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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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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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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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