Chapter 6 Inventories Chapter 6 1 Accounting Principles

Chapter 6 Inventories Chapter 6 -1 Accounting Principles, Ninth Edition

Inventory Costing Unit costs can be applied to quantities on hand using the following costing methods: First-in, first-out (FIFO) Last-in, first-out (LIFO) Average-cost Chapter 6 -2 Cost Flow Assumptions SO 2 Explain the accounting for inventories and apply the inventory cost flow methods.

Inventory Costing – Cost Flow Assumptions “First-In-First-Out (FIFO)” Earliest goods purchased are first to be sold. Often parallels actual physical flow of merchandise. Generally good business practice to sell oldest units first. Chapter 6 -3 SO 2 Explain the accounting for inventories and apply the inventory cost flow methods.

FIFO Practice You made three purchases of merchandise in the following sequence: UNITS COST TOTAL l (1) 300 units at $6, (2) 400 300 X 6= $1800 units at $7, and (3) 200 units at 400 X 7= $2800 $8. l Assuming there are 360 units 200 X 8= $1600 on hand, compute the cost of 900 $6200 the ending inventory under the SOLD: 900 -360 =540 FIFO method. Chapter 6 -4 The ending inventory under FIFO consists of 200 units at $8 + 160 units at $7 for a total allocation of $2, 720 or ($1, 600 + $1, 120).

l l l FIFO- UR TURN In its first month of operations, Quirk Company made three purchases of UNITS merchandise in the following sequence: (1) 470 units at $6, (2) 325 units at $7, and (3) 180 units at $8. SOLD: Assuming there are 360 units on hand, compute the cost of the ending inventory under the FIFO Chapter method. 6 -5 COST TOTAL

ONE MORE FIFO l l l In its first month of operations, ABC made four purchases of merchandise in the following UNITS sequence: (1) 800 units at $6, (2) 300 units at $7, (3) 100 units at $8, (4) 200 units at 9. Assuming there are 200 units on hand, compute the cost of SOLD: the ending inventory under the FIFO method. Chapter 6 -6 COST TOTAL

Inventory Costing – Cost Flow Assumptions “Last-In-First-Out (LIFO)” Latest goods purchased are first to be sold. Seldom coincides with actual physical flow of merchandise. Exceptions include goods stored in piles, such as coal or hay. Chapter 6 -7 SO 2 Explain the accounting for inventories and apply the inventory cost flow methods.

The difference? ? l l l Chapter 6 -8 Net income is USUALLY highest under the FIFO method & USUALLY lowest under the LIFO method. By using LIFO, a company would appear to be making less money than it actually did, and therefore have to report less in taxes. 1 st inventory purchase $50 2 nd inventory purchase $75 SOLD ONE OF THEM FOR $100 NI: FIFO = $50. LIFO = $25

LIFO Practice- ADD THIS TO YOUR SPREADSHEET l l l You made three purchases of merchandise in the following sequence: (1) 300 units at $6, (2) 400 units at $7, and (3) 200 units at $8. Assuming there are 360 units on hand, compute the cost of the ending inventory under the LIFO method. UNITS 300 X 400 X COST 6= 7= 200 X 900 8= TOTAL $1800 $2800 $1600 $6200 SOLD: 900 -360 =540 The ending inventory under LIFO consists of 360 units at $6 + 60 units at $7 for a total allocation of $2, 220 or ($1, 800 + $420). Chapter 6 -9

LIFO UR TURN l l l In its first month of operations, Quirk Company made three purchases of merchandise in the following sequence: (1) 455 units at $6, (2) 657 units at $7, and (3) 173 units at $8. Assuming there are 360 units on hand, compute the cost of the ending inventory under the LIFO method. Chapter 6 -10 UNITS COST TOTAL

ONE MORE LIFO l l l In its first month of operations, ABC made four purchases of merchandise in the following sequence: (1) 800 units at $6, (2) 300 units at $7, (3) 100 units at $8, (4) 200 units at 9. Assuming there are 200 units on hand, compute the cost of the ending inventory under the LIFO method. Chapter 6 -11 UNITS COST TOTAL

FIFO & LIFO UR TURN Calculate the Total Cost Units Unit Cost Total Cost Inventory: January 1 10, 000 $90, 000 Purchases: June 18 6, 000 8. 00 48, 000 November 8 4, 000 7. 00 28, 000 TOTALS 20, 000 $166, 000 A physical inventory on December 31 shows 4, 500 units on hand. 1. Under the LIFO method, the 12/31 inventory is valued at: 2. Under the FIFO method, the 12/31 inventory is valued at: Chapter 6 -12

AVG Cost Practice l l l In its first month of operations, Quirk Company made three purchases of merchandise in the following sequence: (1) 300 units at $6, (2) 400 units at $7, and (3) 200 units at $8. Assuming there are 360 units on hand, compute the cost of the ending inventory under the AVG COST method. Average unit cost is computed as follows: 300 X $6 = $1, 800 400 X $7 = 2, 800 200 X $8 = 1, 600 900 $6, 200 AVG Price formula= TOTAL COST DIVIDED BY TOTAL UNITS. ($6, 200 ÷ 900 = $6. 89) The cost of the ending inventory is $2, 480 or (360 X $6. 89). Chapter 6 -13

AVG Cost UR TURN l l l In its first month of operations, Quirk Company made three purchases of merchandise in the following sequence: (1) 655 units at $6, (2) 392 units at $7, and (3) 286 units at $8. Assuming there are 360 units on hand, compute the cost of the ending inventory under the AVG COST method. UNITS Chapter 6 -14 COST TOTAL

REVIEW Inventory: Purchases: January 1 June 18 November 8 Units 6, 000 7, 500 4, 000 Unit Cost $9. 00 8. 00 7. 00 Total Cost 54, 000 60, 000 28, 000 A physical inventory on December 31 shows 2, 500 units on hand. 1. Under the FIFO method, the 12/31 inventory is valued at: 2. Under the LIFO method, the 12/31 inventory is valued at 3. Using the Average Cost Method, the 12/31 inventory is valued at: FIFO: UNITS SOLD: Chapter 6 -15 COST TOTAL LIFO: UNITS SOLD: COST TOTAL AVERAGE COST: UNITS COST TOTAL

OPEN CH 6 “Estimating Inventories” ON WEBSITE Gross Profit Method The gross profit method estimates the cost of ending inventory by applying a gross profit rate to net sales. Illustration 6 B-1 Chapter 6 -16 SO 8 Describe the two methods of estimating inventories.

Estimating Inventories Retail Inventory Method Company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost. Illustration 6 B-3 Chapter 6 -17 SO 8 Describe the two methods of estimating inventories.

*BE 6 -11 At May 31, Creole Company has net sales of $330, 000 and cost of goods available for sale of $230, 000. Compute the estimated cost of the ending inventory, assuming the gross profit rate is 35%. Chapter 6 -18 SO 8 Describe the two methods of estimating inventories.

Estimating Inventories*BE 6 -12 On June 30, Fabre Fabrics has the following data pertaining to the retail inventory method: Goods available for sale: at cost $35, 000, at retail $50, 000; net sales $40, 000. Compute the estimated cost of the ending inventory using the retail inventory method. Chapter 6 -19 SO 8 Describe the two methods of estimating inventories.

Estimating Inventories Inventory turnover measures the number of times on average the inventory is sold during the period. Inventory Turnover = Cost of Goods Sold Average Inventory (beginning + ending)/ how many #s you added up Days in inventory measures the average number of days inventory is held. Days in Year (365) Days in = Inventory Turnover Chapter 6 -20 SO 6 Compute and interpret the inventory turnover ratio.

BE 6 -9 - Answers. At December 31, 2011, the following information was available for J. Graff Company: ending inventory $40, 000, beginning inventory $60, 000, cost of goods sold $270, 000, and sales revenue $380, 000. Calculate inventory turnover and days in inventory for J. Graff Company. Chapter 6 -21 Inventory Turnover = Days in Inventory = SO 6 Compute and interpret the inventory turnover ratio.

Chapter 6 -22