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6
Inventories
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6-1
Two primary objectives of control
over inventory are:
1) Safeguarding the inventory, and
2) Properly reporting it in the
financial statements.
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6-1
Controls over inventory
include developing and using
security measures to prevent
inventory damage or customer
or employee theft.
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6-1
To ensure the accuracy of the
amount of inventory reported in
the financial statements, a
merchandising business should
take a physical inventory.
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Inventory Costing Methods
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6-2
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10
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Inventory Costing Methods
400
6-2
371
299
300
Number of firms 200
(> $1B Sales)
130
100
0
Fifo
Lifo Average cost
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6-2
Example Exercise 6-1
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The three identical units of Item QBM are purchased during
February, as shown below.
Item QBM
Units
Feb. 8
Purchase
1
15 Purchase
1
26 Purchase
1
Total
3
Average cost per unit
Cost
$ 45
48
51
$144
$48 ($144/3 units)
Assume that one unit is sold on February 27 for $70.
Determine the gross profit for February and ending inventory on
February 28 using (a) first-in, first-out (FIFO); (b) last-in, first-out
(LIFO); and (c) average cost methods.
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6-2
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Follow My Example 6-1
Gross Profit
Ending Inventory
(a) First-in, first-out (FIFO):
$25 ($70 – $45)
$99 ($48 – $51)
(b) Last-in, first-out (LIFO):
$19 ($70 – $51)
$93 ($45 + $48)
(c) Average cost:
$22 ($70 – $48)
$96 ($48 x 2)
$144/3 units
For Practice: PE 6-1A, PE 6-1B
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FIFO Perpetual
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6-3
Item 127B
Jan.
1
4
10
22
28
30
Inventory
Sale
Purchase
Sale
Sale
Purchase
Units
Cost
100
70
80
40
20
100
$20
21
22
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6-3
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Example Exercise 6-2
Beginning inventory, purchases, and sales for Item ER27
are as follows:
Nov. 1 Inventory 40 units at $5
5 Sale
32 units
11 Purchase 60 units at $7
21 Sale
45 units
Assuming a perpetual inventory system and the first-in,
first-out (FIFO) method, determine (a) the cost of the
merchandise sold for the November 21 sale and (b) the
inventory on November 30.
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6-3
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Follow My Example 6-2
a) Cost of merchandise sold:
8 units @ $5
$40
37 units @ $7
259
45 units
$299
b) Inventory, November 30:
$161 = (23 units x $7)
For Practice: PE 6-2A, PE 6-2B
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LIFO Perpetual
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6-3
On January 30, the firm purchased one hundred
additional units of Item 127B at $22 each.
Item 127B
Jan.
1
4
10
22
28
30
Inventory
Sale
Purchase
Sale
Sale
Purchase
Units
Cost
100
70
80
40
20
100
$20
21
22
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6-3
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Example Exercise 6-3
Beginning inventory, purchases, and sales for Item ER27
are as follows:
Nov. 1 Inventory 40 units at $5
5 Sale
32 units
11 Purchase 60 units at $7
21 Sale
45 units
Assuming a perpetual inventory system and the last-in,
first-out (LIFO) method, determine (a) the cost of the
merchandise sold for the November 21 sale and (b) the
inventory on November 30.
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6-3
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Follow My Example 6-3
a) Cost of merchandise sold:
$315 = (45 units x $7)
b) Inventory, November 30:
8 units @ $5
15 units @ $7
23
$ 40
105
$145
For Practice: PE 6-3A, PE 6-3B
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Average Cost
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6-4
The weighted average unit cost
method is based on the average
cost of identical units. The total
cost of merchandise available
for sale is divided by the related
number of units of that item.
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Average Cost
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Jan. 1
100 units @ $20
= $2,000
Jan. 10
80 units @ $21
=
1,680
Jan. 30
100 units @ $22
=
2,200
280
6-4
$5,880
Average unit cost: $5,880 ÷ 280 = $21
Cost of merchandise sold: 130 units at $21 = $2,730
Ending merchandise inventory: 150 units at $21= $3,150
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6-4
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Example Exercise 6-4
The units of an item available for sale during the year were as
follows:
Jan. 1 Inventory
Mar. 20 Purchase
Oct. 30 Purchase
Available for sale
6 units @ $50
14 units @ $55
20 units @ $62
40 units
$ 300
770
1,240
$2,310
There are 16 units of the item in the physical inventory at
December 31. The periodic inventory system is used.
Determine the inventory cost by (a) the first-in, first-out
(FIFO) method, (b) the last-in, first-out (LIFO) method, and
(c) the average cost method.
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6-4
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Follow My Example 6-4
a) First-in, first-out (FIFO) method: $992 (16 units x
$62)
b) Last-in, first-out (LIFO) method: $850 (6 units x $50)
+ (10 units x $55)
c) Average method: $924 (16 units x $57.75) where
average cost = $57.75 ($2,310 ÷ 40 units)
For Practice: PE 6-4A, PE 6-4B
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Lower-of-Cost-or-Market Method
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6-6
If the cost of replacing an
item in inventory is lower
than the original purchase
cost, the lower-of-cost-ormarket (LCM) method is
used to value the inventory.
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6-6
Market, as used in lower
of cost or market, is the
cost to replace the
merchandise on the
inventory date.
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