Chapter 8
Inventory:
Measurement
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-2
Inventory
Those assets that a company:
1. Intends to sell in the normal
course of business.
2. Has in production for future sale.
3. Uses currently in the production
of goods to be sold.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-3
Types of Inventories
Merchandise
Inventory
Manufacturing
Inventory
Goods acquired for
resale
•Raw Materials
•Work-in-process
•Finished Goods
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-4
Inventory Methods
Perpetual
Inventory System
Periodic Inventory
System
The inventory
account is
continuously
updated as
purchases and
sales are made.
The inventory
account is
adjusted at the end
of a reporting
cycle.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-5
Accounting Entries in a Perpetual
System
When a purchase of inventory is made:
GENERAL JOURNAL
Date
Description
Inventory
Accounts Payable
Debit
Page ##
Credit
$$$$
$$$$
Returns of inventory are credited to the inventory account.
Discounts on inventory purchases can be recorded using the
gross or net method.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-6
Accounting Entries in a Perpetual
System
When a sale is made, the seller must make two
separate entries:
GENERAL JOURNAL
Date
Description
Accounts Receivable (or Cash)
Debit
$$$$
Sales
Cost of Goods Sold
Inventory
McGraw-Hill/Irwin
Page ##
Credit
$$$$
$$$
$$$
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-7
Periodic Cost of Goods Sold
Equation
Beginning Inventory
+ Net Purchases
Cost of Goods
Available for Sale
- Ending Inventory
= Cost of Goods Sold
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-8
Accounting Entries in a Periodic
System
When a purchase of inventory is made:
GENERAL JOURNAL
Date
Description
Purchases
Accounts Payable
McGraw-Hill/Irwin
Debit
Page ##
Credit
$$$$
$$$$
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-9
Accounting Entries in a Periodic
System
When a sale is made, the seller only makes an
entry for the sale:
GENERAL JOURNAL
Date
Description
Accounts Receivable (or Cash)
Sales
Debit
Page ##
Credit
$$$$
$$$$
Only at the end of the period will the seller make an entry to record
the Cost of Goods Sold
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-10
Accounting Entries in a Periodic
System
At the end of the accounting period, Purchases is closed,
Inventory is adjusted to the ending balance, and Cost of Goods
Sold is recorded.
GENERAL JOURNAL
Date
Description
Debit
Page ##
Credit
InCost
addition
to Purchases, the contraof goods sold
$$$$
purchase
accounts are also closed
Inventory (ending)
$$$$ to
Inventory (beginning)
$$$$
COGS
at the end of the period:
Purchases
Purchases Discounts
Purchase Returns and Allowances
McGraw-Hill/Irwin
$$$$
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-11
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
Items removed from
inventory for use in
production
No accounting
entries made
Debit WIP inventory
and credit Raw
Materials inventory
account
End-of-period
accounting entries and
related activities
Physical count of
inventory to
determine cost of
good sold
No separate
determination of cost
of goods sold
necessary
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-12
What is Included in Inventory?
General Rule
All goods owned by the company on the inventory
date, regardless of their location.
Goods in Transit
Goods on
Consignment
Depends on FOB
shipping terms.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-13
Expenditures Included in
Inventory
Invoice
Price
Purchase
Returns
+
Freight-in
on
Purchases
McGraw-Hill/Irwin
Purchase
Discounts
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-14
Inventory Cost Flow Methods
Specific cost identification
Average cost
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-15
Specific Cost Identification
Items are added to
inventory at cost
when they are
purchased.
COGS for each sale
is based on the
specific cost of the
item sold.
McGraw-Hill/Irwin
The specific cost of
each inventory item
must be known.
By selecting specific
items from inventory
at the time of sale,
income can be
manipulated.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-16
Average Cost Method
Periodic average cost uses a weightedaverage unit cost:
Weightedaverage unit
cost
=
Cost of goods
available for
sale
÷
Quantity
available for
sale
Perpetual average cost uses a moving average
unit cost that is recomputed each time a new
purchase is made.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-17
Weighted-Average
Periodic Example
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 frames in ending inventory.
Use the periodic weighted-average method to
determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-18
Weighted-Average
Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
$ 47,650.00
?
?
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-19
Weighted-Average
Periodic Example
Now, we have to assign costs to ending inventory and
cost of goods sold.
Ending Inventory
(600 units)
Beginning Inventory
(800 units)
Purchases
(1,150 units)
Available
for Sale
(1,950 units)
Goods Sold
(1,350)
$47,650 ÷ 1,950 = $24.4359 weightedaverage per unit cost
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-20
Weighted-Average
Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
24.4359
24.4359
$ 47,650.00
14,661.54
$ 32,988.46
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-21
Moving-Average
Perpetual Example
The following schedule shows the Frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 mouse pads in ending inventory.
Use the perpetual weighted-average method to
determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-22
Moving-Average
Perpetual Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
Date
9/1
9/10
9/30
Sales Units
600
300
450
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-23
Moving-Average
Perpetual Example
Date
Purchased
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
McGraw-Hill/Irwin
Sold
600 x
22.000 =
Balance
$ 17,600.00
13,200.00
4,400.00
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-24
Moving-Average
Perpetual Example
Date
Purchased
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep 300 x 24.00 =
7,200
10-Sep
Sold
600 x
22.000 =
300 x
23.200 =
Balance
$ 17,600.00
13,200.00
4,400.00
11,600.00
6,960.00
4,640.00
$11,600.00 ÷ (800-600+300) = $23.200
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-25
Moving-Average
Perpetual Example
Date
Beg. Inv.
1-Sep
3-Sep
10-Sep
15-Sep
21-Sep
29-Sep
30-Sep
Purchased
800 x 22.00 = 17,600
300 x
250 x
200 x
400 x
24.00 =
25.00 =
27.00 =
28.00 =
Sold
600 x
22.000 =
300 x
23.200 =
450 x
26.181 =
7,200
6,250
5,400
11,200
Balance
$ 17,600.00
13,200.00
4,400.00
11,600.00
6,960.00
4,640.00
10,890.00
16,290.00
27,490.00
11,781.45
15,708.55
$27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-26
Moving-Average
Perpetual Example
Date
Beg. Inv.
1-Sep
3-Sep
10-Sep
15-Sep
21-Sep
29-Sep
30-Sep
Purchased
800 x 22.00 = 17,600
300 x
250 x
200 x
400 x
24.00 =
25.00 =
27.00 =
28.00 =
Sold
600 x
22.000 =
300 x
23.200 =
450 x
26.181 =
7,200
6,250
5,400
11,200
McGraw-Hill/Irwin
Sum
Cost of Goods Sold in September
Sale Date
Units
Cost/Unit
Total
9/1
600
22.000 $ 13,200.00
9/10
300
23.200
6,960.00
9/30
450
26.181
11,781.45
Total
1,350
31,941.45
Balance
$ 17,600.00
13,200.00
4,400.00
11,600.00
6,960.00
4,640.00
10,890.00
16,290.00
27,490.00
11,781.45
15,708.55
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-27
First-In, First-Out
The FIFO
method
assumes that
items are sold
in the
chronological
order of their
acquisition.
McGraw-Hill/Irwin
The cost of the oldest
inventory items are
charged to COGS
when goods are sold.
The cost of the newest
inventory items remain
in ending inventory.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-28
First-In, First-Out
Even though the periodic
and the perpetual
approaches differ in the
timing of adjustments to
inventory . . .
. . . COGS and Ending
Inventory Cost are the
same under both
approaches.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-29
FIFO - Periodic Example
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 mouse pads in ending inventory.
Use the periodic FIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-30
FIFO - Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
These are
the 600
$ 47,650.00
most recently
acquired units.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-31
FIFO - Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
$ 47,650.00
16,600.00
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-32
FIFO - Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
These are the first
$ 47,650.00
1,350 units
16,600.00
acquired.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-33
FIFO - Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
$ 47,650.00
16,600.00
$ 31,050.00
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-34
FIFO - Perpetual Example
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 mouse pads in ending inventory.
Use the perpetual FIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-35
FIFO - Perpetual Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
Date
9/1
9/10
9/30
Sales Units
600
300
450
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-36
FIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
Sold
600 x
22.00 =
13,200.00
Balance
$ 17,600.00
4,400.00
The ending inventory on 9/1 consists of:
200 units from beginning inventory @ $22.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-37
FIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
Sold
600 x
22.00 =
13,200.00
Balance
$ 17,600.00
4,400.00
11,600.00
The ending inventory on 9/3 consists of:
200 units from beginning inventory @ $22.00
300 units from the 9/3 purchase @ $24.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-38
FIFO - Perpetual Example
Date
Purchased
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
200
3-Sep
300 x 24.00 =
7,200
10-Sep (remaining from Beg. Inv)
(from the 9/3 layer)
Sold
600 x
22.00 =
13,200.00
200 x
100 x
22.00 =
24.00 =
4,400.00
2,400.00
Balance
$ 17,600.00
4,400.00
11,600.00
7,200.00
4,800.00
The ending inventory on 9/10 consists of:
200 units from the 9/3 purchase @ $24.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-39
FIFO - Perpetual Example
Date
Purchased
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
200
3-Sep
300 x 24.00 =
7,200
10-Sep (remaining from Beg. Inv)
(from the 9/3 layer)
15-Sep
250 x 25.00 =
6,250
Sold
600 x
22.00 =
13,200.00
200 x
100 x
22.00 =
24.00 =
4,400.00
2,400.00
Balance
$ 17,600.00
4,400.00
11,600.00
7,200.00
4,800.00
11,050.00
The ending inventory on 9/15 consists of:
200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-40
FIFO - Perpetual Example
Date
Purchased
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
200
3-Sep
300 x 24.00 =
7,200
10-Sep (remaining from Beg. Inv)
(from the 9/3 layer)
15-Sep
250 x 25.00 =
6,250
21-Sep
200 x 27.00 =
5,400
Sold
600 x
22.00 =
13,200.00
200 x
100 x
22.00 =
24.00 =
4,400.00
2,400.00
Balance
$ 17,600.00
4,400.00
11,600.00
7,200.00
4,800.00
11,050.00
16,450.00
The ending inventory on 9/21 consists of:
200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00
200 units from the 9/21 purchase @ $27.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-41
FIFO - Perpetual Example
Date
Purchased
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
200
3-Sep
300 x 24.00 =
7,200
10-Sep (remaining from Beg. Inv)
(from the 9/3 layer)
15-Sep
250 x 25.00 =
6,250
21-Sep
200 x 27.00 =
5,400
29-Sep
400 x 28.00 = 11,200
Sold
600 x
22.00 =
13,200.00
200 x
100 x
22.00 =
24.00 =
4,400.00
2,400.00
Balance
$ 17,600.00
4,400.00
11,600.00
7,200.00
4,800.00
11,050.00
16,450.00
27,650.00
The ending inventory on 9/21 consists of:
200 units from the 9/3 purchase @ $24.00
250 units from the 9/15 purchase @ $25.00
200 units from the 9/21 purchase @ $27.00
400 units from the 9/29 purchase @ $28.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-42
FIFO - Perpetual Example
Date
Purchased
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
10-Sep (remaining from Beg. Inv)
(from the 9/3 layer)
15-Sep
250 x 25.00 =
6,250
21-Sep
200 x 27.00 =
5,400
29-Sep
400 x 28.00 = 11,200
30-Sep (remaining from 9/3 layer)
(from the 9/15 layer)
Sold
600 x
22.00 =
13,200.00
200 x
100 x
22.00 =
24.00 =
4,400.00
2,400.00
200 x
250 x
24.00 =
25.00 =
4,800.00
6,250.00
Balance
$ 17,600.00
4,400.00
11,600.00
7,200.00
4,800.00
11,050.00
16,450.00
27,650.00
22,850.00
16,600.00
Cost of Goods
Sold
=
31,050.00
The ending inventory
on 9/30
consists
of:
200 units from the 9/21 purchase @ $27.00
400 units from the 9/29 purchase @ $28.00.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-43
FIFO - Perpetual Example
Date
Purchased
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
10-Sep (remaining from Beg. Inv)
(from the 9/3 layer)
15-Sep
250 x 25.00 =
6,250
21-Sep
200 x 27.00 =
5,400
29-Sep
400 x 28.00 = 11,200
30-Sep (remaining from 9/3 layer)
(from the 9/15 layer)
Sold
600 x
22.00 =
13,200.00
200 x
100 x
22.00 =
24.00 =
4,400.00
2,400.00
200 x
250 x
24.00 =
25.00 =
4,800.00
6,250.00
Cost of Goods Sold =
31,050.00
Balance
$ 17,600.00
4,400.00
11,600.00
7,200.00
4,800.00
11,050.00
16,450.00
27,650.00
22,850.00
16,600.00
Note that this is the same COGS
computed using the Periodic
approach.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-44
Last-In, First-Out
Any questions
before we run into
LIFO?
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-45
Last-In, First-Out
The LIFO
method
assumes that
the newest
items are sold
first, leaving the
older units in
inventory.
McGraw-Hill/Irwin
The cost of the newest
inventory items are
charged to COGS
when goods are sold.
The cost of the oldest
inventory items remain
in inventory.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-46
Last-In, First-Out
Unlike FIFO, using the
LIFO method may
result in COGS and
Ending Inventory Cost
that differ under the
periodic and perpetual
approaches.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-47
LIFO - Periodic Example
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 mouse pads in ending inventory.
Use the periodic LIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-48
LIFO - Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
These are
the 600
$ 47,650.00
oldest units in
inventory.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-49
LIFO - Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
200 $ 22.00
24.00
25.00
27.00
28.00
600 x $22.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
$ 47,650.00
13,200.00
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-50
LIFO - Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
200 $ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
These are the
$ 47,650.00
most recently
600 x $22.00
acquired 13,200.00
1,350
units.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-51
LIFO - Periodic Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
$/Unit
200 $ 22.00
24.00
25.00
27.00
28.00
1,950
600
1,350 $4,400 + $30,050
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
$ 47,650.00
13,200.00
$ 34,450.00
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-52
LIFO - Perpetual Example
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 mouse pads in ending inventory.
Use the perpetual LIFO method to determine:
(1) Ending inventory cost.
(2) Cost of goods sold.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-53
LIFO - Perpetual Example
Yore Frame, Inc.
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for
Sale
Ending Inventory
Cost of Goods Sold
McGraw-Hill/Irwin
Units
800
300
250
200
400
1,950
600
1,350
$/Unit
$ 22.00
24.00
25.00
27.00
28.00
Total
$ 17,600.00
7,200.00
6,250.00
5,400.00
11,200.00
Date
9/1
9/10
9/30
Sales Units
600
300
450
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-54
LIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
Sold
600 x
22.00 =
13,200.00
Balance
$ 17,600.00
4,400.00
In LIFO, we assume that we sell the
newest units in inventory first.
In this case, the 600 “newest” units
come from beginning inventory,
leaving 200 units in the beginning
inventory layer.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-55
LIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
Sold
600 x
22.00 =
13,200.00
Balance
$ 17,600.00
4,400.00
11,600.00
The ending inventory on 9/3 consists of:
200 units from beginning inventory @ $22.00
300 units from the 9/3 purchase @ $24.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-56
LIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
10-Sep (from the 9/3 purchase)
Sold
600 x
22.00 =
13,200.00
300 x
24.00 =
7,200.00
Balance
$ 17,600.00
4,400.00
11,600.00
4,400.00
For the 9/30 sale, we must identify the 300 newest
units. They all come from the September 3
purchase.
Note that all of the 9/3 units have been “sold” and
only 200 of the beginning inventory units remain.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-57
LIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
10-Sep (from the 9/3 purchase)
15-Sep
250 x 25.00 =
6,250
Sold
600 x
22.00 =
13,200.00
300 x
24.00 =
7,200.00
Balance
$ 17,600.00
4,400.00
11,600.00
4,400.00
10,650.00
The ending inventory
on 9/15
consists
of:
Cost of Goods
Sold
=
20,400.00
200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-58
LIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
10-Sep (from the 9/3 purchase)
15-Sep
250 x 25.00 =
6,250
21-Sep
200 x 27.00 =
5,400
Sold
600 x
22.00 =
13,200.00
300 x
24.00 =
7,200.00
Balance
$ 17,600.00
4,400.00
11,600.00
4,400.00
10,650.00
16,050.00
The ending inventory
on 9/21
consists
of:
Cost of Goods
Sold
=
20,400.00
200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00
200 units from the 9/21 purchase @ $27.00
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-59
LIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
10-Sep (from the 9/3 purchase)
15-Sep
250 x 25.00 =
6,250
21-Sep
200 x 27.00 =
5,400
29-Sep
400 x 28.00 = 11,200
Sold
600 x
22.00 =
13,200.00
300 x
24.00 =
7,200.00
Balance
$ 17,600.00
4,400.00
11,600.00
4,400.00
10,650.00
16,050.00
27,250.00
The ending inventory
on 9/29
consists
of:
Cost of Goods
Sold
=
20,400.00
200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00
200 units from the 9/21 purchase @ $27.00
400 units from the 9/29 purchase @ $28.00.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-60
LIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
10-Sep (from the 9/3 purchase)
15-Sep
250 x 25.00 =
6,250
150
21-Sep
200 x 27.00 =
5,400
29-Sep
400 x 28.00 = 11,200
30-Sep (from the 9/29 purchase)
(from the 9/21 purchase)
Sold
600 x
22.00 =
13,200.00
300 x
24.00 =
7,200.00
400 x
50 x
28.00 =
27.00 =
11,200.00
1,350.00
Cost of Goods Sold =
32,950.00
Balance
$ 17,600.00
4,400.00
11,600.00
4,400.00
10,650.00
16,050.00
27,250.00
16,050.00
14,700.00
For the 9/30 sale, we must identify the 450 newest
units. 400 of them come from the 9/29 purchase.
The other 50 come from the 9/21 purchase.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-61
LIFO - Perpetual Example
Date
Purchased
200
Beg. Inv.
800 x 22.00 = 17,600
1-Sep
3-Sep
300 x 24.00 =
7,200
10-Sep (from the 9/3 purchase)
15-Sep
250 x 25.00 =
6,250
150
21-Sep
200 x 27.00 =
5,400
29-Sep
400 x 28.00 = 11,200
30-Sep (from the 9/29 purchase)
(from the 9/21 purchase)
Sold
600 x
22.00 =
13,200.00
300 x
24.00 =
7,200.00
400 x
50 x
28.00 =
27.00 =
11,200.00
1,350.00
Cost of Goods Sold =
32,950.00
Balance
$ 17,600.00
4,400.00
11,600.00
4,400.00
10,650.00
16,050.00
27,250.00
16,050.00
14,700.00
The ending inventory on 9/30 consists of:
200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00
150 units from the 9/21 purchase @ $27.00.
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-62
When Prices Are Rising . . .
FIFO
Matches low (older)
costs with current
(higher) sales.
Inventory is valued
approximates
replacement cost.
Results in higher
taxable income.
McGraw-Hill/Irwin
LIFO
Matches high (newer)
costs with current
(higher) sales.
Inventory is valued
based on low (older)
cost basis.
Results in lower taxable
income.
Is not officially
endorsed by the IASC.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-63
Decision Makers’ Perspective
What factors motivate companies to
select one inventory method over another?
How closely do
reported
costs reflect actual
flow of inventory?
How well are costs
matched against
related revenues?
How accurate are
the timing of
reported income
and income taxes?
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-64
LIFO Liquidation
When prices rise . . .
LIFO inventory costs on the balance
sheet are “out of date” because they reflect
old purchase transactions.
If inventory declines,
these “out of date” costs
may be charged to
current earnings.
McGraw-Hill/Irwin
This LIFO
liquidation
results in
“paper profits.”
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-65
LIFO Inventory Pools
Inventory Pools consist of
inventory units grouped
according to similarities.
Using Inventory Pools
with LIFO simplifies
record keeping.
McGraw-Hill/Irwin
For example, all
similar units
purchased at the same
time can be “pooled”
and assigned an
average unit cost.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-66
Dollar-Value LIFO (DVL)
DVL inventory pools are viewed as layers
of value, rather than layers of similar units.
DVL simplifies LIFO
record-keeping.
DVL minimizes the
probability of layer
liquidation.
McGraw-Hill/Irwin
At the
end of the
Example
period, we determine if
The inventory
replacement
a new
layer
inventory
differs
was added
byfrom
the
old inventory
on
comparing
ending
hand.
We to
just
create a
inventory
beginning
new
layer.
inventory.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-67
Dollar-Value LIFO (DVL)
We need to determine if the increase in
ending inventory over beginning inventory
was due to a price increase or an increase
in inventory.
1a. Compute a
Cost Index for the
year.
McGraw-Hill/Irwin
Cost index
in layer
year
=
Cost in
layer
year
÷
Cost in
base
year
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-68
Dollar-Value LIFO (DVL)
1b. Deflate the
ending
inventory
value using
the cost index.
1c. Compare
ending
inventory (at
base year
cost) to
beginning
inventory.
McGraw-Hill/Irwin
Ending
Inventory
at base
year cost
Ending
= Inventory ÷
Cost
Cost
Index
Ending
Change in
Inv. at
Beg.
=
–
Inventory
Base Year
Inventory
Cost
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-69
Dollar-Value LIFO (DVL)
Next, identify the layers in ending
inventory and the years they were created.
Convert each layer’s
base year cost to layer
year cost by
multiplying times the
cost index.
McGraw-Hill/Irwin
Sum all the layers to
arrive at Ending
Inventory at DVL
cost.
© 2004 The McGraw-Hill Companies, Inc.
Slide
8-70
End of Chapter 8
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc.