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Inventory Valuation Methods Chapter III 1 MR. MOHAMMED BABIKER - SPRING 15/16.

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Presentation on theme: "Inventory Valuation Methods Chapter III 1 MR. MOHAMMED BABIKER - SPRING 15/16."— Presentation transcript:

1 inventory Valuation Methods Chapter III 1 MR. MOHAMMED BABIKER - SPRING 15/16

2 Inventory Valuation Methods 2 What is Inventory? Inventory is defined as assets that are intended for sale, are in process of being produced for sale or are to be used in producing goods. The following equation expresses how a company's inventory is determined: Beginning Inventory + Net Purchases - Cost of Goods Sold (COGS) = Ending Inventory In other words, you take what the company has in the beginning, add what it has purchased, subtract what's been sold, and the result is what remains.Cost of Goods Sold

3 MR. MOHAMMED BABIKER - SPRING 15/16 How Do We Value Inventory? 3 The accounting method that a company decides to use to determine its inventory costs and sales cost can directly impact the balance sheet, income statement and statement of cash flow. Three inventory-costing methods are widely used by both public and private companies: 1. First In First Out(FIFO)income statementstatement of cash flow 2. Last In First Out(LIFO) 3. Average Cost(AC)

4 MR. MOHAMMED BABIKER - SPRING 15/16 FIFO, LIFO & AC 4 FIFO: This method assumes that the first unit making its way into inventory is the first sold LIFO: This method assumes that the last unit making its way into inventory is sold first AC: This method is quite straightforward; it takes the weighted average of all units available for sale during the accounting period and then uses that average cost to determine the value of COGS and ending inventory weighted average All used to calculate cost of goods sold and cost of ending inventory under periodic inventory system and perpetual inventory system

5 MR. MOHAMMED BABIKER - SPRING 15/16 Example 5 Requirement: Calculate cost of goods sold and cost of ending inventory under periodic and perpetual inventory system by using; 1.FIFO 2.LIFO 3.AC DateExplanationUnitsUnits Cost Jan 1Beginning Inventory100$10 April 15Purchase200$11 Aug 24 Purchase 300$12 Sep 10Sales550? Nov 27 Purchase 400$13

6 MR. MOHAMMED BABIKER - SPRING 15/16 Solutions 6 UnitsUnits CostTotal Cost 100$10$1,000 200$11$2,200 250$12$3,000 Sales 550Cost of Goods Sold $6,200 Periodic Inventory System 1.FIFO Units X Unit Cost = Total Cost Cost of Goods Sold

7 MR. MOHAMMED BABIKER - SPRING 15/16 Solutions 7 UnitsUnits CostTotal Cost 50$12$600 400$13$5,200 Ending Inventory 450Cost of Ending Inventory $5,800 Periodic Inventory System 1.FIFO Units X Unit Cost = Total Cost Cost of Ending Inventory

8 MR. MOHAMMED BABIKER - SPRING 15/16 Solution 8 UnitsUnits CostTotal Cost 400$13$5,200 150$12$1,800 Sales 550Cost of Goods Sold $7,000 Periodic Inventory System 2. LIFO Units X Unit Cost = Total Cost Cost of Goods Sold

9 MR. MOHAMMED BABIKER - SPRING 15/16 Solution 9 UnitsUnits CostTotal Cost 150$12$1,800 200$11$2,200 100$10$1,000 Ending Inventory 450Cost of Ending Inventory $5,000 Periodic Inventory System 1.LIFO Units X Unit Cost = Total Cost Cost of Ending Inventory

10 MR. MOHAMMED BABIKER - SPRING 15/16 Solution 10  Average Cost = Total Cost / Total Units $12 = $12,000/1,000 units  Cost of goods sold = sales X Average Cost $6,600 = 550 unit X $12  Cost of Ending Inventory = Ending Inventory X Average Cost $4,500 = 450 unit X $12

11 MR. MOHAMMED BABIKER - SPRING 15/16 11 Solutions DatePurchasesSalesbalance 1/1100x$10= $1,000 15/4200x$11= $2,200100x$10= $3,200 200x$11= 24/8300x$12 =$3,600100x$10= 200x$11= $6,800 300$12= 10/9100x$10= 200x$11= $6,200 250x$12= 50x$12 = $600 27/11400x$13 =$5,20050x$12= $5,800 400x$13= Perpetual Inventory System 1.FIFO

12 MR. MOHAMMED BABIKER - SPRING 15/16 12 Solutions DatePurchasesSalesbalance 1/1100x$10= $1,000 15/4200x$11= $2,200100x$10= $3,200 200x$11= 24/8300x$12 =$3,600100x$10= 200x$11= $6,800 300$12= 10/9300x$12= 200x$11= $6,300 50x$10= 50x$10 = $000 27/11400x$13 =$5,20050x$10= $5,700 400x$13= Perpetual Inventory System 2. LIFO

13 MR. MOHAMMED BABIKER - SPRING 15/16 13 Solutions DatePurchasesSalesbalance 1/1100x$10= $1,000 15/4200x$11= $2,200300x$10.667=$3,200 24/8300x$12 =$3,600600x$11.333=$6,800 10/9550x$11.333=$6,23350x$11.333 = $567 27/11400x$13 =$5,200450x$12.816=$5,767 Perpetual Inventory System 3.. Average Cost

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