Frequency in Use of Inventory Methods

1. Frequency in Use of Inventory Methods P1 5-1

2. Inventory Costing Illustration P1 5-2

3. Specific Identification P1 The above purchases were made in August. On August 14, a company sold eight bikes originally costing $91 and twelve bikes originally costing $106. 5-3

4. First-In, First-Out (FIFO) P1 The Cost of Goods Sold for the August 14 sale is $1,970. After this sale, there are five units in inventory at $530: 5 @ $106 5-4

5. Last-In, First-Out (LIFO) P1 The Cost of Goods Sold for the August 14 sale is $2,045. After this sale, there are five units in inventory at $455: 5 @ $91 5-5

6. ÷ Weighted Average P1 First, we need to compute the weighted average cost per unit of items in inventory. The Cost of Goods Sold for the August 14 sale is $2,000.After this sale, there are five units in inventory at $500: 5-6

7. Because prices change, inventory methods nearly always assign different cost amounts. Financial Statement Effects of Costing Methods A1 5-7

8. First-In, First-Out (FIFO) P1 The above purchases were made in August. On August 14, the company sold 20 bikes. 5-8

9. Last-In, First-Out (LIFO) P1 The above purchases were made in August. On August 14, the company sold 20 bikes. 5-9

10. Specific Identification P1 The Cost of Goods Sold for the 20 bikes sold on the August 14 sale is $2,000. 8 bikes @ 91 = $ 728 12 bikes @ 106 = $1,272 After this sale, there are five units in inventory at $500: 2 bikes @ $91 = $ 182 3 bikes @ $106 = $ 318 5-10

11. Specific Identification P1 Additional purchases were made on August 17 and 28. The cost of the 23 items sold on August 31 were as follows: 2 @ $91 3 @ $10615 @ $115 3 @ $119 5-11

12. Cost of Goods Sold for August 31 = $2,582 Specific Identification P1 5-12

13. Specific Identification P1 Here are the entries to record the purchases and sales. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150 5-13

14. Cost of Goods Sold for August 31 = $2,600 First-In, First-Out (FIFO) P1 5-14

15. Income Statement COGS = $4,570 Balance Sheet Inventory = $1,420 First-In, First-Out (FIFO) P1 5-15

16. First-In, First-Out (FIFO) P1 Here are the entries to record the purchases and sales entries. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150 5-16

17. Cost of Goods Sold for August 31 = $2,685 Last-In, First-Out (LIFO) P1 5-17

18. Income Statement COGS = $4,730 Balance Sheet Inventory = $1,260 Last-In, First-Out (LIFO) P1 5-18

19. Last-In, First-Out (LIFO) P1 Here are the entries to record the purchases and sales entries. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150 5-19

20. When a unit is sold, theaverage costof each unit in inventory is assigned to cost of goods sold. ÷ Cost of Goods Available for Sale Units on hand on the date of sale Weighted Average P1 5-20

21. Weighted Average P1 Additional purchases were made on August 17 and 28. Twenty-three bikes were sold on August 31. What is the weighted average cost per unit of items in inventory? 5-21

22. ÷ Weighted Average P1 5-22

23. Cost of Goods Sold for August 31 = $2,622 Weighted Average P1 Ending inventory is comprised of 12 units @ an average cost of $114 each or $1,368. 5-23

24. Income Statement COGS = $4,622 Balance Sheet Inventory = $1,368 Weighted Average P1 5-24

25. Weighted Average P1 Here are the entries to record the purchases and sales entries for Trekking. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150 5-25

26. Smoothes out price changes. Ending inventory approximates current replacement cost. Better matches current costs in cost of goods sold with revenues. Financial Statement Effects of Costing Methods A1 Advantages of Methods Weighted Average First-In, First-Out Last-In, First-Out 5-26

27. The Internal Revenue Service (IRS) identifies several acceptable methods for inventory costing for reporting taxable income. Tax Effects of Costing Methods A1 If LIFO is used for tax purposes, the IRS requires it be used in financial statements. 5-27

28. The consistency concept requires a company to use the same accounting methods period after period so that financial statements are comparable across periods. Consistency in Using Costing Methods A1 5-28

29. Inventory must be reported at market value when market is lowerthan cost. Defined as current replacement cost (not sales price). Consistent withthe conservatismprinciple. Lower of Cost or Market P2 Can be applied three ways: (1) separately to each individual item. (2) to major categories of assets. (3) to the whole inventory. 5-29

30. A motorsports retailer has the following items in inventory: Lower of Cost or Market P2 5-30

31. Here is how to compute lower of cost or market for individual inventory items. Lower of Cost or Market P2 5-31

32. Financial Statement Effects of Inventory Errors A2 Income Statement Effects 5-32

33. Financial Statement Effects of Inventory Errors A2 Balance Sheet Effects 5-33

34. Shows how many times a company turns over its inventory during a period. Indicator of how well management is controlling the amount of inventory available. Cost of goods sold Inventory = turnover Average inventory Inventory Turnover A3 5-34

35. Ending inventory Days' sales in × = 365 inventory Cost of goods sold Days’ Sales in Inventory A3 Reveals how much inventory is available in terms of the number of days’ sales. 5-35

36. End of Chapter 5 5-36