Reporting & Analyzing Inventory
Chapter 5
Determining Inventory Items
 Merchandise inventory includes all goods
that a company owns and holds for sale
 Regardless of where the goods are located
when inventory is counted
Goods in Transit
 If ownership has
passed to the
purchaser, the goods
are included in the
purchaser’s inventory
 FOB shipping point
Goods on Consignment
 Are goods shipped by
the owner, to another
party.
 No change in
ownership of the goods
Goods Damaged or Obsolete
 Are not counted in
inventory if they
cannot be sold.
 If they can be sold at a
reduced price, then
included in inventory
at net realizable value
 NRV = Sales price –
Cost of making sale
Determining Inventory Costs
 Merchandise inventory
includes cost of
expenditures necessary,
directly or indirectly, to
bring at item to a
salable condition and
location.
 Freight, storage,
insurance, etc.
Internal Control
 Inventory account under a perpetual system
is updated for each purchase and sale, but the
events can cause the account balance to be
different from the actual inventory available.



Physical inventory
Prenumbered inventory tickets
Counters assigned
Inventory Costing under a
Perpetual System
 Four methods




Specific Identification
First in, First out (FIFO)
Last in, First out (LIFO)
Weighted Average
Illustration
Date
Activity
Aug 1 Beg Inv 10units @ $91 = $910
Units
Inv.
10 units
Aug 3 Purch
25 units
8/14
8/ 17
8/28
Sales
Purch
Purch
8/31
Sales
Units at Cost
Units at
Retail
15 @ $106 = $1,590
20 units
5 units
25
35
23
43 sold
12 units
12 inv.
20 @ $115 = $2300
10 @ $119 = $1190
55units for $5990
Specific Identification
 Each item in inventory
can be identified with
a specific purchase and
invoice.
 Suppose for prior
example company
identified that Aug 14
is 8 from $91 purchase
and 12 for $106.
Suppose that 8/31 was
2 @ $91
3@$106
15@ $115
3 @ $119
Specific Identification
Date
1-Aug
3-Aug
14-Aug
Activity Units @ Cost
COGS
Beg
10 @ $91
Purch
15 @$106
Sale
8 @$91
12 @ 106
17-Aug Purch
20 @ $115
28-Aug Purch
10 @ 119
31-Aug Sale
2 @ 91
3 @ 106
15 @ 115
3 @ 119
Inv.
10
25
2 @ 91
3 @ 106
2 @ 91
3 @ 106
20 @ 115
3 @ 106
2 @ 91
3 @ 106
20 @ 115
10 @ 119
5 @ 115
7@ 119
Specific Identification
 Cost of goods sold

8 @ $91
= $ 728
 12@ 106
= $ 1,272


2 @ $91
= $ 182

3 @ $106
=
318
 15 @ 115
1,725

3 @ 119
357

 Total
$2,000
2,582
4,582
Specific Identification
 Ending Inventory



5 @ $115 =
7 @ $119 =
TOTAL
$575
833
$1,408
First in, First out
 Assigning costs to both inventory and cost of
goods sold that assumes that inventory items
are sold in the order acquired.
First in, First out
Date
1-Aug
3-Aug
14-Aug
Activity Units @ Cost COGS
Inv.
Beg
10 @ $91
10
Purch 15 @$106
25
Sale
10 @ 91
0
10 @ 106 5 @ $106
17-Aug Purch 20 @ $115
5 @ $106
20 @ $115
28-Aug Purch 10 @ 119
5 @ $106
20 @ $115
10 @ 119
31-Aug Sale
5 @ $106
18 @ $115
2 @ $115
10 @ $119
FIFO
 Cost of Goods sold

10 @ $91 = $ 910

10 @ $106 = 1060



Total Aug 14
5@ $106 =
18@ $115=


Total Aug 31
TOTAL
$1970
$ 530
2070
2600
4570
Last in, First out
 Method of assigning costs assumes that the
most recent purchases are sold first
LIFO
Activity Units @ Cost
Beg
10 @ $91
Purch
15 @$106
Sale
15@$106
5@$91
Purch
20 @ $115
Purch
10 @ 119
Sale
COGS
10 @ $119
13 @ $115
Inv.
10@$91
10@$91
15@$106
5@$91
5 @ $91
20 @ $115
5 @ $91
20 @ $115
10 @ 119
5 @ $91
7 @ $115
LIFO
 Cost of goods sold
8/14
15@$106
5@$455
8/31
$1,590
10@$119
13@$115
Total cost of goods sold
455
2,045
$1,190
1,495
2,685
4,730
LIFO
 Ending Inventory
 5 @ $91
= 455
 7 @ $115
= 805

$1,260
Weighted Average
 Method of assigning cost requires that we
compute the weighted average cost per unit
of inventory at the time of each sale.
 W.A.C. = Cost of goods available for sale

Units available for sale
Weighted Average
Date
Activity Units @ Cost
1-Aug Beg
Purch
COGS
Inv.
10 @ $91
10@$91 = $ 910
15 @$106
10@$91 = 910
3-Aug
Avg
$91
15@$106 = 106 $100
14-Aug Sale
20@$100
5@$100 = $500
17-Aug Purch
20 @ $115
5 @ $100 = $500
20@$115 = $2300 $112
28-Aug Purch
10 @ 119
5 @ $100=$500
20@$115 = $2300
10@$119= $1190 $114
31-Aug Sale
23@$114
12@$114 = $1368
Financial Statement Effects of
Costing Methods
Sales
Cost of goods sold
Gross profit
Expenses
Income before taxes
Income tax expense 30%
Net income
Merchandise Inventory
Specific
$6,050
$4,582
$1,468
$450
$1,018
$305
$713
FIFO
$6,050
$4,570
$1,480
$450
$1,030
$309
$721
LIFO
$6,050
$4,730
$1,320
$450
$870
$261
$609
W/Avg
$6,050
$4,622
$1,428
$450
$978
$293
$695
$1,408
$1,420
$1,260
$1,368
Effect
 FIFO assigns the lowest amount to cost of
goods sold – highest gross profit
 LIFO assigns the highest amount to cost of
goods sold – yielding lowest gross profit
 Weighted average – yields the results
between the two above
 Specific id – depends on units sold
Lower of Cost or Market
 Accounting
principles require
that inventory be
reported at the
market value
(cost) of replacing
inventory when
market value is
lower than cost.
Lower of cost or market
 Select the lower cost or market price as the
value of ending inventory
Items Units
Tulips
100
Roses
75
Lily
80
Daisy
125
Sunflower
26
Per Unit
Cost Market LCM
End Inv
$15
$16
$15 $15x100=$1500
$25
$23
$23 $23x75 = $1725
$16
$16
$16 $16X80 =$1280
$10
$11
$10 $10X125=$1250
$5
$4
$4 $4X26=
104
$
5,859.00
Effects of Inventory Errors
Inventory Error Cost of Goods Sold Net Income
Understate End Inv
Overstated
Understated
Understate Beg Inv
Understated
Overstated
Overstate End Inv
Understated
Overstated
Overstate Beg Inv
Overstated Understated
Effects of Inventory Errors
Sales
Cost of goods sold
Beg inv
Purchases
Goods available
Ending Inv
Cost of goods sold
Gross profit
2004
$100,000
2005
$100,000
2006
$100,000
$20,000
$60,000
$80,000
$16,000
$64,000
$36,000
$16,000
$60,000
$76,000
$20,000
$56,000
$34,000
$20,000
$60,000
$80,000
$20,000
$60,000
$40,000
Homework
 Perpetual

Ex 5-1, 5-3
 LCM

Ex 5-5
 Retail

Ex 5-14