1
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7
Inventories
1
2
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After studying this chapter, you should
be able to:
1. Describe the importance of control
over inventory.
2. Describe three inventory cost flow
assumptions and how they impact the
income statement and balance sheet.
2
3
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After studying this chapter, you should
be able to:
3. Determine the cost of inventory under the
perpetual system, using the FIFO, LIFO, and
average cost methods.
4. Determine the cost of inventory under the
periodic system, using the FIFO, LIFO, and
average cost methods.
5. Compare and contrast the use of the three
inventory costing methods.
3
4
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After studying this chapter, you should
be able to:
6. Describe and illustrate the reporting of
merchandise inventory in the financial
statement.
7. Estimate the cost of inventory using the
retail method and the gross profit
method.
4
5
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7-1
Objective 1
Describe the importance of
control over inventory.
5
6
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7-1
Two primary objectives of control
over inventory are:
1) Safeguarding the inventory, and
2) Properly reporting it in the
financial statements.
6
7
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7-1
Controls over inventory
include developing and using
security measures to prevent
inventory damage or customer
or employee theft.
7
8
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7-1
To ensure the accuracy of the
amount of inventory reported in
the financial statements, a
merchandising business should
take a physical inventory.
8
9
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7-2
Objective 2
Describe three inventory cost
flow assumptions and how they
impact the income statement
and balance sheet.
9
10
Inventory Costing Methods
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7-2
10
10
11
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7-2
(Continued)
11
11
12
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7-2
(Continued)
12
12
13
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(Concluded)
7-2
13
13
14
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Inventory Costing Methods In Indonesia
7-2
250
200
150
100
50
0
FIFO
Average
Specific
Indentification
14
15
Inventory Costing Methods In USA
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400
7-2
371
299
300
Number of firms 200
(> $1B Sales)
130
100
0
FIFO
LIFO Average cost
15
14
16
7-2
Example Exercise 7-1
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The three identical units of Item QBM are purchased during
February, as shown below.
Item QBM
Units
Cost
Feb. 8
Purchase
1 Rp45,000
15 Purchase
1
48,000
26 Purchase
1
51,000
Total
3 Rp144,000
Average cost per unit
Rp48,000 (Rp144,000 ÷ 3 units)
Assume that one unit is sold on February 27 for Rp70,000.
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.
16
15
17
7-2
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Follow My Example 7-1
Gross Profit
Ending Inventory
(a)
First-in, first-out (FIFO): Rp25,000 (Rp70,000 – Rp45,000)
Rp99,000 (Rp48,000 – Rp51,000)
(b)
Last-in, first-out (LIFO): Rp19,000 (Rp70,000 – Rp51,000)
Rp93,000 (Rp45,000 + Rp48,000)
(c)
Average cost:
Rp22,000 (Rp70,000 – Rp48,000)
Rp96,000 (Rp48,000 x 2)
$144/3 units
For Practice: PE 7-1A, PE 7-1B
16
17
18
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Objective 3
7-3
Determine the cost of
inventory under the perpetual
inventory system, using
FIFO, LIFO, and average
cost methods.
18
19
FIFO Perpetual
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7-3
On January 1, the firm had 100 units of
Item 127B that cost Rp20,000 per unit.
Item 127B
Units
Jan.
1
Inventory
Cost
100 Rp20,000
19
18
20
FIFO Perpetual
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7-3
On January 4, the firm sold 70 units
of 127B at Rp30,000 each.
Item 127B
Units
Jan.
1
4
Inventory
Sale
Cost
100 Rp20,000
70
20
19
21
FIFO Perpetual
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7-3
On January 4, the firm sold 70 units
of 127B at Rp30,000 each.
4 Accounts Receivable
Sales
2 100 000
2 100 000
On4 January
22, the
firm sold1 twenty
Cost of Merchandise
Sold
400 000
1 400 000
units atMerchandise
$30. Inventory
21
20
22
FIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
Qty.
Unit
Cost
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Total
Cost
2,000
600
Qty.
70
20
Total
Cost
Qty.
Unit
Cost
1,400
100
30
20
20
22
21
The cost was in Rp000
23
FIFO Perpetual
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7-3
On January 10, the firm purchased
80 units at Rp21,000 each.
Item 127B
Units
Jan.
1
4
10
Inventory
Sale
Purchase
Cost
100 Rp20,000
70
80
21,000
23
22
24
7-3
FIFO Perpetual
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On January 10, the firm purchased
80 units at Rp21,000 each.
10 Merchandise Inventory
Accounts Payable
1 680 000
1 680 000
24
23
25
FIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
Unit
Cost
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
20
20
20
21
2,000
600
600
1,680
Qty.
70
80
21
1,680
20
Total
Cost
1,400
25
24
The cost was in Rp000
26
FIFO Perpetual
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7-3
On January 22, the firm sold 40 units
for Rp30,000 each.
Item 127B
Units
Jan.
1
4
10
22
Inventory
Sale
Purchase
Sale
Cost
100 Rp20,000
70
80
21,000
40
26
25
27
FIFO Perpetual
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7-3
On January 22, the firm sold 40 units
for Rp30,000 each.
22 Accounts Receivable
Sales
1 200 000
On
22, theSoldfirm sold twenty
22 January
Cost of Merchandise
810 000
units atMerchandise
$30. Inventory
1 200 000
810 000
27
26
28
FIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
22
Qty.
80
Unit
Cost
21
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
20
20
20
21
2,000
600
600
1,680
70
21
1,470
Qty.
Total
Cost
70
20
1,400
30
10
20
21
600
210
1,680
Of the forty sold, thirty are considered to be from
those acquired at Rp20,000 each. The other ten are
considered to be from the January 10 purchase.
The cost was in Rp000
28
27
29
FIFO Perpetual
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7-3
On January 28, the firm sold 20
units at Rp30,000 each.
Item 127B
Units
Jan.
1
4
10
22
28
Inventory
Sale
Purchase
Sale
Sale
Cost
100 Rp20,000
70
80
21,000
40
20
29
28
30
7-3
FIFO Perpetual
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On January 28, the firm sold 20
units at Rp30,000 each.
28 Accounts Receivable
Sales
600 000
28 Cost of Merchandise Sold
Merchandise Inventory
420 000
600 000
420 000
30
29
31
FIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
22
28
Qty.
80
Unit
Cost
21
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
20
20
20
21
2,000
600
600
1,680
70
50
21
21
1,470
1,050
Qty.
Total
Cost
70
20
1,400
30
10
20
20
21
21
600
210
420
1,680
31
30
Unit Cost and Total Cost is in Rp000
32
FIFO Perpetual
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7-3
On January 30, purchased ten additional
units of Item 127B at Rp22,000 each.
Item 127B
Units
Jan.
1
4
10
22
28
30
Inventory
Sale
Purchase
Sale
Sale
Purchase
Cost
100 Rp20,000
70
80
21,000
40
20
100
22,000
32
31
33
7-3
FIFO Perpetual
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On January 30, purchased ten additional
units of Item 127B at Rp22,000 each.
30 Merchandise Inventory
Accounts Payable
2 200 000
2 200 000
33
32
34
FIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
80
Unit
Cost
21
Total
Cost
22
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
20
20
20
21
2,000
600
600
1,680
70
50
50
21
21
21
100
1,470
1,050
1,050
22
Qty.
Total
Cost
70
20
1,400
30
10
20
20
21
21
600
210
420
1,680
22
28
30 100
Cost of Mdse. Sold
2,200
2,200
34
33
Unit Cost and Total Cost is in Rp000
35
FIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
80
Unit
Cost
21
Total
Cost
22
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
20
20
20
21
2,000
600
600
1,680
70
50
50
21
21
21
100
1,470
1,050
1,050
22
Qty.
Total
Cost
70
20
1,400
30
10
20
20
21
21
600
210
420
1,680
22
28
30 100
Cost of Mdse. Sold
2,200
2,200
Unit Cost and Total
Cost is in Rp000
Cost of merchandise sold for
January is Rp2,630,000.
35
34
36
FIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
80
Unit
Cost
21
Total
Cost
22
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
20
20
20
21
2,000
600
600
1,680
70
50
50
21
21
21
100
1,470
1,050
1,050
22
Qty.
Total
Cost
70
20
1,400
30
10
20
20
21
21
600
210
420
1,680
22
28
30 100
Cost of Mdse. Sold
2,200
2,200
The cost was in Rp000
January 31, inventory is Rp3,250,000 36
35
(Rp1,050,000 + Rp2,200,000)
37
7-3
-
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Example Exercise 7-2
Beginning inventory, purchases, and sales for Item ER27
are as follows:
Nov. 1 Inventory 40 units at Rp5,000
5 Sale
32 units
11 Purchase 60 units at Rp7,000
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.
37
36
38
7-3
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Follow My Example 7-2
a) Cost of merchandise sold:
8 units @ Rp5,000 Rp40,000
37 units @ Rp7,000 259,000
45 units
Rp299,000
b) Inventory, November 30:
Rp161,000 = (23 units x Rp7,000)
For Practice: PE 7-2A, PE 7-2B
37
38
39
LIFO Perpetual
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7-3
On January 1, the firm had 100 units of
Item 127B that cost Rp20,000 per unit.
Item 127B
Units
Jan.
1
Inventory
Cost
100 Rp20,000
39
38
40
LIFO Perpetual
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7-3
On January 4, the firm sold 70 units
of 127B at Rp30,000 each.
Item 127B
Units
Jan.
1
4
Inventory
Sale
Cost
100 Rp20,000
70
40
39
41
LIFO Perpetual
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7-3
On January 4, the firm sold 70 units
of 127B at Rp30,000 each.
4 Accounts Receivable
Sales
2 100 000
2 100 000
On4 January
22, theSoldfirm sold1 400
twenty
Cost of Merchandise
000
1 400 000
units atMerchandise
$30. Inventory
41
40
42
LIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
Qty.
Unit
Cost
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Total
Cost
2,000
600
Qty.
70
20
Total
Cost
Qty.
Unit
Cost
1,400
100
30
20
20
42
41
The unit cost and total cost is in Rp000
43
LIFO Perpetual
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7-3
On January 10, the firm purchased
80 units at Rp21,000 each.
Item 127B
Units
Jan.
1
4
10
Inventory
Sale
Purchase
Cost
100 Rp20,000
70
80
21,000
43
42
44
7-3
LIFO Perpetual
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On January 10, the firm purchased
80 units at Rp21,000 each.
10 Merchandise Inventory
Accounts Payable
1 680 000
1 680 000
44
43
45
LIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
Unit
Cost
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
20
20
20
21
2,000
600
600
1,680
Qty.
70
80
21
1,680
20
Total
Cost
1,400
45
44
The unit cost and total cost is in Rp000
46
LIFO Perpetual
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7-3
On January 22, the firm sold 40 units
for Rp30,000 each.
Item 127B
Units
Jan.
1
4
10
22
Inventory
Sale
Purchase
Sale
Cost
100 Rp20,000
70
80
21,000
40
46
45
47
LIFO Perpetual
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7-3
On January 22, the firm sold 40 units
for Rp30,000 each.
22 Accounts Receivable
Sales
1 200 000
1 200 000
On
22, theSoldfirm sold twenty
22 January
Cost of Merchandise
840 000
840 000
units atMerchandise
$30. Inventory
47
46
48
LIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
22
Qty.
80
Unit
Cost
21
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
30
40
20
20
20
21
20
21
2,000
600
600
1,680
600
840
Qty.
Total
Cost
70
20
1,400
40
21
840
1,680
All of the 40 sold are considered to be from
the January 10 purchase.
48
47
The unit cost and total cost is in Rp000
49
LIFO Perpetual
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7-3
On January 28, the firm sold 20
units at Rp30,000 each.
Item 127B
Units
Jan.
1
4
10
22
28
Inventory
Sale
Purchase
Sale
Sale
Cost
100 Rp20,000
70
80
21,000
40
20
49
48
50
7-3
LIFO Perpetual
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On January 28, the firm sold 20
units at Rp30,000 each.
28 Accounts Receivable
Sales
600 000
28 Cost of Merchandise Sold
Merchandise Inventory
420 000
600 000
420 000
50
49
51
LIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
Unit
Cost
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
30
40
30
20
20
20
20
21
20
21
20
21
2,000
600
600
1,680
600
840
600
420
Qty.
Total
Cost
70
20
1,400
22
40
21
840
28
20
21
420
80
21
1,680
All of the 20 sold are considered to be from
the January 22 purchase.
The unit cost and total cost is in Rp000
51
50
52
LIFO Perpetual
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7-3
On January 30, the firm purchased one hundred
additional units of Item 127B at Rp22,000 each.
Item 127B
Units
Jan.
1
4
10
22
28
30
Inventory
Sale
Purchase
Sale
Sale
Purchase
Cost
100 Rp20,000
70
80
21,000
40
20
100
22,000
52
51
53
7-3
LIFO Perpetual
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On January 30, the firm purchased one hundred
additional units of Item 127B at Rp22,000 each.
30 Merchandise Inventory
Accounts Payable
2 200 000
2 200 000
53
52
54
LIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
Unit
Cost
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
30
40
30
20
30
20
100
20
20
20
21
20
21
20
21
20
21
22
2,000
600
600
1,680
600
840
600
420
600
420
2,200
Qty.
Total
Cost
70
20
1,400
22
40
21
840
28
20
21
420
80
30 100
21
22
1,680
2,200
The unit cost and total cost is in Rp000
54
33
53
55
LIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
Unit
Cost
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
30
40
30
20
30
20
100
20
20
20
21
20
21
20
21
20
21
22
2,000
600
600
1,680
600
840
600
420
600
420
2,200
Qty.
Total
Cost
70
20
1,400
22
40
21
840
28
20
21
420
80
30 100
21
22
1,680
2,200
Cost of merchandise sold
Rp2,660,000
The unit cost and total cost is in Rp000
55
33
54
56
LIFO Perpetual
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7-3
Item 127B
Purchases
Date
Jan. 1
4
10
Qty.
Unit
Cost
Total
Cost
Cost of Mdse. Sold
Inventory Balance
Unit
Cost
Qty.
Unit
Cost
Total
Cost
100
30
30
80
30
40
30
20
30
20
100
20
20
20
21
20
21
20
21
20
21
22
2,000
600
600
1,680
600
840
600
420
600
420
2,200
Qty.
Total
Cost
70
20
1,400
22
40
21
840
28
20
21
420
80
30 100
21
22
1,680
2,200
January 31, inventory…..Rp3,220,000
The unit cost and total cost is in Rp000
56
33
55
57
7-3
-
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Example Exercise 7-3
Beginning inventory, purchases, and sales for Item ER27
are as follows:
Nov. 1 Inventory 40 units at Rp5,000
5 Sale
32 units
11 Purchase 60 units at Rp7,000
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.
57
56
58
7-3
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to
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Follow My Example 7-3
a) Cost of merchandise sold:
Rp315,000 = (45 units x Rp7,000)
b) Inventory, November 30:
8 units @ Rp5,000 Rp 40,000
15 units @ Rp7,000
105,000
23
Rp145,000
For Practice: PE 7-3A, PE 7-3B
57
58
59
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Objective 4
7-4
Determine the cost of inventory
under the periodic inventory
system, using FIFO, LIFO, and
average cost methods.
59
60
FIFO Periodic
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7-4
Using FIFO, the earliest
batch purchased is
considered the first batch
of merchandise sold. The
physical flow does not
have to match the
accounting method chosen.
60
61
FIFO Periodic
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Jan. 1
100 units @ Rp20,000
=Rp2,000,000
Jan. 10
80 units @ Rp21,000
=
1,680,000
Jan. 30
100 units @ Rp22,000
=
2,200,000
7-4
280 units available
Rp5,880,000
for sale during
year
Cost of merchandise
available for sale
61
60
62
FIFO Periodic
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7-4
The physical count on January 31 shows that 150
units are on hand (conclusion: 130 units were
sold). What is the cost of the ending inventory?
= Rp
Jan. 1
100 Sold
unitsthese
@ $20
Jan. 10
Sold 30 of these
80 units @ $21
50 units @ Rp21,000
=
1,050,000
Jan. 30
100
units
@ Rp22,000
100
units
@ $22
=
2,200,000
0
Ending inventory Rp3,250,000
62
61
63
FIFO Periodic
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7-4
Now we can calculate the cost of goods
sold as follows:
Beginning inventory, January 1 (Slide 60)
Purchases (Rp1,680,000 + Rp2,200,000)
Cost of merchandise available for sale
Ending inventory, January 31(Slide 61)
Cost of merchandise sold
Rp2,000,000
3,880,000
Rp5,880,000
3,250,000
Rp2,630,000
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62
64
7-4
LIFO Periodic
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Using LIFO, the most recent batch
purchased is considered the first batch of
merchandise sold. The actual flow of goods
does not have to be LIFO. For example, a
store selling fresh fish would want to sell the
oldest fish first (which is FIFO) even though
LIFO is used for accounting purposes.
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65
LIFO Periodic
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Jan. 1
100 units @ Rp20,000
=Rp2,000,000
Jan. 10
80 units @ Rp21,000
=
1,680,000
Jan. 30
100 units @ Rp22,000
=
2,200,000
7-4
280 units available
Rp5,880,000
for sale during
year
Cost of merchandise
available for sale
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64
66
LIFO Periodic
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7-4
Assume again that the physical count on January
31 is 150 units (and that 130 units were sold).
What is the cost of the ending inventory?
Jan. 1
100 units @ Rp20,000
=Rp2,000,000
Jan. 10
50 units @ Rp21,000
80 units @ $21
Sold 30 of these
=
Jan. 30
100 Sold
unitsthese
@ $22
=
1,050,000
1, 680
2,2000
Ending inventory Rp3,050,000
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67
LIFO Periodic
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7-4
Now we can calculate the cost of goods
sold as follows:
Beginning inventory, January 1 (Slide 64)
Purchases (Rp1,680,000 + Rp2,200,000)
Cost of merchandise available for sale
Ending inventory, January 31(Slide 65)
Cost of merchandise sold
Rp2,000,000
3,880,000
Rp5,880,000
3,050,000
Rp2,830,000
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66
68
Average Cost
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7-4
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 @ Rp20,000
=Rp2,000,000
Jan. 10
80 units @ Rp21,000
= 1,680,000
Jan. 30
100units
units
@ $22
100
@ Rp22,000
= 2,200,000
280
7-4
Rp5,880,000
Average unit cost: Rp5,880,000 ÷ 280 = Rp21,000
Cost of merchandise sold: 130 units at Rp21,000 = Rp2,730,000
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68
Ending merchandise inventory: 150 units at Rp21,000=
Rp3,150,000
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Average Cost
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7-4
Now we can calculate the cost of goods
sold as follows:
Beginning inventory, January 1 (Slide 68)
Purchases (Rp1,680,000 + Rp2,200,000)
Cost of merchandise available for sale
Ending inventory, January 31(Slide 68)
Cost of merchandise sold
Rp2,000,000
3,880,000
Rp5,880,000
3,150,000
Rp2,730,000
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71
7-4
-
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Example Exercise 7-4
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 @ Rp50,000 Rp 300,000
14 units @ Rp55,000
770,000
20 units @ Rp62,000
1,240,000
40 units
Rp 2,310,000
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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7-4
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Follow My Example 7-4
a) First-in, first-out (FIFO) method: Rp992,000 (16 units
x Rp62,000)
b) Last-in, first-out (LIFO) method: Rp850,000 (6 units
x Rp50,000) + (10 units x Rp55,000)
c) Average method: Rp924,000 (16 units x
Rp57,750) where average cost = Rp57,750
(Rp2,310,000 ÷ 40 units)
For Practice: PE 7-4A, PE 7-4B
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7-5
Objective 5
Compare and contrast the
use of the three inventory
costing methods.
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7-5
Partial Income Statements
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First-In, First-Out
Net sales
Rp3,900,000
Cost of merchandise sold:
Beginning inventory
Rp2,000,000
Purchases
3,880,000
Merchandise available for sale Rp5,880,000
Less ending inventory
3,250,000
Cost of merchandise sold
2,630,000
Gross profit
Rp1,270,000
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7-5
Partial Income Statements
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Average Cost
Net sales
Cost of merchandise sold:
Beginning inventory
Purchases
Merchandise available for sale
Less ending inventory
Cost of merchandise sold
Gross profit
Rp3,900,000
Rp2,000,000
3,880,000
Rp5,880,000
3,150,000
2,730,000
Rp1,170,000
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Partial Income Statements
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7-5
Last-In, First-Out
Net sales
Cost of merchandise sold:
Beginning inventory
Purchases
Merchandise available for sale
Less ending inventory
Cost of merchandise sold
Gross profit
Rp3,900,000
Rp2,000,000
3,880,000
Rp5,880,000
3,050,000
2,830,000
Rp1,070,000
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Recap
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FIFO
LIFO
7-5
Weighted
Average
Ending inventory
Rp3,250,000
Rp3,150,000 Rp3,050,000
Cost of merchandise sold
Rp2,630,000
Rp2,730,000
Rp2,830,000
Gross profit
Rp1,270,000
Rp1,170,000
Rp1,070,000
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78
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7-6
Objective 6
Describe and illustrate the
reporting of merchandise
inventory in the financial
statements.
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Lower-of-Cost-or-Market Method
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7-6
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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80
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7-6
Market, as used in lower
of cost or market, is the
cost to replace the
merchandise on the
inventory date.
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7-6
Cost and replacement cost can be
determined for—
1) each item in the inventory,
2) major classes or categories of
inventory, or
3) the inventory as a whole.
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Determining Inventory at
Lower-of-Cost-or-Market
Method
A
Commodity
1A
2B
3C
4D
5 Total
B
Inventory
Quantity
400
120
600
280
C
Unit
Cost
Price
Rp10,250
22,500
8,000
14,000
D
E
F
G
Unit
Total
Market
Lower
Price
Cost
Market
of C or M
Rp 9,500 Rp4,100,000 Rp3,800,000 Rp3,800,000
24,100
2,700,000
2,892,000
2,700,000
7,750
4,800,000
4,650,000
4,650,000
14,750
3,920,000
4,130,000
3,920,000
Rp15,520,000 Rp15,472,000 Rp15,070,000
7-6
1
2
3
4
5
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7-6
Merchandise that is out of date,
spoiled, or damaged should be
written down to its net realizable
value. This is the estimated
selling price less any direct cost
of disposal, such as sales
commissions.
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Merchandise Inventory on the
Balance Sheet
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7-6
Merchandise inventory is usually
presented in the Current Assets
section of the balance sheet,
following receivables.
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7-6
The method of
determining the cost of
inventory (FIFO, LIFO,
or weighted average)
should be shown.
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7-6
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Example Exercise 7-5
On the basis of the following data, determine the value
of the inventory at the lower of cost or market. Apply
lower of cost or market to each inventory item as shown
in Exhibit 7.
Inventory
Unit
Unit
Commodity Quantity Cost Price Market Price
C17Y
10
Rp 39,000 Rp 40,000
B563
7
Rp 110,000
98,000
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7-6
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Follow My Example 7-5
Unit
Unit
Commodity Qty Cost Price Market Price
C17Y
B563
Total
10
7
Rp 39,000
110,000
Rp 40,000
98,000
For Practice: PE 7-5A, PE 7-5B
Cost
Market
Lower of
C or M
Rp 390,000 Rp 400,000 Rp 390,000
770,000
686,000
686,000
Rp1,160,000 Rp1,086,000 Rp1,076,000
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7-6
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Example Exercise 7-6
Agung Jaya Motor Shop incorrectly counted its
December 31, 2008 inventory as Rp250,000,000
instead of the correct amount of Rp220,000,000.
Indicate the effect of the misstatement on Agung
Jaya Motor Shop December 31, 2008 balance sheet
and income statement for the year ended December
31, 2008.
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7-6
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Follow My Example 7-6
Amount of Misstatement
Overstatement (Understatement)
Balance Sheet:
Merchandise inventory overstated
Current assets overstated
Total assets overstated
Owner’s equity overstated
Income Statement:
Cost of merchandise sold understated
Gross profit overstated
Net income overstated
For Practice: PE 7-6A, PE 7-6B
Rp 30,000,000
30,000,000
30,000,000
30,000,000
Rp(30,000,000)
30,000,000
30,000,000
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90
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7-7
Objective 7
Estimate the cost of
inventory, using the retail
method and the gross profit
method.
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Retail Inventory Method
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7-7
The retail inventory method
of estimating inventory
cost is based on the
relationship of the cost of
merchandise available for
sale to the retail price of the
same merchandise.
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Determining Inventory by
the Retail Method
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A
1 Merchandise inventory, January 1
2 Purchases in January (net)
3 Merchandise available for sale
Ratio of cost to retail price: (Rp 62,000,000:Rp
4
100,000,000) = 62%
5 Sales for January (net)
6 Merchandise inventory, January 31, at retail
7 Merchandise inventory, January 31, at estimated cost
8 (Rp30,000,000 x 62%)
B
C
Cost
Retail
Rp19,400,000 Rp36,000,000
42,600,000
64,000,000
Rp62,000,000 Rp100,000,000
7-7
1
2
3
4
70,000,000
Rp30,000,000
Rp18,600,000
5
6
7
8
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7-7
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Example Exercise 7-7
A business using the retail method of inventory costing
determines that merchandise inventory at retail is
Rp900,000,000. If the ratio of cost to retail price is
70%, what is the amount of inventory to be reported on
the financial statements?
Follow My Example 7-7
Rp630,000,000 (Rp900,000,000 x 70%)
For Practice: PE 7-7A, PE 7-7B
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Gross Profit Method
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7-7
The gross profit method uses
the estimated gross profit for the
period to estimate the inventory
at the end of the period.
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7-7
Estimating Inventory by
Gross Profit Method
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A
1
2
3
4
5
6
7
B
Cost
C
Retail
Rp 57,000,000
180,000,000
Rp 237,000,000
Merchandise inventory January 1
Purchases in January (net)
Merchandise available for sale
Sales for January (net)
Rp 250,000,000
Less estimated gross profit (Rp250,000 x 30%)
75,000,000
Estimated cost of merchandise sold
175,000,000
Estimated merchandise inventory, January 31
Rp 62,000,000
1
2
3
4
5
6
7
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7-7
The gross profit method is useful for
estimating inventories for monthly or
quarterly financial statements in a
periodic inventory system.
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7-7
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Example Exercise 7-8
Based on the following data, estimate the cost of ending
merchandise inventory:
Sales (net)
Estimated gross profit rate
Rp1,250,000,000
40%
Beginning merchandise inventory Rp100,000,000
Purchases (net)
800,000,000
Merchandise available for sale
Rp900,000,000
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7-7
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Follow My Example 7-8
Merchandise available for sale
Rp900,000,000
Less cost of merchandise sold
[Rp1,250,000,000 x (100% – 40%)]
750,000,000
Estimated ending merchandise inventory Rp150,000,000
For Practice: PE 7-8A, PE 7-8B
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7-7
Inventory turnover measures the
relationship between the volume of goods
(merchandise) sold and the amount of
inventory carried during the period.
Cost of merchandise sold
Inventory turnover =
Average inventory
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7-7
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Cost Of Merchandise Sold
Inventories
Beginning Of Year
End Of Year
Average
Inventory Turnover
HERO
Rp4,035,116,000,000
RIMO
Rp87,696,796,439
Rp427,941,000,000
Rp494,919,000,000
Rp461,430,000,000
Rp24,907,993,901
Rp28,537,693,305
Rp26,722,843,603
8.74 times
3.28 times
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7-7
Generally, the larger the
inventory turnover, the more
efficient and effective the
management of inventory.
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7-7
The number of days’ sales in
inventory is a rough measure of the
length of time it takes to acquire,
sell, and replace the inventory.
Number of days’
sales in inventory
=
Average inventory
Average daily cost of
merchandise sold
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7-7
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HERO
Average Daily Cost Of Merchandise Sold
Rp16,681,472,000/365
Rp11,055,112,328.77
Rp1,157,226,000/365
Average Inventory
Rp461,430,000,000
Number Of Days' Sales in Inventory
41.74 days
RIMO
Rp240,265,196
Rp26,722,843,603
111.22 days
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