6 Inventories

FINANCIAL
ACCOUNTING
PowerPoint Presentation by
2ND EDITION Gail B. Wright
Professor of Accounting
BY Bryant University
© Copyright 2007 Thomson South-Western, a part

DUCHAC, REEVE, & WARREN of The Thomson Corporation. Thomson, the Star
Logo, and South-Western are trademarks used
herein under license.

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TYPES OF INVENTORY
Inventories differ between
merchandisers and
manufacturers
Merchandisers
Hold inventory for resale
Do not make goods

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MANUFACTURING
INVENTORIES
Materials inventory
Raw material used to make product
Work-in-process inventory
Cost of partially completed products
Finished goods inventory
Total costs of completed goods
Materials
Labor
Factory overhead

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COST?

How is cost of inventory

determined?

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COST FLOW ASSUMPTIONS

3 methods to calculate cost

– First-in-first-out (FIFO)
– Last-in-last-out (LIFO)
– Average

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FIFO

Under FIFO, the first goods

purchased are assumed to be
the first goods sold

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EXERCISE 6-10a
Ending inventory is 11 units.
1/1 Inventory 6 units @ $28
2/4 Purchase 12 units @ $30
7/20 Purchase 14 units @ $32
12/30 Purchase 8 units @ $33
Calculate the cost of ending
inventory using FIFO.

a = $360
Press “Enter” or click left mouse button for answer.
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LIFO

Under LIFO, the last goods

purchased are assumed to be
the first goods sold

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EXERCISE 6-10b
Ending inventory is 11 units.
1/1 Inventory 6 units @ $28
2/4 Purchase 12 units @ $30
7/20 Purchase 14 units @ $32
12/30 Purchase 8 units @ $33
Calculate the cost of ending
inventory using LIFO.

a = $318
Press “Enter” or click left mouse button for answer.
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AVERAGE

With Average cost, the

average purchase cost is
cost of merchandise sold.

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EXERCISE 6-10b
Ending inventory is 11 units.
1/1 Inventory 6 units @ $28
2/4 Purchase 12 units @ $30
7/20 Purchase 14 units @ $32
12/30 Purchase 8 units @ $33
Calculate the cost of ending
inventory using AVERAGE.

a = $341
Press “Enter” or click left mouse button for answer.
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PERPETUAL INVENTORY
JAN ITEM 127B UNITS COST
1 Inventory 10 $20
4 Sale 7
10 Purchase 8 21
22 Sale 4
28 Sale 2
30 Purchase 10 22

1/31 Ending Inventory: 28 – 13 = 15

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FIFO CMS:
Income Statement

SOLD
JAN UNITS COST TOTAL
4 7 20 $140
22 3 20 60
1 21 21
28 2 21 42
31 CMS $263 I/S

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FIFO INVENTORY:
Balance Sheet

Ending
Inventory COST TOTAL
5 21 $105
10 22 220
15 $325 B/S

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LIFO CMS:
Income Statement

SOLD
JAN UNITS COST TOTAL
4 7 20 $140
2 4 21 84
28 2 21 42
31 CMS $266 I/S

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LIFO INVENTORY:
Balance Sheet
Ending
Inventory COST TOTAL
3 20 $60
2 21 42
10 22 220
15 $322 B/S

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PERIODIC INVENTORY
SYSTEM
Only revenue is recorded at point of sale
Cost of merchandise sold (CMS) is
calculated at the end of the period
using
– FIFO
– LIFO
– Average

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LEARNING GOALS

6 Compare 3 inventory
methods.

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INVENTORY RECORDS
Units Cost Total
1/1 Inventory 200 $9 $1,800
3/10 Purchase 300 10 3,000
9/21 Purchase 400 11 4,400
11/18 Purchase 100 12 1,200

Available for sale 1,000 $10,400

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COMPARING METHODS

Sales = $15,000
Merchandise available for sale = $10,400
3 cost methods
– FIFO
– LIFO
– Average

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FIFO

Sales $15,000
- Cost of Merchandise sold 7,000

Gross Profit $8,000

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LIFO

Sales $15,000
- Cost of Merchandise sold 7,600

Gross Profit $7,400

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AVERAGE

Sales $15,000
-Cost of Merchandise sold 7,280

Gross Profit $7,720

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LEARNING GOALS

Determine lower-of-

7 cost-or-market for
inventory.

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INVENTORY VALUATION:
Other Than Cost

Used to ensure inventory not

reported at a cost higher than
its replacement cost

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LOWER-OF-COST-OR
MARKET (Slide 1 of 3)
Unit Unit
Item Quantity Cost Market
A 400 $10.25 $ 9.50
B 120 22.50 24.10
C 600 8.00 7.75
D 280 14.00 14.75

Basic Information
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LOWER-OF-COST-OR
MARKET (Slide 2 of 3)

Item Cost Market LCM

A $4,100 $3,800 $3,800
B 2,700 2,892 2,700
C 4,800 4,650 4,650
D 3,920 4,130 3,920

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LOWER-OF-COST-OR
MARKET (Slide 3 of 3)

Calculation:
$3,800 + $2,700 + $4,650 + $3,920
Ending Inventory = $15,070

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 INVENTORY RATIOS

Measures efficiency, effectiveness of

inventory level
– Inventory turnover
– Days sales in inventory

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 INVENTORY RATIOS:
Formulas

– Inventory turnover
Cost Merchandise Sold/ Average
Inventory
– Days sales in inventory
Ave Inventory/ Ave. Daily CMS

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INVENTORY TURNOVER
Best Buy Circuit City
CMS $18,350 $7,904
Ave Inventory $2,342 $1,488
Inventory
turnover 7.84 5.31

Measures number of times inventory turns

over during year.
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ANALYSIS: Inventory Turnover

Best Buy turns its inventory almost

8 times in a year
Circuit City turns its inventory
slightly more than 5 times in a year

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 DAYS IN SALES
Best Circuit
Buy City
Ave. Daily CMS $50.27 $21.65
Ave. Inventory $2,342 $1,488
Days in Sales 47 days 69 days

Measures number of days inventory stays on

shelves
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ANALYSIS: Days in Sales

Best Buy sells through its

inventory every 47 days on
average
Circuit City sells through its
inventory every 69 days on
average

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My inferiority complex is not as
good as yours.

You don’t stop laughing because

you grow old, you grow old
because you stopped laughing.

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