Inventory

1. Inventory By Rachelle Agatha, CPA, MBA Slides by Rachelle Agatha, CPA, with excerpts from Warren, Reeve, Duchac

2. 0 Objectives Describe the importance of control over inventory. Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet. Determine the cost of inventory under the perpetual system, using the FIFO, LIFO, and average cost methods.

3. 0 Objectives • Determine the cost of inventory under the periodic system, using the FIFO, LIFO, and average cost methods. • Compare and contrast the use of the three inventory costing methods. Describe and illustrate the reporting of merchandise inventory in the financial statement.

4. 0 Objective 1 Describe the importance of control over inventory.

5. 0 Two primary objectives of control over inventory are: • Safeguarding the inventory, and • Properly reporting it in the financial statements.

6. 0 Controls over inventory include developing and using security measures to prevent inventory damage or customer or employee theft.

7. 0 To ensure the accuracy of the amount of inventory reported in the financial statements, a merchandising business should take a physical inventory.

8. 0 Objective 2 Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet.

9. Inventory Costing Methods

14. 0 Objective 3 Determine the cost of inventory under the perpetual inventory system, using FIFO, LIFO, and average cost methods.

15. In FIFO, the cost in ending inventory are the newer costs and the cost of merchandise sold has the older cost (First In – First out). FIFO - cost inventory from the bottom up. Newest in is sitting in inventory.

16. FIFO Perpetual Inventory

17. FIFO Perpetual Inventory

18. FIFO Perpetual Inventory

20. In LIFO, the cost in ending inventory are the older cost and the cost of merchandise sold has the newer cost (Last In – First out). LIFO - cost inventory from the top down. Oldest is sitting in inventory.

21. LIFO Perpetual Inventory

22. LIFO Perpetual Inventory

23. LIFO Perpetual Inventory

26. When the Average Cost Method is used with in a perpetual system, the average cost for each type of item is computed each time a purchase is made The Average Cost Method is rarely used in a perpetual system so it is not illustrated.

27. 0 Computerized Perpetual Accounting Systems Most companies will use a computerized system if they chose to do perpetual inventory as is it very time intensive manually. Computerized systems track all relevant information about each inventory item, such as description, quantity, cost, size, location. For every inventory transaction, there is an entry into the system. Companies will use bar codes, scanners, and other technology. A physical inventory is taken at the end of the year and compared to the system records.

28. 0 Objective 4 Determine the cost of inventory under the periodic inventory system, using FIFO, LIFO, and average cost methods.

29. 0 FIFO Periodic Using FIFO, the earliest batch purchased is considered the first batch of merchandise sold. The physical flow does not have to match the accounting method chosen.

30. FIFO Periodic

31. FIFO Periodic

33. 0 LIFO Periodic Using LIFO, the most recent batch purchased is considered the first batch of merchandise sold. The actual flow of goods does not have to be LIFO. For example, a store selling fresh fish would want to sell the oldest fish first (which is FIFO) even though LIFO is used for accounting purposes.

34. LIFO Periodic

35. LIFO Periodic

37. 0 Average Cost The weighted average unit cost method is based on the average cost of identical units. The total cost of merchandise available for sale is divided by the related number of units of that item.

38. Average Cost - Periodic

39. Average Cost - Periodic

40. 0 Objective 5 Compare and contrast the use of the three inventory costing methods.

41. Comparison of Methods

42. Comparison of Methods

43. Comparison of Methods

44. Comparison of Methods

45. Comparison of Methods

46. 0 Objective 6 Describe and illustrate the reporting of merchandise inventory in the financial statements.

47. 0 7-6 Lower-of-Cost-or-Market Method If the cost of replacing an item in inventory is lower than the original purchase cost, the lower-of-cost-or-market (LCM) methodis used to value the inventory.

48. 0 Market, as used in lower of cost or market, is the cost to replace the merchandise on the inventory date.

49. 0 Cost and replacement cost can be determined for— • each item in the inventory, • major classes or categories of inventory, or • the inventory as a whole.