Chapter 9

1. © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Chapter 9 Inventories Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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3. Objectives 1.Summarize and provide examples of internal control procedures that apply to inventories. 2.Describe the effect of inventory errors on the financial statement. 3.Describe the three inventory cost flow assumptions and how they impact the income statement and balance sheet. 4.Compute the cost of inventory under the perpetual inventory system, using the following cost methods: first-in, first-out; last-in, first-out; average cost. After studying this chapter, you should be able to:

4. Objectives 5.Compute the cost of inventory under the periodic inventory system, using the following costing methods: first-in, first-out; last-in, first-out; average cost. 6.Compare and contrast the use of the three inventory costing methods. 7.Compute the proper valuation of inventory at other than cost, using the lower-of-cost-or-market and net realization value concepts. 8.Prepare a balance sheet presentation of merchandise inventory.

5. Objectives 9.Estimate the cost of inventory, using the retail method and the gross profit method. 10.Compute the interpret the inventory turnover ratio and number of days’ sales in inventory.

6. Why is Inventory Control Important? • Inventory is a significant assetand for many companies the largest asset. • Inventory is central to the main activity of merchandising and manufacturing companies. • Mistakes in determining inventory cost can cause critical errors in financial statements. • Inventory must be protected from external risks ( such as fire and theft) and internal fraudby employees.

7. Receiving report Purchase order Invoice AGREE AGREE AGREE JOURNAL Post. Ref. Date Description Nov. 9 Inventory 1 222 00 Accounts Payable--XYZ Co. 1 222 00 Purchased merchandise on account.

8. Effect of Inventory Errors on Financial Statements LIABILITIES overstated understated overstated overstated Merchandise Inventory OWNER’S EQUITY ASSETS Net Income Cost of Merchandise Sold REVENUES COSTS & EXPENSES If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . .

9. Effect of Inventory Errors on Financial Statements If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . . understated overstated understated understated

10. Inventory Cost Flow Assumptions Purchased goods FIFO Sold goods

11. Inventory Cost Flow Assumptions Purchased goods Sold goods LIFO

12. Inventory Cost Flow Assumptions Purchased goods Sold goods Average Cost

13. Fifo Lifo Average Other Inventory Costing Methods 43% 40% 30% 20% 10% 0% 34% 19% 4%

14. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold

15. Fifo Perpetual

16. FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.

17. FIFO Perpetual Inventory Account Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold On January 4, 7 units of Item 127B are sold at $30 each.

18. The sale of 7 units leaves a balance of 3 units. FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 2004 7 20 140 3 20 60 Jan. 1 10 20 200 On January 4, 7 units of Item 127B are sold at $30 each.

19. FIFO Perpetual Inventory Account Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold On January 10, the firm purchased eight units at $21 each.

20. Because the purchase price of $21 is different than the cost of the previous 3 units on hand, the inventory balance of 11 units is accounted for separately. FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 On January 10, the firm purchased eight units at $21 each.

21. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold FIFO Perpetual Inventory Account On January 22, the firm sold four units for $31 each.

22. Of the four units sold, three are from the first units in (fifo) at a cost of $20. FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance On January 22, the firm sold four units for $31 each. Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 3 20 60 1 21 21 7 21 147

23. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold FIFO Perpetual Inventory Account On January 28, the firm sold two units at $32.

24. FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 3 20 60 1 21 21 7 21 147 28 2 21 42 5 21 105 On January 28, the firm sold two units at $32.

25. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Cost of Mdse. Sold FIFO Perpetual Inventory Account On January 30, purchased ten additional units of Item 127B at $22 each.

26. FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 On January 30, purchased ten additional units of Item 127B at $22 each. 10 8 21 168 3 20 60 8 21 168 22 3 20 60 1 21 21 7 21 147 28 2 21 42 5 21 105 30 10 22 220 5 21 105 10 22 220 Totals 18 $388 13 $263 15 $325

27. Lifo Perpetual

28. LIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.

29. LIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 On January 4, the firm sold 7 units at $30 each.

30. LIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 Note that a new layer is formed. On January 10, the firm purchased eight units at $21 each.

31. LIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 4 21 84 3 20 60 4 21 84 On January 22, the firm sells four units at $31 each. Of the 4 units sold, all come from the most recent purchase at a cost of $21 each.

32. LIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42 On January 28, sold two units at $32 each.

33. LIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42 30 10 22 220 3 20 60 2 21 42 10 22 220 On January 30, purchase 10 units at $22 each.

34. LIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42 30 10 22 220 3 20 60 2 21 42 10 22 220 Totals 18 $388 13 $266 15 $322

35. Fifo Periodic

36. 1,000 units available for sale during year Fifo Periodic Jan. 1 Beginning Inventory 200 units @ $9 300 units @ $10 Mar. 10 Purchase 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase

37. = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 1,000 units available for sale during year Cost of merchandise available for sale Fifo Periodic 200 units @ $9 300 units @ $10 400 units @ $11 100 units @ $12 $10,400

38. Fifo Periodic A physical count on December 31 reveals that 700 of the 1,000 units have been sold. Using fifo, the first units purchased are theoretically the first units sold. We begin the count with January 1.

39. 1,000 units available for sale during year Fifo Periodic Sold these 200 200 units @ $9 = $1,800 Jan. 1 = $ 0 Jan. 1 Sold these 300 300 units @ $10 = 3,000 Mar. 10 = 0 Mar. 10 Sold 200 of these 400 units @ $11 200 units @ $11 = 2,200 Sept. 21 = 4,400 Sept. 21 100 units @ $12 = 1,200 Nov. 18 $ 3,400 $10,400 Ending inventory

40. Fifo Periodic Cost of merchandise available for sale $10,400 Less ending inventory 3,400 Cost of merchandise sold $ 7,000

41. Summary of Fifo Periodic Cost of Merchandise Sold Merchandise Available for Sale Purchases 200 units at $9 $1,800 Jan. 1 200 units at $9 $1,800 $3,000 300 units at $10 Mar. 10 300 units at $10 $3,000 200 units at $11 $2,200 Sep. 21 400 units at $11 $7,000 700 units $4,400 Merchandise Inventory Nov. 18 100 units at $12 $1,200 $2,200 200 units at $11 1,000 units $10,400 100 units at $12 $1,200 $3,400 300 units

42. Lifo Periodic

43. 1,000 units available for sale during year Lifo Periodic Jan. 1 Beginning Inventory 200 units @ $9 300 units @ $10 Mar. 10 Purchase 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase Using lifo, the most recent batch purchased is considered the first batch of merchandise sold.

44. 1,000 units available for sale during year Lifo Periodic Jan. 1 Beginning Inventory Assume again that 700 units were sold during the year. 200 units @ $9 300 units @ $10 Mar. 10 Purchase 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase

45. = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 $2,800 1,000 units available for sale during year Ending Inventory Lifo Periodic 200 units @ $9 100 units @ $10 Sold 200 of these 300 units @ $10 1,000 Sold these 400 400 units @ $11 0 Sold these 100 100 units @ $12 0 $10,400

46. Lifo Periodic Cost of merchandise available for sale $10,400 Less ending inventory 2,800 Cost of merchandise sold $ 7,600

47. Summary of Lifo Periodic Cost of Merchandise Sold Merchandise Available for Sale Purchases 200 units at $9 $1,800 $1,800 Jan. 1 200 units at $9 $1,000 100 units at $10 $1,800 $2,800 300 units Mar. 10 300 units at $10 $3,000 Cost of Merchandise Sold Sep. 21 400 units at $11 $4,400 $2,000 200 units at $10 Nov. 18 100 units at $12 $1,200 $4,400 400 units at $11 $10,400 1,000 units $1,200 100 units at $12 $7,600 700 units

48. 1,000 units available for sale during year Average Cost Periodic 200 units @ $9 Jan. 1 Beginning Inventory The average cost periodic method is based on the average cost of identical units. 300 units @ $10 Mar. 10 Purchase 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase

49. 1,000 units available for sale during year Average Cost Periodic 200 units @ $9 = $ 1,800 300 units @ $10 = $ 3,000 400 units @ $11 = $ 4,400 100 units @ $11 = $ 1,200 $10,400 Cost of merchandise available for sale

50. $10,400 1,000 Units Average Cost Periodic Cost of Merchandise Available for Sale = Average Unit Cost Units Available for Sale During Year = $10.40 per Unit