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Effective Inventory Control Strategies and Costing Methods

Understand inventory management, internal controls, compute costs using FIFO, LIFO, and average cost methods, and journalize transactions in this informative chapter.

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Effective Inventory Control Strategies and Costing Methods

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  1. Inventory Chapter 8

  2. Objective 1 Describe inventory and discuss the related internal controls

  3. Inventory • Goods that a business owns and has available to sell to customers as part of normal operations • Current asset – usually listed after accounts receivable

  4. Internal Controls • Separation of access to assets from access to record • Secure inventory items • Physical count at least once a year • Maintain perpetual records of inventory transactions • Document purchases and sales

  5. Objective 2 Compute inventory costs using first-in, first-out (FIFO), last-in, first-out (LIFO), and average cost methods and journalize inventory transactions

  6. Inventory Costing Methods • Specific Unit Cost • FIFO • LIFO • Average Cost

  7. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  8. FIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 40 $40

  9. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  10. FIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory. 270 Accounts Payable 270 July 5

  11. FIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $270 Because the purchase price of $45 is different than the cost of the previous unit on hand, the inventory balance of 7 units is accounted for separately.

  12. Cost of Goods Sold Ending Inventory First-In, First-Out (FIFO) Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

  13. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  14. FIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $470 Because the purchase price of $45 is different than the cost of the previous unit on hand, the inventory balance of 7 units is accounted for separately.

  15. FIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $470 15 1 $40 $40 3 $45 $135 3 $45 $135

  16. FIFO Perpetual Inventory Accounting Date Description Debit Credit Accounts Receivable 320 Sales 320 Cost of Goods Sold 175 Inventory 175 July 15

  17. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  18. FIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory. 350 Accounts Payable 350 July 26

  19. FIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $270 15 1 $40 $40 3 $45 $135 3 $45 $135 26 7 $50 $350 3 $45 $135 7 $50 $350

  20. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  21. Cost of Goods Sold Ending Inventory First-In, First-Out (FIFO) Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

  22. FIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $470 15 1 $40 $40 3 $45 $135 3 $45 $135 26 7 $50 $350 3 $45 $135 7 $50 $350

  23. FIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $470 15 1 $40 $40 3 $45 $135 3 $45 $135 26 7 $50 $350 3 $45 $135 7 $50 $350 31 3 $45 $135 5 $50 $250 2 $50 $100

  24. FIFO Perpetual Inventory Accounting Date Description Debit Credit Accounts Receivable 640 Sales 640 Cost of Goods Sold 385 Inventory 385 July 31

  25. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  26. FIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory. 275 Accounts Payable 275 July 31

  27. FIFO Perpetual Inventory Account Item DVD’s Purchases Cost Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $470 15 1 $40 $40 3 $45 $135 3 $45 $135 26 7 $50 $350 3 $45 $135 7 $50 $350 31 3 $45 $135 31 5 $50 $250 2 $50 $100 31 5 $55 $275 2 $50 $100 5 $55 $275

  28. Inventory Shrinkage • Loss of inventory • Compare physical count with balance in books • Sources • Breakage • Theft • Obsolescence

  29. Inventory Shrinkage • Took a physical count of DVD’s and determined that two were damaged during shipment. • Record the adjusting entry for inventory shrinkage.

  30. FIFO Perpetual Inventory Account Item Suede Jacket Purchases Cost Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $470 15 1 $40 $40 3 $45 $135 3 $45 $135 26 7 $50 $350 3 $45 $135 7 $50 $350 31 3 $45 $135 31 5 $50 $250 2 $50 $100 31 5 $55 $275 2 $50 $100 5 $55 $275

  31. Cost of Goods Sold and shrinkage Ending Inventory First-In, First-Out (FIFO) Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

  32. Inventory Shrinkage Inventory value of 5 units Remaining 5 at $55 = $275 ($375-$275 = $100)

  33. FIFO Inventory Shrinkage Date Description Debit Credit Cost of Goods Sold 100 Inventory 100 July 31

  34. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  35. LIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 40 $40

  36. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  37. LIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory270 Accounts Payable 270 July 5

  38. LIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Nov. 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $270 Because the purchase price of $45 is different than the cost of the previous unit on hand, the inventory balance of 7 units is accounted for separately.

  39. Cost of Goods Sold Ending Inventory Last-In, First-Out (LIFO) Valued based on the most recent costs of purchases Valued based on the earlier costs of purchases

  40. LIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $270 Because the purchase price of $45 is different than the cost of the previous unit on hand, the inventory balance of 7 units is accounted for separately.

  41. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  42. Cost of Goods Sold Ending Inventory Last-In, First-Out (LIFO) Valued based on the most recent costs of purchases Valued based on the earlier costs of purchases

  43. LIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $270 Because the purchase price of $45 is different than the cost of the previous unit on hand, the inventory balance of 7 units is accounted for separately.

  44. LIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $270 15 1 $40 $40 4 $45 $180 2 $45 $90

  45. LIFO Perpetual Inventory Accounting Date Description Debit Credit Accounts Receivable 320 Sales 320 Cost of Goods Sold 180 Inventory 180 July 15

  46. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  47. LIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory. 350 Accounts Payable 350 July 26

  48. LIFO Perpetual Inventory Account Item DVD’s Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost July 1 1 $40 $40 5 6 $45 $270 1 $40 $40 6 $45 $270 15 1 $40 $40 4 $45 $180 2 $45 $90 26 7 $50 $350 1 $40 $50 2 $45 $90 7 $50 $350

  49. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Smart Touch Learning Units Cost Price July 1 Inventory 1 $40 5 Purchase 6 $45 15 Sale 4 $80 26 Purchase 7 $50 31 Sale 8 $80 31 Purchase 5 $55 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  50. Cost of Goods Sold Ending Inventory Last-In, First-Out (LIFO) Valued based on the most recent costs of purchases Valued based on the earlier costs of purchases

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