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Contemporary Mathematics FOR BUSINESS AND CONSUMERS Brechner
Inventory
PowerPoint Presentation by Domenic Tavella, MBA
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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PERFORMANCE OBJECTIVES
Section I Inventory Valuation
16-1: Pricing inventory by using the first-in,
first-out (FIFO) method
16-2: Pricing inventory by using the last-in,
first-out (LIFO) method
16-3:Pricing inventory by using the average
cost method
16-4: Pricing inventory by using the lower-ofcost-or-market (LCM) rule
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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PERFORMANCE OBJECTIVEScontinued
Section II Inventory Estimation
16-5: Estimating the value of ending inventory
by using the retail method
16-6: Estimating the value of ending inventory
by using the gross profit method
Section III Inventory Turnover and Targets
16-7: Calculating inventory turnover rate at
retail
16-8: Calculating inventory turnover rate at
cost
16-9: Calculating target inventories based on
industry standards
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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Inventory Valuation
inventory
• Goods that a company has in its possession at any
given time. May be in the form of raw materials,
partially finished goods, or goods available for sale.
merchandise inventory
• Goods purchased by wholesalers and retailers for
resale.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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Inventory Systems
periodic inventory system
• Inventory system in which merchandise is physically
counted at least once a year to determine the value
of the goods available for sale.
perpetual inventory system
• Inventory system in which goods available for sale
are updated on a continuous basis by computer.
• Purchases by the company are added to inventory,
whereas sales to customers are subtracted from
inventory.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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Inventory Systems
continued
book inventory
• Is the balance of a perpetual inventory system at any
given time.
• Must be confirmed with an actual physical count at
least once a year.
specific identification method
• Is a valuation method in which each item in inventory
is matched or coded with its actual cost.
• Is feasible only for low-volume merchandise flow
such as automobiles, boats, or other expensive
items.
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a publicly accessible website, in whole or in part.
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Methods for Pricing Inventory
first-in, first-out (FIFO) method
• Assumes the items purchased by a company first are the first
items to be sold. Items remaining in ending inventory at the end
of an accounting period are therefore considered as if they
were the most recently purchased.
last-in, first-out (LIFO) method
• Assumes the items purchased by a company last are the first
items to be sold. Items remaining in ending inventory at the end
of an accounting period are therefore considered as if they
were the oldest goods.
average cost, or weighted average, method
• Assumes the cost of each unit of inventory is the average cost
of all goods available for sale during that accounting period.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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STEPS
TO CALCULATE THE VALUE OF ENDING
INVENTORY BY USING FIFO
STEP 1 List the number of units on hand at the end of the year
and their corresponding costs starting with the ending
balance and working backward through the incoming
shipments.
STEP 2 Multiply the number of units by the corresponding cost
per unit for each purchase.
STEP 3 Calculate the value of ending inventory by totaling the
extensions from Step 2.
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a publicly accessible website, in whole or in part.
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EXHIBIT 16-1
First-In, First-Out—FIFO
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a publicly accessible website, in whole or in part.
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FIFO Example
Using the FIFO method of inventory pricing for the
following data , what is the dollar value of ending
inventory if 167 units were on hand on December 31?
Date
Inventory
Jan 1
Total
Units
Cost
Beginning inventory
235
140.00
32,900
March 10
Purchase
152
143.50
21,812
May 16
Purchase
135
146.80
Oct 9
Purchase
78
150.00
19,818
11,700
86,230
Total
FIFO Inventory Valuation (12/31)
Oct 9
May 16
Total
600
Units
78
89
167
Cost
150.00
146.80
Total
11,700
13,065.20
24,765.20
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a publicly accessible website, in whole or in part.
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Inventory Costs and Inventory
Valuation
When inventory costs are rising:
• FIFO: Higher gross profit
• LIFO: Lower gross profit
When inventory costs are decreasing:
• FIFO: Lower gross profit
• LIFO: Higher gross profit
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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STEPS
TO CALCULATE THE VALUE OF ENDING
INVENTORY BY USING LIFO
STEP 1 List the number of units on hand at the end of the
year and their corresponding costs starting with the
beginning inventory and working forward through
the incoming shipments.
STEP 2 Multiply the number of units by the corresponding
cost per unit for each purchase.
STEP 3 Calculate the value of ending inventory by totaling
the extensions from Step 2.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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EXHIBIT 16-2
Last-In, First-Out—LIFO
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a publicly accessible website, in whole or in part.
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Last-In, First-Out (LIFO) Method
Example
Using the LIFO method of inventory pricing for the
following data, what is the dollar value of ending
inventory if 167 units were on hand on December 31?
Date
Inventory
Units
Cost
Jan 1
Beginning inventory
235
140.00
March 10
Purchase
152
143.50
May 16
Purchase
135
146.80
Oct 9
Purchase
78
150.00
Total
LIFO Inventory Valuation (12/31)
Jan 1
600
Units
167
Cost
140.00
Total
32,900
21,812
19,818
11,700
86,230
Total
23,380
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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STEPS
TO CALCULATE THE VALUE OF ENDING
INVENTORY BY USING AVERAGE COST
STEP 1 Calculate the average cost per unit by using the
following formula.
Cost of goods available for sale
Average cost per unit = Total units available for sale
STEP 2 Calculate the value of ending inventory by
multiplying the number of units in ending inventory
by the average cost per unit.
Ending inventory = Units in ending inventory × Average cost per unit
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a publicly accessible website, in whole or in part.
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Average Cost Method Example
Using the average cost method of inventory pricing
for the following data, what is the dollar value of
ending inventory if 167 units were on hand on
December 31?
Units
Cost
Total
Beginning inventory
235
140.00
32,900
March 10
Purchase
152
143.50
21,812
May 16
Purchase
135
146.80
Oct 9
Purchase
78
150.00
19,818
11,700
86,230
Date
Inventory
Jan 1
Total
Average Cost Inventory Valuation
600
Units
86,230
600
Total Value =
167 x 143.72 =
Average Cost
=143.72
24,001.24
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a publicly accessible website, in whole or in part.
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STEPS
TO CALCULATE THE VALUE OF ENDING INVENTORY
BY USING THE LOWER-OF-COST-OR-MARKET RULE
STEP 1 Calculate the cost for each item in the inventory by using
one of the acceptable methods: FIFO, LIFO, or weighted
average.
STEP 2 Determine the market price or current replacement cost
for each item.
STEP 3 For each item, select the basis for valuation, cost or
market, by choosing the lower figure.
STEP 4 Calculate the total amount for each inventory item by
multiplying the number of items by the valuation price
chosen in Step 3.
STEP 5 Calculate the total value of the inventory by adding all the
figures in the Amount column.
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a publicly accessible website, in whole or in part.
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Lower-of-Cost-or-Market (LCM)
Rule Example
Determine the value of the following inventory
by using lower-of- cost-or-market rule.
Unit Price
Description
Valuation
Quantity
Cost
Market
Basis
Amount
Lamp
75
9.50
9.20
9.20
Tray
120
26.30
27.15
26.30
690.00
3,156.00
16’ vase
88
42.40
12’ vase
64
23.65
Fruit bowl
42
36.90
3,493.60
21.40
21.40
1,369.60
1,549.80
42.00
36.90
Total Value of Inventory 10,259.00
39.70
39.70
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a publicly accessible website, in whole or in part.
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Inventory Estimation
retail method
• Is used by most retailers based on a comparison of
goods available for sale at cost and at retail.
cost to retail price ratio, or cost ratio
• Is the ratio of goods available for sale at cost to the
goods available for sale at retail.
• Used in the retail method of inventory estimation to
represent the cost of each dollar of retail sales.
©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to
a publicly accessible website, in whole or in part.
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STEPS
TO ESTIMATE THE VALUE OF ENDING INVENTORY
BY USING THE RETAIL METHOD
STEP 1
List beginning inventory and purchases at both cost and retail.
STEP 2
Add purchases to beginning inventory to determine goods available for sale
at both cost and retail.
+
STEP 3
Calculate the cost ratio.
Cost ratio =
STEP 4
Goods available for sale at cost
Goods available for sale at retail
Subtract net sales from goods available for sale at retail to get ending
inventory at retail.
–
STEP 5
Beginning inventory
Purchases
Goods available for sale
Goods available for sale at retail
Net sales
Ending inventory at retail
Convert ending inventory at retail to ending inventory at cost by multiplying
the ending inventory at retail by the cost ratio.
Ending inventory at cost = Ending inventory at retail × Cost ratio
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a publicly accessible website, in whole or in part.
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Retail Method Example
Using the retail method, estimate the value of the
ending inventory at cost on August 31, from the
following information:
August 1 – August 31
Cost
Retail
Beginning inventory
600,000
800,000
Net purchases
285,000
380,000
885,000
1,180,000
Goods available for sale
Cost ratio 
Goods available for sale at cost
Goods available for sale at retail
Cost ratio 
885,000
 .75 =75%
1,180,000
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a publicly accessible website, in whole or in part.
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Retail Method Example continued
August 1 – August 31
Cost
Retail
Beginning inventory
600,000
800,000
Net purchases
285,000
380,000
Goods available for sale
885,000
1,180,000
Net sales
- 744,000
Ending inventory
436,000
Ending inventory at cost =
Ending inventory at retail × Cost Ratio
Ending inventory at cost =
436,000 × .75 = 327,000
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a publicly accessible website, in whole or in part.
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Inventory Estimation: Gross Profit
Method
gross profit or gross margin method
• Uses a company’s gross margin percent to estimate
the ending inventory. This method assumes that a
company maintains approximately the same gross
margin from year to year.
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a publicly accessible website, in whole or in part.
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STEPS
STEP 1
TO ESTIMATE THE VALUE OF ENDING INVENTORY
BY USING THE GROSS PROFIT METHOD
Calculate the goods available for sale.
+
STEP 2
Beginning inventory
Net Purchases
Goods available for sale
Find the estimated cost of goods sold by multiplying net sales
by the cost of goods sold percent (complement of gross
margin percent).
Estimated cost of goods sold = Net sales(100% – Gross margin %)
STEP 3
Calculate the estimate of ending inventory by subtracting the
estimated cost of goods sold from the goods available for sale.
–
Goods available for sale
Estimated cost of goods sold
Estimated ending inventory
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a publicly accessible website, in whole or in part.
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Gross Profit Method Example
A firm maintains a gross margin of 41% on all its
inventory. In November, the company had a beginning
inventory of $149,000, net purchases of $242,000, and
net sales of $425,000. Use the gross profit method to
estimate the cost of ending inventory in November.
Beginning inventory
149,000
Net Purchases
+242,000
Goods available for sale
391,000
Estimated cost of goods sold =
Net sales × (100% - Gross margin %)=
425,000 (100% - 41%) = 425,000 (.59) = $250,750
Goods available for sale
391,000
Estimated cost of goods sold
-250,750
Estimated ending inventory 140,250
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a publicly accessible website, in whole or in part.
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Inventory Turnover and Targets
inventory or stock turnover
• The number of times during an operating period that
the average dollars invested in merchandise
inventory was theoretically sold out or turned over.
• May be calculated in retail dollars or in cost dollars.
average inventory
• An estimate of a company’s typical inventory at any
given time, calculated by dividing the total of all
inventories taken during an operating period by the
number of times inventory was taken.
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a publicly accessible website, in whole or in part.
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STEPS
TO CALCULATE INVENTORY TURNOVER RATE AT
RETAIL
STEP 1 Calculate average inventory at retail.
Average inventory at retail =
Beginning inventory at retail + Ending inventory at retail
2
STEP 2 Calculate the inventory turnover at retail.
Round to the nearest tenth when necessary.
Inventory turnover at retail =
Net sales
Average inventory at retail
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a publicly accessible website, in whole or in part.
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Inventory Turnover Rate at Retail
Example
A firm had net sales of $260,700 for the year. If the beginning
inventory at retail was $65,100 and the ending inventory at retail
was $52,800, what are (a) the average inventory and (b) the
inventory turnover rounded to the nearest tenth?
Average inventoryat retail 
Begin inventory at retail  Ending inventory at retail
2
Average inventory at retail  65,100 + 52,800 = $58,950
2
Inventory turnoverat
retail
Inventory turnoverat retail 

Net sales
Average inventory at retail
260,700
58,950
= 4.4
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a publicly accessible website, in whole or in part.
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STEPS
TO CALCULATE INVENTORY TURNOVER RATE AT
COST
STEP 1 Calculate average inventory at cost.
Average inventory at cost =
Beginning inventory at cost + Ending inventory at cost
2
STEP 2 Calculate the inventory turnover at cost.
Inventory turnover at cost =
Cost of goods sold
Average inventory at cost
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a publicly accessible website, in whole or in part.
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Inventory Turnover Rate at Cost
Example
A store had a cost of goods sold of $756,400 for the year. If the
beginning inventory at cost was $43,500 and the ending inventory at
cost was $59,300, what are (a) the average inventory at cost and (b)
the inventory turnover rounded to the nearest tenth?
Average inventoryat cost 
Begin inventory at cost  Ending inventory at cost
2
Average inventory at cost  43,500 + 59,300 = $51,400
2
Inventory turnoverat cost 
Inventory turnoverat cost 
Cost of goods sold
Average inventory at cost
756,400 = 14.7
51,400
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a publicly accessible website, in whole or in part.
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Target Inventories
target average inventory
• Inventory standards published by trade associations
and the federal government for companies of all
sizes and in all industries.
• Used by managers as targets for the ideal amount of
inventory to carry for maximum efficiency.
cost

Cost of goods sold
Published inventory turnover at cost
retail

Net sales
Published inventory turnover at retail
Target average inventoryat
Target average inventoryat
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a publicly accessible website, in whole or in part.
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Target Inventories Example
A firm had net sales of $2,650,000 for the year. The beginning
inventory at retail was $495,000, and the ending inventory at retail
amounted to $380,000. The inventory turnover at retail published as
the standard for a business of this size is seven times. (a) Calculate
the average inventory and actual inventory turnover for the
company. (b) If the turnover is less than seven times, calculate the
target average inventory needed to come up to industry standards.
Average inventoryat retail 
Begin inventory at retail  Ending inventory at retail
2
Average inventory at retail 
495,000 + 380,000
2
= $437,500
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a publicly accessible website, in whole or in part.
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Target Inventories Example
Inventory turnoverat
retail
Inventory turnoverat retail 
Target average inventoryat
retail

Target average inventory at retail 

continued
Net sales
Average inventory at retail
2,650,000
437,500
= 6.1
Net sales
Published inventory turnover at retail
2,650,000
7
= $378,571.43
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a publicly accessible website, in whole or in part.
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CHAPTER REVIEW PROBLEM 1
A firm had net sales of $340,250 for the year. If the beginning
inventory at retail was $82,300 and the ending inventory at retail
was $61,750, what are (a) the average inventory and (b) the
inventory turnover rounded to the nearest tenth?
Average inventoryat retail 
Begin inventory at retail  Ending inventory at retail
2
Average inventory at retail  82,300 + 61,750 = $72,025
2
Inventory turnoverat retail 
Inventory turnoverat retail 
Net sales
Average inventory at retail
340,250
72,025
= 4.7
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a publicly accessible website, in whole or in part.
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