Inventories
Chapter 7
© 2009 The McGraw-Hill Companies, Inc.
Reporting Inventory and Cost of Goods Sold
Merchandisers
Manufacturers
Usually hold merchandise
inventory, which they acquire
in finished condition, ready for
sale without further processing.
Often hold three types of
inventory, each of which
represents a different stage in
the manufacturing process.
Short-term investments
AMERICAN EAGLE OUTFITTERS, INC.
Partial Consolidated Income Statement
For the Year Ended January 31, 2007
(in millions)
Assets
Net sales
$2,794
Cost of goods sold
1,454
$60
Gross profit
1,340
767
Merchandise inventory
264
AMERICAN EAGLE OUTFITTERS, INC.
Partial Consolidated Balance Sheet
At January 31, 2007
(in millions)
Assets
Current assets:
Cash and cash equivalents
Accounts and note receivable
26
Prepaid expenses and other
34
McGraw-Hill/Irwin
Slide 2
Cost of Goods Sold Equation
Beginning
Inventory
$40,000
Purchases
$55,000
Cost of Goods
Available for Sale
$95,000
Still here
Sold
Ending
Inventory
$35,000
Cost of
Goods Sold
$60,000
(Balance Sheet)
(Income Statement)
BI + P – CGS = EI
McGraw-Hill/Irwin
Slide 3
Cost of Goods Sold Equation
Cost of Goods Sold Calculation
Beginning inventory
Plus: Purchases of merchandise during the year
Goods available for sale
Less: Cost of goods sold
Ending inventory
+
McGraw-Hill/Irwin
Merchandise Inventory (A)
BI
P
40,000
55,000
EI
35,000
60,000
$40,000
55,000
95,000
60,000
$35,000
-
CGS
Slide 4
Inventory Costing Methods
How do we determine cost of goods sold when the
same inventory item is purchased at different prices?
5/3
5/5
5/6
5/8
Purchased 1 units of Product A for $70
Purchased 1 units of Product A for $75
Purchased 1 units of Product A for $95
Sold 2 units of Product A for $125 each.
Generally accepted inventory costing methods provide
four methods of dealing with this problem:
1.Specific identification,
2.First-in, first-out (FIFO),
3.Last-in, first-out (LIFO), and
4.Weighted average
McGraw-Hill/Irwin
Slide 5
Inventory Costing Methods
FIFO
LIFO
May 6
$95
May 5
$75
May 3
$70
Weighted average
May 6
$95
May 5
$75
May 3
$70
May 6
$95
May 5
$75
May 3
$70
$240 = $80
3
Income Statement
Net sales
$250
Cost of goods sold
145
Gross profit
$105
Income Statement
Net sales
$250
Cost of goods sold
170
Gross profit
$80
Income Statement
Net sales
$250
Cost of goods sold
160 2 × $80
Gross profit
$90
Balance Sheet
Inventory
Balance Sheet
Inventory
Balance Sheet
Inventory
$95
$70
$80
1 × $80
McGraw-Hill/Irwin
Slide 6
Cost-Flow Methods Under a
Perpetual Inventory System
In a perpetual inventory system all inventory purchases,
and sales and cost of goods sold are recorded in
sequence as they occur. Consider the following
information provided by American Eagle for it AE Alpine
Bomber Jacket, each selling for $150 per unit.
Date
Description
Jan. 1 Beginning inventory
Jan. 12 Purchase
Jan. 17 Sale
Purchase
Jan. 19
Jan. 26 Sale
Units
20
60
50
20
32
Unit
Cost
$70
80
100
Total
Balance
Cost
in Units
$1,400
20
4,800
80
30
2,000
50
18
$8,200
McGraw-Hill/Irwin
Slide 7
First-In, First-Out Method FIFO
FIFO Perpetual Calculations
Purchases
Unit
Total
Units Cost
Cost
Cost of Goods Sold
Unit
Total
Units Cost
Cost
Beginning
Jan. 1 inventory
Jan. 12 Purchase
60
$80
$4,800
Jan. 17 Sale
Jan. 19 Purchase
20
100
McGraw-Hill/Irwin
80
$70
$1,400
30
80
2,400
2,000
Jan. 26 Sale
Totals
20
$6,800
30
80
2,400
2
100
200
82
$6,400
Inventory Balance
Unit
Total
Units Cost
Cost
20
$70
$1,400
60
80
4,800
30
80
2,400
20
100
2,000
18
100
1,800
18
$1,800
Slide 8
Last-In, First-Out Method (LIFO)
LIFO Perpetual Calculations
Purchases
Unit
Total
Units Cost
Cost
Jan. 1 Beginning inventory
Jan. 12 Purchase
Jan. 17 Sale
Jan. 19 Purchase
Jan. 26 Sale
Totals
McGraw-Hill/Irwin
60
20
80
$80
100
Cost of Goods Sold
Unit
Total
Units Cost
Cost
$4,800
50
$80
$4,000
20
10
2
82
100
80
70
2,000
800
140
$6,940
2,000
$6,800
Inventory Balance
Unit
Total
Units Cost
Cost
20
60
20
10
20
18
18
$70
80
70
80
100
100
$1,400
4,800
1,400
800
2,000
1,800
$1,260
Slide 9
Weighted Average Cost Method
Weighted Average - Perpetual
Purchases
Units
Unit
Cost
Cost of Goods Sold
Total Cost Units
Unit Cost Total Cost Units
Jan. 1 Beginning inventory
Jan. 12 Purchase
60
$80
50
Jan. 19 Purchase
20
100
32
80
$70.00
$1,400
60
80.00
4,800
30
77.50
2,325
20
100.00
2,000
2,768
18
86.50
1,557
$6,643
18
$3,875
2,000
Jan. 26 Sale
Totals
$77.50
$6,800
86.50
82
Unit Cost Total Cost
20
$4,800
Jan. 17 Sale
Inventory Balance
$1,557
($1,400 + $4,800) ÷ (20 + 60) = $77.50 per
unit
($2,325 + $2,000) ÷ (30 + 20) = $86.50 per
unit
McGraw-Hill/Irwin
Slide 10
Financial Statement Effects of
Inventory Costing Methods
Effect on the Income Statement
Sales
Cost of goods sold
Gross Profit
Effect on the Balance Sheet
Inventory
FIFO
LIFO
WAC
$12,300
6,400
5,900
$12,300
6,940
5,360
$12,300
6,643
5,657
$1,800
$1,260
$1,557
Effects of Increasing Costs on the Financial Statements
Inventory on balance sheet
Cost of goods sold on income statement
McGraw-Hill/Irwin
FIFO
Higher
Lower
LIFO
Lower
Higher
Slide 11
Financial Statement Effects of
Inventory Costing Methods
FIFO
Jan. 12 Inventory (+A)
Accounts Payable (+L)
Jan. 17 Cash (+A)
Sales Revenue (+R, +OE)
Cost of Goods Sold (+E, -OE)
Inventory (-A)
Debit
4,800
4,800
7,500
3,800
Jan. 26 Cash (+A)
Sales Revenue (+R, +OE)
4,800
7,500
4,000
4,000
2,000
3,875
2,000
2,000
4,800
4,800
2,000
4,800
4,800
2,940
2,600
7,500
3,875
2,000
2,600
WAC
Debit
Credit
4,800
4,800
7,500
3,800
2,000
McGraw-Hill/Irwin
7,500
7,500
Jan. 19 Inventory (+A)
Accounts Payable (+L)
Cost of Goods Sold (+E, -OE)
Inventory (-A)
Credit
LIFO
Debit
Credit
4,800
4,800
4,800
2,768
2,940
2,768
Slide 12
Do It……
The accounting records of Shumway AG Implement show the following
data:
Beginning Inventory
4000 units @ $3
Purchases
6000 units @ $4
Sales
7000 units @ $12
Determine the Cost of Goods sold during the period using the
a) FIFO Method
b) LIFO Method
c) Average method
McGraw-Hill/Irwin
Slide 13