1. INVENTORY Chapter 8 1

2. OBJECTIVE 1 Describe inventory and discuss the related internal controls 2

3. Inventory 3  Goods that a business owns and has available to sell to customers as part of normal operations  Current asset – usually listed after accounts receivable

4. Internal Controls 4  Separation of access to assets from access to record  Secure inventory items  Physical count at least once a year  Maintain perpetual records of inventory transactions  Document purchases and sales

5. OBJECTIVE 2 Compute inventory costs using first-in, first-out (FIFO), last-in, first-out (LIFO), and average cost methods and journalize inventory transactions 5

6. Inventory Costing Methods 6  Specific Unit Cost  FIFO  LIFO  Average Cost

7. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

8. Beg.2060 $1,200 Item Crate of toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost

9. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

10. DateDescriptionDebitCredit DateDescriptionDebitCredit FIFO Perpetual Inventory Accounting Inventory1,950 Accounts Payable1,950 30 units X $65 = $1,950

11. Beg20 $60$1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 Item Crate of toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost Because the purchase price of $65 is different than the cost of the previous unit on hand, the inventory balance of 30 units is accounted for separately. We have 50 units on hand

12. First-In, First-Out (FIFO) 12 Cost of Goods Sold Ending Inventory Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

13. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

14. Beg20 $60$1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 Item Crate of toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost Because the purchase price of $65 is different than the cost of the previous unit on hand, the inventory balance of 30 units is accounted for separately. CAREFUL IN READING!: We have 50 units on hand with a value of $3,150 ($1,200 + $1,950)

15. Beg.20$60 $1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 20$60$1,200 20$65$1,30010$65 $650 Item Crate of Toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost Point, we use up the oldest inventory first. The balance in inventory is always shown between the red lines.

16. DateDescriptionDebitCredit DateDescriptionDebitCredit FIFO Perpetual Inventory Accounting Accounts Receivable4,000 Sales4,000 Cost of Goods Sold2,500 Inventory2,500

17. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

18. DateDescriptionDebitCredit DateDescriptionDebitCredit FIFO Perpetual Inventory Accounting Inventory4,900 Accounts Payable4,900

19. Beg.20 $60$1,200 30$65 $1,950 20 $60$1,200 30 $65 $1,950 20$60 $1,200 20$65$1,30010$65 $650 70$70 $4,90010$65$650 70$70 $4,900 Item Crate of Toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost Point! Inventory balance is between red lines. We have 80 items in inventory at a cost of $5,550

20. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

21. First-In, First-Out (FIFO) 21 Cost of Goods Sold Ending Inventory Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

22. Beg.20 $60$1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 20$60 $1,200 20$65$1,30010$65 $650 70$70 $4,90010$65$650 70$70 $4,900 Item Crate of Toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

23. Beg.20 $60 $1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 20$60 $1,200 20$65$1,30010$65 $650 70$70 $4,90010$65 $650 70$70 $4,900 10$65$650 65$70$4,5505$70$350 Item Crate of Toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

24. DateDescriptionDebitCredit DateDescriptionDebitCredit FIFO Perpetual Inventory Accounting Accounts Receivable8,250 Sales8,250 Cost of Goods Sold5,200 Inventory5,200

25. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

26. DateDescriptionDebitCredit DateDescriptionDebitCredit FIFO Perpetual Inventory Accounting Inventory375 Accounts Payable375

27. Beg.20 $60 $1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 20$60 $1,200 20$65$1,30010$65 $650 70$70 $4,90010$65$650 70$70$4,900 10$65$650 65$70$4,5505$70$350 5$75$3755$70 $350 5$75$375 Item Crate of Toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

28. Inventory Shrinkage 28  Loss of inventory  Compare physical count with balance in books  Sources  Breakage  Theft  Obsolescence

29. Inventory Shrinkage 29  Took a physical count of the Crates of Toys and determined that 8 crates were in condition to sale. (i.e. 2 crates were damaged beyond repair).  Record the adjusting entry for inventory shrinkage.

30. First-In, First-Out (FIFO) 30 Shrinkage Cost of Goods Sold Ending Inventory Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

31. Beg.20 $60 $1,200 30$65$1,950 20 $60 $1,200 30 $65 $1,950 20$60 $1,200 20$65$1,30010$65 $650 70$70 $4,90010$65$650 70$70 $4,900 10$65$650 65$70$4,5505$70$350 5$75$3755$70 $350 5$75$375 Item Crate of Toys FIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

32. Inventory Shrinkage 5 at $75 = $375 3 at $70 = $210 (earliest purchase) $585 (725-585 = $140) Inventory value of 8 unit Remaining Point: We assume earliest inventory was damaged!

33. DateDescriptionDebitCredit DateDescriptionDebitCredit FIFO Inventory Shrinkage Cost of Goods Sold 140 Inventory140 Point! Shrinkage is considered “Cost of Good Sold”

34. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

35. Beg.2060 $1,200 Item Create of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost

36. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

37. DateDescriptionDebitCredit DateDescriptionDebitCredit LIFO Perpetual Inventory Accounting Inventory1,950 Accounts Payable1,950

38. Beg20 $60 $1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 Item Crate of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost Because the purchase price of $65 is different than the cost of the previous unit on hand, the inventory balance of 30 units is accounted for separately.

39. Last-In, First-Out (LIFO) 39 Valued based on the most recent costs of purchases Cost of Goods Sold Valued based on the earlier costs of purchases Ending Inventory

40. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

41. Beg20 $60 $1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 Item Crate of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost Because the purchase price of $65 is different than the cost of the previous unit on hand, the inventory balance of 30 units is accounted for separately. CAREFUL IN READING!: We have 50 units on hand with a value of $3,150 ($1,200 + $1,950) (Same as in fifo)

42. Beg20 $60 $1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 30$65$1,950 10$60$60010$60 $600 Item Crate of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

43. DateDescriptionDebitCredit DateDescriptionDebitCredit L IFO Perpetual Inventory Accounting Accounts Receivable4,000 Sales4,000 Cost of Goods Sold2,550 Inventory2,550

44. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

45. DateDescriptionDebitCredit DateDescriptionDebitCredit LIFO Perpetual Inventory Accounting Inventory4,900 Accounts Payable4,900

46. Beg20 $60 $1,200 30$65$1,950 20 $60 $1,200 30 $65 $1,950 30$65$1,950 10$60$60010$60 $600 70$70 $4,90010$60 $600 70$70 $4,900 Item Crate of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

47. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

48. Last-In, First-Out (LIFO) 48 Valued based on the most recent costs of purchases Cost of Goods Sold Valued based on the earlier costs of purchases Ending Inventory

49. Beg20 $60 $1,200 30$65 $1,950 20 $60 $1,200 30 $65 $1,950 30$65$1,950 10$60$60010$60 $600 70$70 $4,90010$60 $600 70$70 $4,900 Item Crate of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

50. Beg20 $60$1,200 30$65$1,950 20 $60 $1,200 30 $65 $1,950 30$65$1,950 10$60$60010$60 $600 70$70$4,90010$60 $600 70$70 $4,900 70$70$4,900 5$60$3005$60$300 Item Crate of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

51. DateDescriptionDebitCredit DateDescriptionDebitCredit L IFO Perpetual Inventory Accounting Accounts Receivable8,250 Sales8,250 Cost of Goods Sold5,200 Inventory5,200

52. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 KayBeeUnits Cost Price Inventory20 $60 1Purchase30$65 1Sale40 $100 2Purchase70 $70 2Sale75$110 3 Purchase 5 $75 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

53. DateDescriptionDebitCredit DateDescriptionDebitCredit LIFO Perpetual Inventory Accounting Inventory375 Accounts Payable375

54. Inventory Shrinkage 54  Loss of inventory  Compare physical count with balance in books  Sources  Breakage  Theft  Obsolescence

55. Inventory Shrinkage 55  Took a physical count of the Crates of Toys and determined that 8 crates were in condition to sale. (i.e. 2 crates were damaged beyond repair).  Record the adjusting entry for inventory shrinkage.

56. Beg20 $60$1,200 30$65$1,950 20 $60 $1,200 30 $65 $1,950 30$65$1,950 10$60$60010$60 $600 70$70$4,90010$60 $600 70$70$4,900 70$70$4,900 5$60$3005$60$300 5$75$375 5$60$300 5 $75 $375 Item Crate of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

57. Beg20 $60$1,200 30$65$1,950 20 $60 $1,200 30 $65 $1,950 30$65$1,950 10$60$60010$60 $600 70$70$4,90010$60 $600 70$70$4,900 70$70$4,900 5$60$3005$60$300 5$75$375 5$60$300 5 $75 $375 Item Crate of toys LIFO Perpetual Inventory Account PurchasesCost of Goods SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty. CostCost Qty.CostCost Qty.CostCost

58. Last-In, First-Out (LIFO) 58 Valued based on the most recent costs of purchases Shrinkage Cost of Goods Sold Valued based on the earlier costs of purchases Ending Inventory

59. Inventory Shrinkage 5 at $60 = $300 3 at $75 = $225 $525 ($675-$525 = $150) Inventory value of 8 unit Remaining Point: Shrinkage is from most recent purchases.

60. DateDescriptionDebitCredit DateDescriptionDebitCredit LIFO Inventory Shrinkage Cost of Goods Sold 150 Inventory150

61. OBJECTIVE 3 Compare the effects of the different costing methods on the financial statements

62. Comparison FIFOLIFO Sales $12,250 COGS Gross Profit $7,840 $4,410 $7,900 $4,350 62

63. Comparison FIFOLIFO Inventory$585 $525 63

64. Advantage of Each Method 64 Smoothes out price changes During inflation minimizes net income and income taxes. Better matching of current costs in cost of goods sold with revenues Matches actual flow of goods. Inventory valued closest to replacement value First-In, First- Out Weighted Average Last-In, First- Out

65. Use of Inventory Methods in Practice 65