CHAPTER 8
VALUATION OF INVENTORIES:
A COST-BASIS APPROACH
Sommers – ACCT 3311
Discussion Question
Q8-6
(a) Goods out on approval to customers
(b) Goods in transit that were recently
purchased f.o.b. destination
(c) Land held by a realty firm for sale
(d) Raw Materials
(e) Goods received on consignment
(f) Manufacturing supplies
Transfer of ownership
A company should record purchases when it obtains legal
title to the goods.
Discussion Question
Q8-3 What is the difference between a perpetual inventory and a
physical inventory? If a company maintains a perpetual inventory,
should its physical inventory at any date be equal to the amount
indicated by the perpetual inventory records? Why?
Comparison of Inventory Systems
Transaction or
Event
Periodic Inventory Perpetual Inventory
Routine purchases of
various inventory items
Costs debited to
purchases account
Costs debited to
inventory account
Sale of inventory
No accounting entries
made to inventory
Debit Cost of goods
sold and credit
inventory
End-of-period
accounting entries and
related activities
Physical count to
No separate
determine ending
determination of cost of
inventory and cost of
goods sold necessary
goods sold
Periodic Inventory System
Calculation of Cost of Goods Sold
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold
$
120,000
600,000
720,000
(180,000)
$ 540,000
We need the following adjusting entry to record cost of good sold.
December 31, 2011
To adjust inventory, close purchases, and record cost of goods sold.
Inventory Notation
Beginning
Balance
Purchases
Cost of Goods
Available for Sale
Ending
Balance
Cost of
Goods Sold
?
?
Choosing a Cost Flow Assumption
Specific Identification --- Average Cost
LIFO --- FIFO
Cost Flow Assumption Adopted
does not need to equal
Physical Movement of Goods
Method adopted should be one that most clearly reflects periodic income.
Example 1: FIFO Periodic
Ferris Company began 2011 with 6,000 units of its principal product.
The cost of each unit is $8. Merchandise transactions for the month of
January 2011 are as follows:
Purchases
Date
Units
Sales
Unit Cost
Total Cost
Date
Units
Jan 10
5,000
$9
$45,000
Jan 5
3,000
Jan 18
6,000
10
60,000
Jan 12
2,000
Totals
11,000
$105,000
Jan 20
4,000
Total
9,000
8,000 units were on hand at the end of the month.
Calculate January’s ending inventory and cost of goods sold for the
month using FIFO, periodic system.
Example 1: FIFO Periodic
Units
Cost of Goods Sold:
Ending Inventory:
Dollars
Example 1: LIFO Periodic
Ferris Company began 2011 with 6,000 units of its principal product.
The cost of each unit is $8. Merchandise transactions for the month of
January 2011 are as follows:
Purchases
Date
Units
Sales
Unit Cost
Total Cost
Date
Units
Jan 10
5,000
$9
$45,000
Jan 5
3,000
Jan 18
6,000
10
60,000
Jan 12
2,000
Totals
11,000
$105,000
Jan 20
4,000
Total
9,000
8,000 units were on hand at the end of the month.
Calculate January’s ending inventory and cost of goods sold for the
month using LIFO, periodic system.
Example 1: LIFO Periodic
Units
6,000
Dollars
11,000
48,000
17,000
8,000
Cost of Goods Sold:
Ending Inventory:
105,000
153,000
9,000
Old Stuff
New Stuff
Example 1: LIFO Perpetual
Ferris Company began 2011 with 6,000 units of its principal product.
The cost of each unit is $8. Merchandise transactions for the month of
January 2011 are as follows:
Purchases
Date
Units
Sales
Unit Cost
Total Cost
Date
Units
Jan 10
5,000
$9
$45,000
Jan 5
3,000
Jan 18
6,000
10
60,000
Jan 12
2,000
Totals
11,000
$105,000
Jan 20
4,000
Total
9,000
8,000 units were on hand at the end of the month.
Calculate January’s ending inventory and cost of goods sold for the
month using LIFO, perpetual system.
Ex 1: LIFO Perpetual (January 5th Sale)
Units
Available:
Cost of Goods Sold:
Ending Inventory:
Dollars
Ex 1: LIFO Perpetual (January 12th Sale)
Units
Available:
Cost of Goods Sold:
Ending Inventory:
Dollars
Ex 1: LIFO Perpetual (January 20th Sale)
Units
6,000
Dollars
6,000
51,000
12,000
8,000
60,000
111,000
4,000
Available:
Beg
3,000 units @ $ 8
Jan 10 3,000 units @ $ 9
Jan 18 6,000 units @ $10
12,000 units
Cost of Goods Sold:
Jan 18 4,000 units @ $10
Ending Inventory:
Beg
3,000 units @ $ 8
Jan 10 3,000 units @ $ 9
Jan 18 2,000 units @ $10
8,000 units
Old Stuff
= $ 24,000
=
27,000
=
60,000
$111,000
= $ 40,000
= $ 24,000
=
27,000
=
20,000
$ 71,000
New Stuff
Example 1: LIFO Perpetual (Summary)
Cost of Goods Sold:
Jan 5
3,000 units
Jan 12
2,000 units
Jan 20
4,000 units
Total
9,000 units
= $24,000
= 18,000
= 40,000
= $82,000
Ending Inventory:
Beg
3,000 units @ $ 8
Jan 10 3,000 units @ $ 9
Jan 18 2,000 units @ $10
8,000 units
= $24,000
= 27,000
= 20,000
$71,000
Example 1: Average Cost, Periodic
Ferris Company began 2011 with 6,000 units of its principal product.
The cost of each unit is $8. Merchandise transactions for the month of
January 2011 are as follows:
Purchases
Date
Units
Sales
Unit Cost
Total Cost
Date
Units
Jan 10
5,000
$9
$45,000
Jan 5
3,000
Jan 18
6,000
10
60,000
Jan 12
2,000
Totals
11,000
$105,000
Jan 20
4,000
Total
9,000
8,000 units were on hand at the end of the month.
Calculate January’s ending inventory and cost of goods sold for the
month using Average Cost, Periodic.
Example 1: Average Cost Periodic
Units
Cost of Goods Sold:
Ending Inventory:
Dollars
Example 1: Average Cost, Perpetual
Ferris Company began 2011 with 6,000 units of its principal product.
The cost of each unit is $8. Merchandise transactions for the month of
January 2011 are as follows:
Purchases
Date
Units
Sales
Unit Cost
Total Cost
Date
Units
Jan 10
5,000
$9
$45,000
Jan 5
3,000
Jan 18
6,000
10
60,000
Jan 12
2,000
Totals
11,000
$105,000
Jan 20
4,000
Total
9,000
8,000 units were on hand at the end of the month.
Calculate January’s ending inventory and cost of goods sold for the
month using Average Cost, Perpetual.
Ex 1: Average Cost Perpetual (Jan 5th Sale)
Units
Cost of Goods Sold:
Ending Inventory:
Dollars
Ex 1: Average Cost Perpetual (Jan 12th Sale)
Units
Cost of Goods Sold:
Ending Inventory:
Dollars
Ex 1: Average Cost Perpetual (Jan 20th Sale)
Units
6,000
Dollars
6,000
51,750
12,000
8,000
60,000
111,750
4,000
?
111,750 / 12,000 = $9.3125 Cost per unit
Cost of Goods Sold:
4,000 units @ $9.3125 = $37,250
Ending Inventory:
8,000 units @ $9.3125 = $74,500
?
Ex 1: Average Cost Perpetual (Summary)
Cost of Goods Sold:
Jan 5
3,000 units
Jan 12
2,000 units
Jan 20
4,000 units
Total
9,000 units
= $24,000
= 17,250
= 37,250
= $78,500
Ending Inventory:
8,000 units @ $9.3125 = $74,500
Example 1: Summary of Results
Cost of
Ending
Goods Sold Inventory
FIFO, Periodic
LIFO, Periodic
LIFO, Perpetual
Avg Cost, Periodic
Avg Cost, Perpetual
$75,000
87,000
82,000
$78,000
66,000
71,000
81,000
78,500
72,000
74,500
Supplemental LIFO Disclosures
Tootsie Roll 2008
Balance Sheet
2008
2007
Finished goods and work-in-process
34,862
37,031
Raw materials and supplies
20,722
20,371
Income Statement
Product cost of goods sold
333,314
327,695
Footnote:
Inventories are stated at cost, not to exceed market. The cost of substantially
all of the Company’s inventories ($53,557 and $54,367 at December 31, 2008
and 2007, respectively) has been determined by the last-in, first-out (LIFO)
method. The excess of current cost over LIFO cost of inventories
approximates $12,432 and $11,284 at December 31, 2008 and 2007,
respectively. The cost of certain foreign inventories ($2,027 and $3,036 at
December 31, 2008 and 2007, respectively) has been determined by the firstin, first-out (FIFO) method. Rebates, discounts and other cash consideration
received from a vendor related to inventory purchases is reflected as a
reduction in the cost of the related inventory item, and is therefore reflected in
cost of sales when the related inventory item is sold.
Supplemental LIFO Disclosures
Tootsie Roll 2008
Balance Sheet
Finished goods and work-in-process
Raw materials and supplies
Total LIFO inventory
LIFO reserve
Total FIFO inventory
Income Statement
Product cost of goods sold – LIFO
Product cost of goods sold – FIFO
2008
34,862
20,722
55,584
12,432
68,016
2007
37,031
20,371
57,402
11,284
68,686
333,314
?
327,695
?
LIFO to FIFO Conversion – Tootsie Roll
LIFO
Inventory Turnover:
LIFO:
FIFO:
FIFO