accounting for inventories. inventory costs all expenditures incurred
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Accounting for Accounting for InventoriesInventories
Inventory CostsInventory Costs
All expenditures incurredAll expenditures incurred
Inventory CostsInventory Costs
All expenditures incurred to All expenditures incurred to bring the item to itsbring the item to its
Inventory CostsInventory Costs
All expenditures incurred to All expenditures incurred to bring the item to its bring the item to its
existing condition and existing condition and locationlocation
Costs includeCosts include
Invoice costInvoice cost ShippingShipping Cash discountsCash discounts Purchases allowancesPurchases allowances
Inventory Systems - PeriodicInventory Systems - Periodic
Compute inventory balance at end Compute inventory balance at end of each accounting periodof each accounting period
Compute cost of goods sold at Compute cost of goods sold at accounting period endaccounting period end
Inventory Systems - PerpetualInventory Systems - Perpetual
Compute cost of goods sold at Compute cost of goods sold at each saleeach sale
Compute new inventory balance at Compute new inventory balance at each saleeach sale
Cost Flow AssumptionsCost Flow Assumptions
Only with specific identification do Only with specific identification do we attempt to match the actual we attempt to match the actual movement of product through the movement of product through the business with the movement of business with the movement of costs through the accounting costs through the accounting systemsystem
Cost Flow AssumptionsCost Flow Assumptions
With other inventory cost methods, we With other inventory cost methods, we make an assumption of the movement make an assumption of the movement of costs through the accounting of costs through the accounting system.system.
This "flow" of costs through the This "flow" of costs through the system need not match the movement system need not match the movement of product through the business.of product through the business.
Cost Flow AssumptionsCost Flow Assumptions
First-In, First-OutFirst-In, First-Out
Cost Flow AssumptionsCost Flow Assumptions
First-In, First-OutFirst-In, First-Out– Earliest goods assumed to be first Earliest goods assumed to be first
units soldunits sold
Cost Flow AssumptionsCost Flow Assumptions
First-In, First-OutFirst-In, First-Out– Earliest goods assumed to be first Earliest goods assumed to be first
units soldunits sold
– Inventory made up of latest goods Inventory made up of latest goods acquiredacquired
Cost Flow AssumptionsCost Flow Assumptions
Last-In, First-OutLast-In, First-Out
Cost Flow AssumptionsCost Flow Assumptions
Last-In, First-OutLast-In, First-Out– Newest goods assumed to be first Newest goods assumed to be first
units soldunits sold
Cost Flow AssumptionsCost Flow Assumptions
Last-In, First-OutLast-In, First-Out– Newest goods assumed to be first Newest goods assumed to be first
units soldunits sold
– Inventory made up of earliest goods Inventory made up of earliest goods acquiredacquired
Cost Flow AssumptionsCost Flow Assumptions
Average costAverage cost
Cost Flow AssumptionsCost Flow Assumptions
Average costAverage cost– Cost of items sold is the weighted Cost of items sold is the weighted
average of costs incurredaverage of costs incurred
Cost Flow AssumptionsCost Flow Assumptions
Average costAverage cost– Cost of items sold is the weighted Cost of items sold is the weighted
average of costs incurredaverage of costs incurred
– Inventory is the weighted average of Inventory is the weighted average of costs incurredcosts incurred
Inventory Example DataInventory Example Data
Jan. 1Jan. 1 Beg Inven.Beg Inven. 200200 $4.00$4.00 $ 800.00$ 800.00
Apr. 10Apr. 10 PurchasePurchase 700700 5.005.00 3,500.003,500.00
Oct. 23Oct. 23 PurchasePurchase 400400 6.006.00 2,400.002,400.00
AvailableAvailable 1,3001,300 $6,700.00$6,700.00
Merchandise SalesMerchandise Sales
May 5May 5 500500
Dec. 19Dec. 19 300300
TotalTotal 800800
First-In First-OutFirst-In First-Out
Newest layerNewest layer $6.00$6.00
First-In First-OutFirst-In First-Out
Newest layerNewest layer 400 units @ $6.00400 units @ $6.00$2,400$2,400
First-In First-OutFirst-In First-Out
Newest layerNewest layer 400 units @ $6.00400 units @ $6.00$2,400$2,400
Next newest layerNext newest layer $5.00$5.00
First-In First-OutFirst-In First-Out
Newest layerNewest layer 400 units @ $6.00400 units @ $6.00$2,400$2,400
Next newest layerNext newest layer 100 units @ $5.00100 units @ $5.00500500
First-In First-OutFirst-In First-Out
Newest layerNewest layer 400 units @ $6.00400 units @ $6.00$2,400$2,400
Next newest layerNext newest layer 100 units @ $5.00100 units @ $5.00500500
Total costTotal cost$2,900$2,900
First-In First-OutFirst-In First-Out
Cost of Goods SoldCost of Goods SoldBeginning Inventory $ 800
First-In First-OutFirst-In First-Out
Cost of Goods SoldCost of Goods SoldBeginning InventoryBeginning Inventory $ 800$ 800
PurchasesPurchases 5,9005,900
Cost of goods available Cost of goods available
for salefor sale $6,700$6,700
First-In First-OutFirst-In First-Out
Cost of Goods SoldCost of Goods SoldBeginning InventoryBeginning Inventory $ 800$ 800
PurchasesPurchases 5,9005,900
Cost of goods available Cost of goods available
for salefor sale $6,700$6,700
Deduct: Ending InventoryDeduct: Ending Inventory 2,9002,900
Cost of goods soldCost of goods sold $3,800$3,800
First-In First-OutFirst-In First-Out
Proof of cost of goods sold:Proof of cost of goods sold:
Oldest cost layerOldest cost layer
200 units @ $4.00200 units @ $4.00 $ 800$ 800
First-In First-OutFirst-In First-Out
Proof of cost of goods sold:Proof of cost of goods sold:
Oldest cost layerOldest cost layer
200 units @ $4.00200 units @ $4.00 $ 800$ 800
Next oldest layerNext oldest layer
600 units @ $5.00600 units @ $5.00 3,0003,000
TotalTotal $3,800$3,800
Last-In First-OutLast-In First-Out
Oldest layerOldest layer
$4.00$4.00
Last-In First-OutLast-In First-Out
Oldest layerOldest layer
200 units @ $4.00200 units @ $4.00 $ 800$ 800
Last-In First-OutLast-In First-Out
Oldest layerOldest layer
200 units @ $4.00200 units @ $4.00 $ 800$ 800
Next oldest layerNext oldest layer
$5.00$5.00
Last-In First-OutLast-In First-Out
Oldest layerOldest layer
200 units @ $4.00200 units @ $4.00 $ 800$ 800
Next oldest layerNext oldest layer
300 units @ $5.00300 units @ $5.00 1,5001,500
Last-In First-OutLast-In First-Out
Oldest layerOldest layer
200 units @ $4.00200 units @ $4.00 $ 800$ 800
Next oldest layerNext oldest layer
300 units @ $5.00300 units @ $5.00 1,5001,500
Total costTotal cost $2,300$2,300
Last-In First-OutLast-In First-Out
LIFOLIFOPeriodic InventoryPeriodic Inventory
Cost of goods sold:Cost of goods sold:
Beginning inventoryBeginning inventory
$ 800$ 800
Last-In First-OutLast-In First-Out
LIFOLIFOPeriodic InventoryPeriodic Inventory
Cost of goods sold:Cost of goods sold:
Beginning inventoryBeginning inventory $ 800$ 800
PurchasePurchase 5,9005,900
Cost of goods availableCost of goods available $6,700$6,700
Last-In First-OutLast-In First-Out
LIFOLIFOPeriodic InventoryPeriodic Inventory
Cost of goods sold:Cost of goods sold:
Beginning inventoryBeginning inventory $ 800$ 800
PurchasePurchase 5,9005,900
Cost of goods availableCost of goods available $6,700$6,700
Deduct: Ending inventoryDeduct: Ending inventory 2,3002,300
Cost of goods soldCost of goods sold $4,400$4,400
Last-In First-OutLast-In First-Out
LIFOLIFOPeriodic InventoryPeriodic Inventory
Proof of Cost of Goods SoldProof of Cost of Goods Sold
Last-In First-OutLast-In First-Out
LIFOLIFOPeriodic InventoryPeriodic Inventory
Proof of Cost of Goods SoldProof of Cost of Goods Sold
Newest cost layerNewest cost layer
400 units @ $6.00400 units @ $6.00
$2,400$2,400
Last-In First-OutLast-In First-Out
LIFOLIFOPeriodic InventoryPeriodic Inventory
Proof of Cost of Goods SoldProof of Cost of Goods Sold
Newest cost layerNewest cost layer
400 units @ $6.00400 units @ $6.00 $2,400$2,400
Next newest layerNext newest layer
400 units @ $5.00400 units @ $5.00 2,0002,000
Total costTotal cost $4,400$4,400
Weighted AverageWeighted Average
Periodic InventoryPeriodic Inventory
Weighted average cost equalsWeighted average cost equals
Cost of goods available for saleCost of goods available for sale $6,700$6,700
divided bydivided by
Total units availableTotal units available 1,3001,300
equalsequals
Weighted average cost per unitWeighted average cost per unit $5.1538$5.1538
Weighted AverageWeighted Average
Periodic InventoryPeriodic Inventory
December 31 InventoryDecember 31 Inventory
500 units x $5.1538 = $2,577500 units x $5.1538 = $2,577
Weighted AverageWeighted Average
Periodic InventoryPeriodic Inventory
Cost of goods sold:Cost of goods sold:
Weighted AverageWeighted Average
Periodic InventoryPeriodic Inventory
Cost of goods sold:Cost of goods sold:Beginning inventoryBeginning inventory $ 800$ 800
PurchasesPurchases 5,9005,900
Cost of goods availableCost of goods available $6,700$6,700
Weighted AverageWeighted Average
Periodic InventoryPeriodic Inventory
Cost of goods sold:Cost of goods sold:Beginning inventoryBeginning inventory $ 800$ 800
PurchasesPurchases 5,9005,900
Cost of goods availableCost of goods available $6,700$6,700
Deduct: Ending inventoryDeduct: Ending inventory 2,5772,577
Cost of goods soldCost of goods sold $4,123$4,123
Weighted AverageWeighted Average
Periodic InventoryPeriodic Inventory
Proof of cost of goods soldProof of cost of goods sold
800 units x $5.1538 = $4,123800 units x $5.1538 = $4,123
Income Statement Comparison Income Statement Comparison
Periodic InventoryPeriodic InventoryFIFOFIFO LIFOLIFO WAWA
SalesSales $8,000$8,000 $8,000$8,000 $8,000$8,000
CGSCGS 3,8003,800 4,4004,400 4,1234,123
GMGM $4,200$4,200 $3,600$3,600 $3,877$3,877
Op. expenseOp. expense 1,0001,000 1,0001,000 1,0001,000
Net incomeNet income $3,200$3,200 $2,600$2,600 $2,877$2,877
Last-In First-OutLast-In First-Out
LIFO - Perpetual InventoryLIFO - Perpetual Inventory200 x $4 $800200 x $4 $800
Last-In First-OutLast-In First-Out
LIFO - Perpetual InventoryLIFO - Perpetual Inventory4/44/4 700 x $5700 x $5 $3500$3500 200 x $4 $800200 x $4 $800
700 x $5 3500700 x $5 3500$4300$4300
Last-In First-OutLast-In First-Out
LIFO - Perpetual InventoryLIFO - Perpetual Inventory4/44/4 700 x $5700 x $5 $3500$3500 200 x $4 $800200 x $4 $800
700 x 700 x $5$5 3500 3500$4300$4300
5/55/5 500 x 500 x $5$5 $2500 $2500 200 x $4 $800200 x $4 $800
200200 x $5 1000 x $5 1000$1800$1800
Last-In First-OutLast-In First-Out
LIFO - Perpetual InventoryLIFO - Perpetual Inventory4/44/4 700 x $5700 x $5 $3500$3500 200 x $4 $800200 x $4 $800
700 x $5 3500700 x $5 3500$4300$4300
5/55/5 500 x $5 $2500500 x $5 $2500 200 x $4 $800200 x $4 $800
200 x $5 1000200 x $5 1000$1800$1800
10/2310/23 400 x $6400 x $6 $2400$2400 200 x $4 $800200 x $4 $800
200 x $5 1000200 x $5 1000
400 x $6 2400400 x $6 2400$4200$4200
Last-In First-OutLast-In First-Out
LIFO - Perpetual InventoryLIFO - Perpetual Inventory4/44/4 700 x $5700 x $5 $3500$3500 200 x $4 $800200 x $4 $800
700 x $5 3500700 x $5 3500 $4300$4300
5/55/5 500 x $5 $2500500 x $5 $2500 200 x $4 $800200 x $4 $800
200 x $5 1000200 x $5 1000 $1800$1800
10/2310/23 400 x $6400 x $6 $2400$2400 200 x $4 $800200 x $4 $800
200 x $5 1000200 x $5 1000
400 x 400 x $6$6 2400 2400 $4200$4200
12/1912/19 300x $6 $1800300x $6 $1800 200 x $4 $800200 x $4 $800
200 x $5 1000200 x $5 1000
100100 x $6 600 x $6 600 $2400$2400
Last-In First-OutLast-In First-Out
LIFO - Perpetual InventoryLIFO - Perpetual Inventory4/44/4 700 x $5700 x $5 $3500$3500 200 x $4 $800200 x $4 $800
700 x $5 3500700 x $5 3500 $4300$4300
5/55/5 500 x $5 $2500500 x $5 $2500 200 x $4 $800200 x $4 $800
200 x $5 1000200 x $5 1000 $1800$1800
10/2310/23 400 x $6400 x $6 $2400$2400 200 x $4 $800200 x $4 $800
200 x $5 1000200 x $5 1000
400 x $6 2400400 x $6 2400 $4200$4200
12/1912/19 300x $6 $1800300x $6 $1800 200 x $4 $800200 x $4 $800
200 x $5 1000200 x $5 1000
100 x $6 600100 x $6 600 $2400$2400
Cost of goods soldCost of goods sold $4300$4300
Lower of Cost or MarketLower of Cost or Market
Class AClass A CostCost MktMkt LCMLCM
Item 1Item 1 $100$100 $120$120
Item 2Item 2 8080 7070
Class BClass B
Item 6Item 6 $50$50 $65$65
Item 7Item 7 4040 2020
Lower of Cost or Market - By ItemLower of Cost or Market - By Item
Class AClass A CostCost MktMktLCMLCM
Item 1Item 1 $100$100 $120$120$100$100
Lower of Cost or Market - By ItemLower of Cost or Market - By Item
Class AClass A CostCost MktMktLCMLCM
Item 1Item 1 $100$100 $120$120$100$100
Item 2Item 2 8080 70707070
Lower of Cost or Market - By ItemLower of Cost or Market - By Item
Class AClass A CostCost MktMkt LCMLCM
Item 1Item 1 $100$100 $120$120 $100$100
Item 2Item 2 8080 7070 7070
Class BClass B
Item 6Item 6 $50$50 $65$65 5050
Lower of Cost or Market - By ItemLower of Cost or Market - By Item
Class AClass A CostCost MktMkt LCMLCM
Item 1Item 1 $100$100 $120$120 $100$100
Item 2Item 2 8080 7070 7070
Class BClass B
Item 6Item 6 $50$50 $65$65 5050
Item 7Item 7 4040 2020 2020
TotalTotal $240$240
Lower of Cost or Market - By ClassLower of Cost or Market - By Class
Class AClass A CostCost MktMktLCMLCM
Item 1Item 1 $100$100 $120$120
Item 2Item 2 8080 7070
TotalTotal $180$180 $190$190$180$180
Lower of Cost or Market - By ClassLower of Cost or Market - By Class
Class AClass A CostCost MktMkt LCMLCM
Item 1Item 1 $100$100 $120$120
Item 2Item 2 8080 7070
TotalTotal $180$180 $190$190 $180$180
Class BClass B
Item 6Item 6 $50$50 $65$65
Item 7Item 7 4040 2020
TotalTotal $90$90 $85$85 8585
TotalTotal $265$265
Lower of Cost or Market- By TotalLower of Cost or Market- By Total
Class AClass A CostCost MktMkt LCMLCM
Item 1Item 1 $100$100 $120$120
Item 2Item 2 8080 7070
Class BClass B
Item 6Item 6 5050 4040
Item 7Item 7 4040 2020
TotalTotal $270$270 $275$275 $270$270
Gross Margin MethodGross Margin MethodLogic of Income StatementLogic of Income Statement
Net SalesNet Sales $70$70
Cost of goods sold:Cost of goods sold:
Begin invBegin inv $ 5$ 5
Net purchasesNet purchases 50 50
Cost goods availCost goods avail $55$55
End invEnd inv 10 10 45 45
Gross marginGross margin $25$25
Gross Margin MethodGross Margin MethodInventory EstimationInventory Estimation
Cost of goods available:Cost of goods available:
Begin invBegin inv $ 20,000$ 20,000
Net purchasesNet purchases 135,000135,000
Cost of goods availableCost of goods available $155,000$155,000
Deduct cost of goods sold:Deduct cost of goods sold:
Gross Margin MethodGross Margin MethodInventory EstimationInventory Estimation
Cost of goods availableCost of goods available $155,000$155,000
Net salesNet sales $150,000$150,000
Multiply by (1 - Gross margin rate)Multiply by (1 - Gross margin rate)
(1 - 0.30) (1 - 0.30) x 0.70x 0.70
Est cost of goods soldEst cost of goods sold 105,000105,000
Est ending inventoryEst ending inventory $ 50,000$ 50,000
Gross Margin Method Gross Margin Method Proof of AnswerProof of Answer
Net salesNet sales $150,000$150,000
Cost of goods soldCost of goods sold
Begin invBegin inv $ 20,000$ 20,000
Net purchasesNet purchases 135,000135,000
CGASCGAS $155,000$155,000
End invEnd inv 50,00050,000
Cost of goods soldCost of goods sold 105,000105,000
Gross marginGross margin $ 45,000$ 45,000
Inventory ErrorsInventory Errors
An error in the computation of An error in the computation of inventory at the end of one periodinventory at the end of one period
Inventory ErrorsInventory Errors
An error in the computation of An error in the computation of inventory at the end of one period inventory at the end of one period
causes an error in assets and causes an error in assets and owner’s equity at the end of that owner’s equity at the end of that
periodperiod
Inventory ErrorsInventory Errors
An error in the computation of An error in the computation of inventory at the end of one period inventory at the end of one period
causes an error in assets and causes an error in assets and owner’s equity at the end of that owner’s equity at the end of that
periodperiod
and an error in income for two and an error in income for two periodsperiods..
Effect of Inventory ErrorsEffect of Inventory Errors
Overstatement of inventory at end Overstatement of inventory at end of period 1of period 1– Causes an overstatement of net Causes an overstatement of net
income for period 1income for period 1
Effect of Inventory ErrorsEffect of Inventory Errors
Overstatement of inventory at end Overstatement of inventory at end of period 1of period 1– Causes an overstatement of net Causes an overstatement of net
income for period 1income for period 1
– and an overstatement of assets and and an overstatement of assets and owner's equity at period 1 endowner's equity at period 1 end
Effect of Inventory ErrorsEffect of Inventory Errors
Overstatement of inventory at end Overstatement of inventory at end of period 1of period 1– Causes an understatement of net Causes an understatement of net
income for period 2income for period 2
Effect of Inventory ErrorsEffect of Inventory Errors
Overstatement of inventory at end Overstatement of inventory at end of period 1of period 1– Causes an understatement of net Causes an understatement of net
income for period 2income for period 2
– BUT assets and owner's equity at BUT assets and owner's equity at period 2 end will be correctperiod 2 end will be correct
Effect of Inventory ErrorsEffect of Inventory Errors
Understatement of inventory at end Understatement of inventory at end of period 1of period 1– Causes an understatement of net Causes an understatement of net
income for period 1income for period 1
Effect of Inventory ErrorsEffect of Inventory Errors
Understatement of inventory at end Understatement of inventory at end of period 1of period 1– Causes an understatement of net Causes an understatement of net
income for period 1income for period 1
– and an understatement of assets and and an understatement of assets and owner's equity at period 1 endowner's equity at period 1 end
Effect of Inventory ErrorsEffect of Inventory Errors
Understatement of inventory at end Understatement of inventory at end of period 1of period 1– Causes an overstatement of net Causes an overstatement of net
income for period 2income for period 2
Effect of Inventory ErrorsEffect of Inventory Errors
Understatement of inventory at end Understatement of inventory at end of period 1of period 1– Causes an overstatement of net Causes an overstatement of net
income for period 2income for period 2
– BUT assets and owner's equity at BUT assets and owner's equity at period 2 end will be correctperiod 2 end will be correct