HFT 2403
Chapter 10
Inventory
Inventory
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Goods that a firm holds for resale to
its guests
As a percentage of total assets, it
should be low for a hospitality
operation
Inventory has a large impact on
profit, therefore it should be
monitored carefully
Internal Control of Inventory
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Maintain separation of duties- Custodian
of the inventory records and custodian of
the inventory
Complete periodic physical inventories
Investigate any significance variances in
inventory
Complete a daily inventory of high-priced
items
Inventory storeroom should be secured
and access limited to authorized
personnel
Perpetual Inventory System
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Continuously updates the
merchandise inventory account
Uses record cards to monitor
purchases and requisitions from the
storeroom
Occasional physical inventories are
completed to verify the status of the
inventory to the record cards.
Periodic Inventory System
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Does not keep a continuous record
of the inventory items.
Between physical inventory counts,
only estimates of inventory is
available.
Uses a Purchases account when
inventory items are purchased.
Uses a calculated cost of good sold
statement
Effects on Profit from Inventory Errors
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Error in Inventory
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Beginning
Inventory
Understated
Beginning
Inventory
Overstated
Ending Inventory
Understated
Ending Inventory
Overstated
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Effect on Profit
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Overstated
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Understated
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Understated
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Overstated
Completion of the Physical Inventory
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Should be a minimum of two people
Final inventory should be “footed”
by another person to insure
accuracy
Ensure a proper cut-off period
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Items physically in the storeroom but
already sold should not be counted
Items that are received but not
invoiced should be included in the
inventory
Transportation Costs
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Should be included in the total
purchase price
FOB Destination or FOB Shipping
Point
FOB Destination – Shipper pays the
freight
FOB Shipping Point – Indicates the
point of origin. The buyer pays
shipping costs.
Inventory Valuation Methods
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Specific Identification
FIFO
LIFO
Weighted Average
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These are valuation methods only and
may not parallel the physical flow of
goods through the storeroom
Specific Identification
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Used to value big ticket items
Exact costs are used to value the
inventory items
Usually have very few of these
items in inventory
Weighted Average
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Total number of inventory units
available for sale is divided into the
total cost of the units purchased.
This gives an “average” cost, which
is used as the per unit cost in the
inventory
FIFO
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First In – First Out
Assumes that the first units
purchased into inventory are the
first units out of inventory.
The inventory consists of the latest
purchases, while the cost of goods
sold consists of the earliest
purchases.
LIFO
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Last In – First Out
Assumes the first units in are the
last units out
Inventory pricing consist of the
earliest purchases
LIFO Versus FIFO
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In an inflationary climate, FIFO results in
a higher inventory value and a lower cost
of good sold. Will increase profit.
In an inflationary period, LIFO results in a
lower inventory value and a higher coast
of goods sold. Will reduce profit. Can be
used for tax purposes.
In a deflationary period, FIFO results in a
lower inventory value and higher cost of
goods sold
In a deflationary period, LIFO results in a
higher inventory value and a lower cost of
goods sold.
Lower of Cost or Market (LCM) and
Gross Profit Methods
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Inventory cost is based using the
lowest of either the market value or
the original cost.
Can be done on either an item by
item basis or in total
This method is based on the
conservatism principle
Gross Profit Method assumes
consistent cost percentages over a
period of time.
Homework
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Problem 7
Problem 8
Problem 9 – Using the instructions
for problem 11. Ignore the
instructions given in the problem
Problem 11
Problem 13 - do the calculation for
both problems 11 & 13. Use $100
sales price per unit for problem 13.