales on Approval:

53. Inventories: Measurement52 Special Cases (contd.) d. Product Financing Arrangements: (Parking Transactions; SFAS No. 49) e.Sales on Installment (revenue recognition on accrual basis):

54. Inventories: Measurement53 What Should Be Included in The Product Costs  Purchase price  Freight-In cost xHandling charge xStorage cost related to purchase xBuying cost of the purchasing department xInsurance, taxes  Interest cost: only in some cases.  --> Yes x --> No  --> may be

55. Inventories: Measurement54 What Should Be Included in the Product Costs (contd.) n Purchase Discount account should be treated as a contra account to purchases.

56. Inventories: Measurement55 6. Inventory Valuation - the LCM Rule Departure from Historical Cost Assumption LCM: Lower of Cost or Market. Reasons: Conservatism. Market ==> Replacement Cost constrained by: Ceiling=> Net Realizable Value = Selling price - estimated cost to complete and sell Floor=> NRV - normal profit s

57. Inventories: Measurement56 Inventory Valuation - Example  Selling price = 12  Package cost = $1  Transportation cost = $3  Normal profits = $3  NRV = Selling price - Package - Transportation = $12 - $1- $3 = $8  NRV - Normal profit = $5

58. Inventories: Measurement57 Inventory Valuation - Example (contd.) a.Example of the ceiling can prevent future unexpected loss. b.Example of preventing the recognition of abnormal loss in the current period.

59. Inventories: Measurement58 Inventory Valuation - LCM n For financial reporting, LCM can be performed at the individual item level, at the category level or at the total inventory level. n Common practice: at the individual item level. n LCM performed at the individual item level is most conservative and is most commonly used because it is complied with the IRS rule.

60. Inventories: Measurement59 LCM Application - at Individual Level versus at Group Level ItemCostMarketLCM (at individual level) A$50$60$50 B*$140$100$100 C$300$360$300 Total$490$520$450 _______________ LCM at group level ==> $490 The difference of $40 is resulting from item B: $140 - 100 = $40

61. LCM and iGAAP IAS No. 2 requires inventory to be valued at LCM. The market value of IAS is the NRV, not the replacement cost as in US GAAP. IAS allows the reversal of inventory write- down when the conditions for write-down do not exist. US GAAP does not allow the reversal of inventory write-down. Inventories: Measurement60

62. Inventories: Measurement61 7. Initial Adoption of LIFO n The accounting treatments for accounting method changes are: n a. Current Period Approach: cumulative effect from the change reported in the I/S. (Note: eliminated by SFAS 154) n b. Retrospective Approach

63. Inventories: Measurement62 Initial Adoption of LIFO n When change from other method to LIFO, neither a cumulative effect nor a retrospective adjustment can be made. n The base year inventory for all following years is the beginning inventory of the year In which LIFO is adopted.

64. Inventories: Measurement63 Initial Adoption of LIFO n This value of the beginning inventory needs to be adjusted to the cost. n The effect of the change on the current year’s income and on the value of the ending inventory must be disclosed.

65. Inventories: Measurement64 Journal Entry to Restate the Beginning Inventory to Cost n Assume that Rooms, Inc. decided to switch from FIFO to LIFO in 20x9. The beginning inventory of 20x9 has a cost basis of $100,000 but is reported at $90,000 on the balance sheet because market is lower than cost. The following entry is made to restate the inventory to a cost basis (ignoring tax effects):

66. Inventories: Measurement65 Journal Entry to Restate the Beginning Inventory to Cost (contd.) n Alternative 1: Allowance to Reduce Inventory to Market10,000 Adjustment to Record Inventory at cost 10,000 (If an allowance method is used in LCM application.)

67. Inventories: Measurement66 Journal Entry to Restate the Beginning Inventory to Cost (contd.) n Alternative 2: Inventory10,000 Adjustment to Record Inv. at Cost10,000 (only If a direct write-off method is used in LCM application)

68. Inventories: Measurement67 Footnote Disclosure of Changing from FIFO to LIFO Note: Inventory Pricing. In the fourth quarter, the company expanded its use of the LIFO method of inventory to additional portion of its inventories in order to more closely match current costs with current revenues. The effect of this change was to reduce net income for the current year by $2,804,000 or $0.49 per share. As of December 31, inventories valued on a LIFO basis amounted to $74,166,000. If valued on a FIFO basis, such inventories would be increased to $90,551,000.

69. Inventories: Measurement68 8. LIFO Inventory Pools (Specific Goods Pooled LIFO) (source: Spiceland, etc.)*  Problems associated with the Unit LIFO (i.e., the LIFO concept applies to units of inventory as described in previous sections; also called specific goods LIFO):  Costly to implement: It requires the records of each unit of inventory.  LIFO liquidations: When units of a specific inventory purchased are less than units sold during the period, the beginning layers are eroded.

70. Inventories: Measurement69 LIFO Inventory Pools (contd.)* n LIFO inventory pools technique can: n 1) simplify recordkeeping by grouping inventory into pools, and n 2)reduce the probability of LIFO layer liquidation/erosion.

71. Inventories: Measurement70 LIFO Inventory Pools (contd.) n Within pools, all purchases of goods in the pool are considered to be made at the same time during the period and at the average cost. n When the quantity of ending inventory in the pool increases (i.e., the quantity of ending inv. is greater than that of the beg. Inv.), the ending inventory of the pool will consist of the beg. Inv. and the layer of the period.

72. Inventories: Measurement71 LIFO Inventory Pools: An Example (contd.) n The 2008 beg. inventory (BI)of Cole Glass Inc. LIFO inventory pool consisted of the following: Quantity (squared foot (SF)) Cost (per SF) Total Cost Grade A Window Glass 10,000$3.00$30,000 Grade B14,000$2.50$35,000 Grade C11,000$2.20$24,200 Totals35,000$89,200 Average SF Cost of the Pool -BI $2.55 =($89,200/ 35,000)

73. Inventories: Measurement72 LIFO Inventory Pools: An Example n During 20x8, Cole sold 48,000 squared feet of window glass and purchased 51,000 squared feet as follows: Quantity (squared foot (SF)) Cost (per SF)Total Cost Grade A Window Glass 20,000$3.10$62,000 Grade B15,000$2.60$39,000 Grade C16,000$2.45$39,200 Totals51,000$140,200 Average 2008 SF Cost of the Pool $2.75 =($140,200/ 51,000)

74. Inventories: Measurement73 LIFO Inventory Pools: An Example (contd.) n The average cost of 2008 beg. inventory and 2008 window glass inventory pool is $2.55 and $2.75, respectively. n The ending inventory quantity for the pool is: 35,000+51,000-48,000=38,000 units

75. Inventories: Measurement74 LIFO Inventory Pools: An Example (contd.) n Since the ending inventory of 2008 exceeds its beg. Inventory, the ending inventory will include the beginning inventory (i.e., 35,000 units ) and a LIFO layer of 3,000 units from 2008. n Thus, the cost of 2008 ending inventory equals: $2.55 x 35,000+ $2.75x 3,000 = $97,500

76. Inventories: Measurement75 Problems Associated with LIFO Inventory Pools n When a product in an inventory pool is discontinued, the old costs of the discontinued item will become the cost of goods sold and therefore, result in LIFO liquidation. n Even if the product is replaced, it may not be similar to the old item and cannot be included in the same pool. n Therefore, LIFO inventory pool requires redefine pools periodically when there are changes in the product mix of the pool.

77. Inventories: Measurement76 9. Dollar-Value LIFO (DV LIFO) Technique* n DV LIFO technique simplifies the recordkeeping procedures (due to no need to keep unit flows). n DV LIFO technique helps to protect LIFO layers from erosion (i.e., reduce the probability of LIFO liquidations; more than the LIFO inventory pool technique). n This technique is frequently used in practice

78. Inventories: Measurement77 DV LIFO Technique (contd.)* n DV LIFO defines a layer as the dollar value, not units, of ending inventory for a specific year. n One layer is formed for each year. n Dollar Value of Inventories: Current cost (the most recent purchase price) of the ending Inventory.

79. Inventories: Measurement78 DV LIFO Technique (contd.)* n To determine whether a new LIFO layer is added under DV LIFO, the DV of ending inventory (EI) is compared with that of the beg. Inventory (BI). n If the DV of EI exceeds that of the BI, the EI layers will consist of the DV of the BI layer plus a new DV layer created for the current year (i.e., the DV of EI – the DV of BI).

80. Inventories: Measurement79 The Cost Index n When the price level of the EI differs from that of BI, a cost index should be used to adjust the DV of EI at the price level of the BI before forming the layers for the EI. n Cost index of a layer year = Cost in layer year/Cost in base year  Base year is the year in which DV LIFO is adopted and a layer year is any subsequent year in which an inv. Layer is created..

81. Inventories: Measurement80 Dollar Value LIFO – An Example Layer Current CostCostEI atValue of Yearof Ending(Price)Base yearInv. At Inventory Index Price Levl. D-V LIFO 20x0 a $20,000100$20,000$20,000 20x1$30,000120$25,000$26,000 20x2$31,200130$24,000$24,800 20x3$39,200140$28,000$30,400 a. the base year

82. Inventories: Measurement81 Example (contd.) Forming of layers: 20x0 20x1 20x2 20x3 20,000... L120,000...L120,000...L120,000...L1 5,000...L24,000...L24,000...L20...L3 4,000..L4 Converting to the corresponding year’s index level: 20x0 20x1 20x2 20x3 20,000x120, 000x1+20,000x1+20,000x1+ =20,0005,000x1.2 4,000x1.2+4,000x1.2+ =26,000 0x1.30x1.3+ =24,8004,000x1.4 =30,400

83. Inventories: Measurement82 Comments on Dollar-Value LIFO n Items with similar economic, not physical, characteristics (i.e., subject to similar cost change pressure) will be pooled together. n The more items are included in an inventory pool, the less likely the erosion of the LIFO layers can occur.

84. Inventories: Measurement83 Comments on Dollar-Value LIFO (contd.)* n Income number can be manipulated by changing the number of inventory pools. n On average, retailers form 6 pools for their inventories and non-retailers form 3 pools for their inventories.

85. Inventories: Measurement84 An Example of Manipulating Income by Changing the Number of Inventory Pools n Stauffer Chemical Company had increased LIFO pools from 8 to 280, boosting its net income by $16,515,000 (13%) (source: KWW, 13 th edition).

86. Inventories: Measurement85 Types of Indexes n Internal Index: Internal price index computed by the company for its own product. n External Index: Computed by an outside party such as the government, commodity exchange, or trade association. n General Index: Composed of several commodities, goods or services. n Specific Index: For one commodity, good or service.

87. Inventories: Measurement86 External Price Index* n The Consumer Price Index for urban consumers (CPI-U) is an example of an external general price index. n CPI-U is published monthly by the Bureau of Labor Statistics of the federal government. n Specific external price indexes (i.e., for gold, silver, corn…) are also available from trade associations.

88. Inventories: Measurement87 The Internal Indexes  A Double-Extension Method (i.e., the value of inv. units extended at both current and base-year prices ):  Internal Index for the Current Year = End. Inv*. at Current Year’s Cost End. Inv. at Base-Year Cost  End. Inv. is the ending inventory of the current year.  The cost index for the base year equals one.

89. Inventories: Measurement88 Example n To compute specific internal price indexes: YearCurrentUnits ofCost Cost End. Inv.Index(%) 20x0 (base year)$19300100 a 20x1$22.8400120 b 20x2$24.7450130 c 20x3$26.6370140 d a. 19*300/19.0*300=100% c.24.7*450/19*450=130% b. 22.8*400/19*400=120% d.26.6*370/19*370=140%

90. Inventories: Measurement89 Example (contd.) n General internal price index: (for more than one inventory in the pool): Inv. A Inv. B Current Units ofCurrentUnits of Cost End. Inv. Cost End. Inv. 20x0(base year) $19 100$20150 20x1 $22.8110$22120 General internal price index of 20x0: (19x100+20x150) / (19x100+20x150)=100% General internal price index of 20x1: (22.8x110+22x120) / (19x110+20x120)=114.6%