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LESSON 20-2 Determining the Cost of Merchandise Inventory

LESSON 20-2 Determining the Cost of Merchandise Inventory. Learning Objectives. LO 2 Calculate the cost of merchandise inventory using the first-in, first-out (FIFO) inventory costing method.

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LESSON 20-2 Determining the Cost of Merchandise Inventory

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  1. LESSON20-2 Determining the Cost ofMerchandise Inventory Learning Objectives LO2Calculate the cost of merchandise inventory using the first-in, first-out (FIFO) inventory costing method. LO3 Calculate the cost of merchandise inventory using the last-in, first-out (LIFO) inventory costing method. LO4 Calculate the cost of merchandise inventory using the weighted-average inventory costing method.

  2. Lesson 20-2 First-In, First-Out Inventory Costing Method LO2 Using the price of merchandise purchased first to calculate the cost of merchandise sold first is called the first-in, first-out inventory costing method. • The first-in, first-out method is frequently abbreviated as FIFO. SLIDE 2

  3. Lesson 20-2 First-In, First-Out Inventory Costing Method LO2 3 4 1 2 5 Units from the Most Recent Purchase Units Needed to Equal the Total Units on Hand Unit Cost Times FIFO Units Total Unitson Hand Total FIFO Cost SLIDE 3

  4. Lesson 20-2 Last-In, First-Out Inventory Costing Method LO3 Using the price of merchandise purchased last to calculate the cost of merchandise sold first is called the last-in, first-out inventory costing method. • The last-in, first-out method is frequently abbreviated as LIFO. SLIDE 4

  5. Lesson 20-2 Last-In, First-Out Inventory Costing Method LO3 5 1 4 6 3 2 Unit Cost Times LIFO Units Units Needed to Equal the Total Units on Hand Beginning Inventory Units Units from the Earliest Purchase Total Unitson Hand Total LIFO Cost SLIDE 5

  6. Lesson 20-2 Weighted-Average Inventory Costing Method LO4 Using the average cost of beginning inventory plus merchandise purchased during a fiscal period to calculate the cost of merchandise sold is called the weighted-average inventory costing method. • The average unit price of the total inventory available is calculated. • This average unit price is used to calculate both ending inventory and cost of merchandise sold. • The average cost of merchandise is then charged against current revenue. SLIDE 6

  7. Lesson 20-2 Weighted-Average Inventory Costing Method LO4 Total Cost of Inventory Available 1 Weighted-Average Cost per Unit 2 Cost of Ending Inventory 3 SLIDE 7

  8. Lesson 20-2 Inventory Costing Method and Actual Flow of Inventory LO4 Flow in inventory doesn’t have to match costing method • A grocery store may use FIFO. • A hardware store may use LIFO. • A gas station may use weighted-average. • All of the above can choose any costing method they like, it doesn’t have to be the same as the flow of the inventory. SLIDE 8

  9. Lesson 20-2 Calculating the Cost of Merchandise Sold LO4 SLIDE 9

  10. Lesson 20-2 Comparison of Inventory Methods LO4 SLIDE 10

  11. Lesson 20-2 Lower of Cost or Market Inventory Costing Method LO4 The cost that must be paid to replace an asset is called themarket value. Using the lower of cost or market value to calculate the cost of ending merchandise inventory is called the lower of cost or market inventory costing method (LCM). • In this context, cost refers to the actual amount paid for the unit of inventory on hand. • Market refers to the amount that must be paid to replace the unit of inventory. SLIDE 11

  12. Lesson 20-2 Lower of Cost or Market Inventory Costing Method LO4 Calculate the cost Calculate the market value Determine the smaller number to use as the lower of cost or market SLIDE 12

  13. Lesson 20-2 Lesson 20-2 Audit Your Understanding 1. On what idea is the FIFO method based? ANSWER The price of merchandise purchased first should be charged against current revenue. SLIDE 13

  14. Lesson 20-2 Lesson 20-2 Audit Your Understanding 2. When the LIFO method is used, at what cost is each item in ending merchandise inventory recorded? ANSWER The prices of merchandise purchased last are used in recording prices for each item on the inventory record. SLIDE 14

  15. Lesson 20-2 Lesson 20-2 Audit Your Understanding 3. In a period of rising costs, which inventory costing method gives the lowest cost of merchandise sold? ANSWER FIFO SLIDE 15

  16. Lesson 20-2 Lesson 20-2 Audit Your Understanding 4. Why should a business select one inventory costing method and use that same method continuously for each fiscal period? ANSWER Using the same inventory costing method for all fiscal periods provides financial statements that can be compared with other fiscal period statements. If a business changes inventory cost methods, part of the difference in gross profit and net income may be caused by the change in methods. SLIDE 16

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