1. © 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO2 Calculate the cost of merchandise inventory using the first-in, first-out (FIFO) inventory costing method. LO3 Calculate the cost of merchandise inventory using the last-in, first-out (LIFO) inventory costing method. LO4 Calculate the cost of merchandise inventory using the weighted-average inventory costing method.

2. © 2014 Cengage Learning. All Rights Reserved. First-In, First-Out Inventory Costing Method ●Using the price of merchandise purchased first to calculate the cost of merchandise sold first is called the first-in, first-out inventory costing method. ●The first-in, first-out method is frequently abbreviated as FIFO. SLIDE 2 LO2 Lesson 20-2

3. © 2014 Cengage Learning. All Rights Reserved. First-In, First-Out Inventory Costing Method SLIDE 3 LO2 Lesson 20-2 Purchase Dates Units Purchased Unit Price Total Cost FIFO Units on Hand FIFO Cost January 1, beginning inventory10$20.80$208.00 February 16, purchases621.60129.60 April 17, purchases1422.40313.60 September 5, purchases1223.40280.8010$234.00 November 22, purchases823.50188.008 50$1,120.0018$422.00 3 3 Units Needed to Equal the Total Units on Hand 4 4 Unit Price Times FIFO Units 1 1 Total Units on Hand 2 2 Units from the Most Recent Purchase 5 5 Total FIFO Cost

4. © 2014 Cengage Learning. All Rights Reserved. Last-In, First-Out Inventory Costing Method ●Using the price of merchandise purchased last to calculate the cost of merchandise sold first is called the last-in, first-out inventory costing method. ●The last-in, first-out method is frequently abbreviated as LIFO. SLIDE 4 LO3 Lesson 20-2

5. © 2014 Cengage Learning. All Rights Reserved. Last-In, First-Out Inventory Costing Method SLIDE 5 LO3 Lesson 20-2 Purchase Dates Units Purchased Unit Price Total Cost LIFO Units on Hand LIFO Cost January 1, beginning inventory10$20.80$208.0010$208.00 February 16, purchases621.60129.606 April 17, purchases1422.40 313.60244.80 September 5, purchases1223.40 280.80 November 22, purchases823.50188.00 50$1,120.0018$382.40 2 2 Beginning Inventory Units 5 5 Unit Price Times LIFO Units 1 1 Total Units on Hand Units Needed to Equal the Total Units on Hand 4 4 Total LIFO Cost 6 6 3 3 Units from the Earliest Purchase

6. © 2014 Cengage Learning. All Rights Reserved. Weighted-Average Inventory Costing Method ●Using the average cost of beginning inventory plus merchandise purchased during a fiscal period to calculate the cost of merchandise sold is called the weighted-average inventory costing method. ●The average unit price of the total inventory available is calculated. ●This average unit price is used to calculate both ending inventory and cost of merchandise sold. ●The average cost of merchandise is then charged against current revenue. SLIDE 6 LO4 Lesson 20-2

7. © 2014 Cengage Learning. All Rights Reserved. Weighted-Average Inventory Costing Method SLIDE 7 LO4 Lesson 20-2 Purchases Total Cost Purchase Dates Units Unit Price January 1, beginning inventory10$20.80$208.00 February 16, purchases621.60129.60 April 17, purchases14 22.40 313.60 September 5, purchases1223.40280.80 November 22, purchases823.50188.00 50$1,120.00 Total of Beginning Inventory and Purchases ÷Total Units= Weighted-Average Price per Unit $1,120.00÷50=$22.40 Units in Ending Inventory × Weighted-Average Price per Unit = Cost of Ending Inventory 18×$22.40=$403.20 Total Cost of Inventory Available 1 1 2 2 Weighted-Average Price per Unit 3 3 Cost of Ending Inventory

8. © 2014 Cengage Learning. All Rights Reserved. $1,120.00−$422.00=$698.00 Calculating the Cost of Merchandise Sold SLIDE 8 LO4 Lesson 20-2 Cost of Merchandise Available for Sale − FIFO Cost of Ending Inventory =Cost of Merchandise Sold

9. © 2014 Cengage Learning. All Rights Reserved. Comparison of Inventory Methods SLIDE 9 LO4 Lesson 20-2 FIFOLIFO Weighted- Average Cost of merchandise sold: Merchandise inventory, Jan. 1…………...........$208.00 Net purchases..............................................912 Merchandise available for sale....................$1,120.00 Less ending inventory, Dec. 31....................422382.4403.2 Cost of merchandise sold.............................$698.00$737.60$716.80 In a period of rising prices: Relative cost of ending inventoryhighestlowestintermediate Relative cost of merchandise soldlowesthighestintermediate

10. © 2014 Cengage Learning. All Rights Reserved. Lower of Cost or Market Inventory Costing Method ●The price that must be paid to replace an asset is called the market value. ●Using the lower of cost or market price to calculate the cost of ending merchandise inventory is called the lower of cost or market inventory costing method (LCM). ●In this context, cost refers to the actual amount paid for the unit of inventory on hand. ●Market refers to the amount that must be paid to replace the unit of inventory. SLIDE 10 LO4 Lesson 20-2

11. © 2014 Cengage Learning. All Rights Reserved. Lower of Cost or Market Inventory Costing Method SLIDE 11 LO4 Lesson 20-2 Lower of Cost or Market Inventory Costing Method Costing MethodCost Market Value (18 units × $22.50 current market price) Lower of Cost or Market FIFO$422.00$405.00 LIFO382.40405.00382.40 Weighted-average403.20405.00403.20 Calculate the cost Determine the smaller number to use as the lower of cost or market Calculate the market price

12. © 2014 Cengage Learning. All Rights Reserved. Lesson 20-2 Audit Your Understanding 1.On what idea is the FIFO method based? SLIDE 12 ANSWER The price of merchandise purchased first should be charged against current revenue. Lesson 20-2

13. © 2014 Cengage Learning. All Rights Reserved. Lesson 20-2 Audit Your Understanding 2.When the LIFO method is used, at what price is each item in ending merchandise inventory recorded? SLIDE 13 ANSWER The prices of merchandise purchased last are used in recording prices for each item on the inventory record. Lesson 20-2

14. © 2014 Cengage Learning. All Rights Reserved. Lesson 20-2 Audit Your Understanding 3.In a period of rising prices, which inventory costing method gives the lowest cost of merchandise sold? SLIDE 14. ANSWER FIFO Lesson 20-2

15. © 2014 Cengage Learning. All Rights Reserved. Lesson 20-2 Audit Your Understanding 4.Why should a business select one inventory costing method and use that same method continuously for each fiscal period? SLIDE 15 ANSWER Using the same inventory costing method for all fiscal periods provides financial statements that can be compared with other fiscal period statements. If a business changes inventory cost methods, part of the difference in gross profit and net income may be caused by the change in methods. Lesson 20-2