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Accounting for Inventories
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All expenditures incurred
Inventory Costs
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All expenditures incurred to bring the item to its
Inventory Costs
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All expenditures incurred to bring the item to its existing condition and location
Inventory Costs
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Invoice cost
Shipping
Cash discounts
Purchases allowances
Costs include
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Compute inventory balance at end of each accounting period
Compute cost of goods sold at accounting period end
Inventory Systems - Periodic
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Compute cost of goods sold at each sale
Compute new inventory balance at each sale
Inventory Systems - Perpetual
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Only with specific identification do we attempt to match the actual movement of product through the business with the movement of costs through the accounting system
Cost Flow Assumptions
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With other inventory cost methods, we make an assumption of the movement of costs through the accounting system.
This "flow" of costs through the system need not match the movement of product through the business.
Cost Flow Assumptions
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First-In, First-Out
Cost Flow Assumptions
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First-In, First-Out
Earliest goods assumed to be first units sold
Cost Flow Assumptions
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First-In, First-Out
Earliest goods assumed to be first units sold
Inventory made up of latest goods acquired
Cost Flow Assumptions
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Last-In, First-Out
Cost Flow Assumptions
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Last-In, First-Out
Newest goods assumed to be first units sold
Cost Flow Assumptions
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Last-In, First-Out
Newest goods assumed to be first units sold
Inventory made up of earliest goods acquired
Cost Flow Assumptions
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Average cost
Cost Flow Assumptions
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Average cost
Cost of items sold is the weighted average of costs incurred
Cost Flow Assumptions
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Average cost
Cost of items sold is the weighted average of costs incurred
Inventory is the weighted average of costs incurred
Cost Flow Assumptions
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Jan. 1 Beg Inven. 200 $4.00 $ 800.00
Apr. 10 Purchase 700 5.00 3,500.00
Oct. 23 Purchase 400 6.00 2,400.00
Available 1,300 $6,700.00
Merchandise Sales
May 5 500
Dec. 19 300
Total 800
Inventory Example Data
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Newest layer $6.00
First-In First-Out
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Newest layer 400 units @ $6.00 $2,400
First-In First-Out
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Newest layer 400 units @ $6.00 $2,400
Next newest layer $5.00
First-In First-Out
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Newest layer 400 units @ $6.00 $2,400
Next newest layer 100 units @ $5.00 500
First-In First-Out
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Newest layer 400 units @ $6.00 $2,400
Next newest layer 100 units @ $5.00 500
Total cost $2,900
First-In First-Out
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Cost of Goods Sold
Beginning Inventory $ 800
First-In First-Out
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Cost of Goods Sold
Beginning Inventory $ 800
Purchases 5,900
Cost of goods available
for sale $6,700
First-In First-Out
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Cost of Goods Sold
Beginning Inventory $ 800
Purchases 5,900
Cost of goods available
for sale $6,700
Deduct: Ending Inventory 2,900
Cost of goods sold $3,800
First-In First-Out
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Proof of cost of goods sold:
Oldest cost layer
200 units @ $4.00 $ 800
First-In First-Out
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Proof of cost of goods sold:
Oldest cost layer
200 units @ $4.00 $ 800
Next oldest layer
600 units @ $5.00 3,000
Total $3,800
First-In First-Out
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Oldest layer
$4.00
Last-In First-Out
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Oldest layer
200 units @ $4.00 $ 800
Last-In First-Out
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Oldest layer
200 units @ $4.00 $ 800
Next oldest layer
$5.00
Last-In First-Out
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Oldest layer
200 units @ $4.00 $ 800
Next oldest layer
300 units @ $5.00 1,500
Last-In First-Out
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Oldest layer
200 units @ $4.00 $ 800
Next oldest layer
300 units @ $5.00 1,500
Total cost $2,300
Last-In First-Out
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LIFO
Periodic Inventory
Cost of goods sold:
Beginning inventory $ 800
Last-In First-Out
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LIFO
Periodic Inventory
Cost of goods sold:
Beginning inventory $ 800
Purchase 5,900
Cost of goods available $6,700
Last-In First-Out
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LIFO
Periodic Inventory
Cost of goods sold:
Beginning inventory $ 800
Purchase 5,900
Cost of goods available $6,700
Deduct: Ending inventory 2,300
Cost of goods sold $4,400
Last-In First-Out
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LIFO
Periodic Inventory
Proof of Cost of Goods Sold
Last-In First-Out
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LIFO
Periodic Inventory
Proof of Cost of Goods Sold
Newest cost layer
400 units @ $6.00 $2,400
Last-In First-Out
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LIFO
Periodic Inventory
Proof of Cost of Goods Sold
Newest cost layer
400 units @ $6.00 $2,400
Next newest layer
400 units @ $5.00 2,000
Total cost $4,400
Last-In First-Out
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Periodic Inventory
Weighted average cost equals
Cost of goods available for sale $6,700
divided by
Total units available 1,300
equals
Weighted average cost per unit $5.1538
Weighted Average
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Periodic Inventory
December 31 Inventory
500 units x $5.1538 = $2,577
Weighted Average
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Periodic Inventory
Cost of goods sold:
Weighted Average
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Periodic Inventory
Cost of goods sold:
Beginning inventory $ 800
Purchases 5,900
Cost of goods available $6,700
Weighted Average
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Periodic Inventory
Cost of goods sold:
Beginning inventory $ 800
Purchases 5,900
Cost of goods available $6,700
Deduct: Ending inventory 2,577
Cost of goods sold $4,123
Weighted Average
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Periodic Inventory
Proof of cost of goods sold
800 units x $5.1538 = $4,123
Weighted Average
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Periodic Inventory
FIFO LIFO WA
Sales $8,000 $8,000 $8,000
CGS 3,800 4,400 4,123
GM $4,200 $3,600 $3,877
Op. expense 1,000 1,000 1,000
Net income $3,200 $2,600 $2,877
Income Statement Comparison
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LIFO - Perpetual Inventory
200 x $4 $800
Last-In First-Out
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LIFO - Perpetual Inventory
4/4 700 x $5 $3500 200 x $4 $800
700 x $5 3500 $4300
Last-In First-Out
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LIFO - Perpetual Inventory
4/4 700 x $5 $3500 200 x $4 $800
700 x $5 3500 $4300
5/5 500 x $5 $2500 200 x $4 $800
200 x $5 1000 $1800
Last-In First-Out
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LIFO - Perpetual Inventory
4/4 700 x $5 $3500 200 x $4 $800
700 x $5 3500 $4300
5/5 500 x $5 $2500 200 x $4 $800
200 x $5 1000 $1800
10/23 400 x $6 $2400 200 x $4 $800
200 x $5 1000
400 x $6 2400 $4200
Last-In First-Out
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LIFO - Perpetual Inventory
4/4 700 x $5 $3500 200 x $4 $800
700 x $5 3500 $4300
5/5 500 x $5 $2500 200 x $4 $800
200 x $5 1000 $1800
10/23 400 x $6 $2400 200 x $4 $800
200 x $5 1000
400 x $6 2400 $4200
12/19 300x $6 $1800 200 x $4 $800
200 x $5 1000
100 x $6 600 $2400
Last-In First-Out
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LIFO - Perpetual Inventory
4/4 700 x $5 $3500 200 x $4 $800
700 x $5 3500 $4300
5/5 500 x $5 $2500 200 x $4 $800
200 x $5 1000 $1800
10/23 400 x $6 $2400 200 x $4 $800
200 x $5 1000
400 x $6 2400 $4200
12/19 300x $6 $1800 200 x $4 $800
200 x $5 1000
100 x $6 600 $2400
Cost of goods sold $4300
Last-In First-Out
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Class A Cost Mkt LCM
Item 1 $100 $120
Item 2 80 70
Class B
Item 6 $50 $65
Item 7 40 20
Lower of Cost or Market
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Class A Cost Mkt LCM
Item 1 $100 $120 $100
Lower of Cost or Market - By Item
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Class A Cost Mkt LCM
Item 1 $100 $120 $100
Item 2 80 70 70
Lower of Cost or Market - By Item
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Class A Cost Mkt LCM
Item 1 $100 $120 $100
Item 2 80 70 70
Class B
Item 6 $50 $65 50
Lower of Cost or Market - By Item
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Class A Cost Mkt LCM
Item 1 $100 $120 $100
Item 2 80 70 70
Class B
Item 6 $50 $65 50
Item 7 40 20 20
Total $240
Lower of Cost or Market - By Item
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Class A Cost Mkt LCM
Item 1 $100 $120
Item 2 80 70
Total $180 $190 $180
Lower of Cost or Market - By Class
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Class A Cost Mkt LCM
Item 1 $100 $120
Item 2 80 70
Total $180 $190 $180
Class B
Item 6 $50 $65
Item 7 40 20
Total $90 $85 85
Total $265
Lower of Cost or Market - By Class
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Class A Cost Mkt LCM
Item 1 $100 $120
Item 2 80 70
Class B
Item 6 50 40
Item 7 40 20
Total $270 $275 $270
Lower of Cost or Market- By Total
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Page 62 of 76
Net Sales $70
Cost of goods sold:
Begin inv $ 5
Net purchases 50
Cost goods avail $55
End inv 10 45
Gross margin $25
Gross Margin Method Logic of Income Statement
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Page 63 of 76
Cost of goods available:
Begin inv $ 20,000
Net purchases 135,000
Cost of goods available $155,000
Deduct cost of goods sold:
Gross Margin Method Inventory Estimation
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Cost of goods available $155,000
Net sales $150,000
Multiply by (1 - Gross margin rate)
(1 - 0.30) x 0.70
Est cost of goods sold 105,000
Est ending inventory $ 50,000
Gross Margin Method Inventory Estimation
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Net sales $150,000
Cost of goods sold
Begin inv $ 20,000
Net purchases 135,000
CGAS $155,000
End inv 50,000
Cost of goods sold 105,000
Gross margin $ 45,000
Gross Margin Method Proof of Answer
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An error in the computation of inventory at the end of one period
Inventory Errors
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An error in the computation of inventory at the end of one period causes an error in assets and owner’s equity at the end of that period
Inventory Errors
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An error in the computation of inventory at the end of one period causes an error in assets and owner’s equity at the end of that period
and an error in income for two periods.
Inventory Errors
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Overstatement of inventory at end of period 1
Causes an overstatement of net income for period 1
Effect of Inventory Errors
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Overstatement of inventory at end of period 1
Causes an overstatement of net income for period 1
and an overstatement of assets and owner's equity at period 1 end
Effect of Inventory Errors
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Overstatement of inventory at end of period 1
Causes an understatement of net income for period 2
Effect of Inventory Errors
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Overstatement of inventory at end of period 1
Causes an understatement of net income for period 2
BUT assets and owner's equity at period 2 end will be correct
Effect of Inventory Errors
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Understatement of inventory at end of period 1
Causes an understatement of net income for period 1
Effect of Inventory Errors
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Understatement of inventory at end of period 1
Causes an understatement of net income for period 1
and an understatement of assets and owner's equity at period 1 end
Effect of Inventory Errors
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Understatement of inventory at end of period 1
Causes an overstatement of net income for period 2
Effect of Inventory Errors
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Understatement of inventory at end of period 1
Causes an overstatement of net income for period 2
BUT assets and owner's equity at period 2 end will be correct
Effect of Inventory Errors
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