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3. inventories

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Perpetual and Periodic inventory valuation methods are discussed in this presentation. The systems are explained using the different valuations methods (FIFO, LIFO and AVG).

Perpetual and Periodic inventory valuation methods are discussed in this presentation. The systems are explained using the different valuations methods (FIFO, LIFO and AVG).

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  • 1. Universidad Cuauhtémoc Campus Aguascalientes Inventories Análisis de Costos Maestría en Administración
  • 2. Contents Inventory Control Importance Effects of Inventory in Financial Statements Inventory Costing Methods 1. FIFO Perpetual (First In First Out) 2. LIFO Perpetual (Last In First Out) 3. FIFO Periodic 4. LIFO Periodic 5. Average Periodic Inventory Turn Over
  • 3. Why is Inventory Control Important?  Inventory is a significant asset and 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 fraud by employees.
  • 4. Receiving report Purchase order Invoice AGREE JOURNAL Description Nov. 9 Post. Ref. Date Inventory 1 222 00 Accounts Payable—XYZ Co. 1 222 00 Purchased merchandise on account.
  • 5. LIABILITIES STOCK- HOLDERS’ EQUITY REVENUES ASSETS COSTS & EXPENSES Effect of Inventory Errors on Financial Statements Merchandise Inventory Cost of Merchandise Sold If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Total stockholders’ equity is . . . . . overstated understated overstated overstated Net Income
  • 6. If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . . understated overstated understated understated Effect of Inventory Errors on Financial Statements
  • 7. Purchased goods Sold goods Inventory Cost Flow Assumptions
  • 8. Purchased goods Sold goods Inventory Cost Flow Assumptions
  • 9. Purchased goods Sold goods Inventory Cost Flow Assumptions
  • 10. Purchased goods Sold goods Inventory Cost Flow Assumptions
  • 11. Inventory Costing Methods 40% 30% 20% 10% 0% 43% 34% 19% 4% Fifo Lifo Average Other
  • 12. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold 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
  • 13. Item 127B FIFO Perpetual Inventory Account 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.
  • 14. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold 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 FIFO Perpetual Inventory Account On January 4, 7 units of Item 127B are sold at $30 each.
  • 15. Item 127B FIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost The sale of 7 units leaves a balance of 3 units. Jan. 1 10 20 200 4 7 20 140 3 20 60 Jan. 1 10 20 200 On January 4, 7 units of Item 127B are sold at $30 each.
  • 16. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold 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 FIFO Perpetual Inventory Account On January 10, the firm purchased eight units at $21 each.
  • 17. Item 127B FIFO Perpetual Inventory Account 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. 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.
  • 18. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold 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 FIFO Perpetual Inventory Account On January 22, the firm sold four units for $31 each.
  • 19. 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 FIFO Perpetual Inventory Account 22 3 20 60 1 21 21 7 21 147 Of the four units sold, three are from the first units in (fifo) at a cost of $20. On January 22, the firm sold four units for $31 each.
  • 20. FIFO Perpetual Inventory Account On January 28, the firm sold two units at $32. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold 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
  • 21. 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 FIFO Perpetual Inventory Account 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.
  • 22. FIFO Perpetual Inventory Account On January 30, purchased ten additional units of Item 127B at $22 each. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold 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
  • 23. 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 FIFO Perpetual Inventory Account 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 On January 30, purchased ten additional units of Item 127B at $22 each.
  • 24. Item 127B LIFO Perpetual Inventory Account 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.
  • 25. Item 127B LIFO Perpetual Inventory Account 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.
  • 26. Item 127B LIFO Perpetual Inventory Account 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. Note that a new layer is formed.
  • 27. Item 127B LIFO Perpetual Inventory Account 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 22, the firm sells four units at $31 each. 22 4 21 84 3 20 60 4 21 84 Of the 4 units sold, all come from the most recent purchase at a cost of $21 each.
  • 28. Item 127B LIFO Perpetual Inventory Account 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 28, sold two units at $32 each. 22 4 21 84 3 20 60 4 21 84 28 2 21 42 3 20 60 2 21 42
  • 29. Item 127B LIFO Perpetual Inventory Account 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 30, purchase 10 units at $22 each. 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
  • 30. Item 127B LIFO Perpetual Inventory Account 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
  • 31. Fifo Periodic
  • 32. Jan. 1 Beginning Inventory 200 units @ $9 Mar. 10 Purchase300 units @ $10 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year Fifo Periodic
  • 33. Fifo Periodic 200 units @ $9 300 units @ $10 400 units @ $11 100 units @ $12 1,000 units available for sale during year $10,400 = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 Cost of merchandise available for sale
  • 34. 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.
  • 35. Fifo Periodic 200 units @ $9 300 units @ $10 400 units @ $11 100 units @ $12 1,000 units available for sale during year $10,400 = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 Sold these 200 Sold these 300 Sold 200 of these200 units @ $11 = $ 0 Jan. 1 = 0 Mar. 10 = 2,200 Sept. 21 $ 3,400 Ending inventory
  • 36. Cost of merchandise available for sale $10,400 Less ending inventory 3,400 Cost of merchandise sold $ 7,000 Fifo Periodic
  • 37. Jan. 1 200 units at $9 Summary of Fifo Periodic Mar. 10 300 units at $10 Sep. 21 400 units at $11 Nov. 18 100 units at $12 $1,800 $3,000 $4,400 $1,200 Purchases Merchandise Available for Sale $1,800 $3,000 $2,200 Cost of Merchandise Sold 200 units at $9 $10,400 $2,200 $1,200 $7,000 Merchandise Inventory $3,400 300 units at $10 200 units at $11 200 units at $11 100 units at $12 1,000 units 700 units 300 units
  • 38. Lifo Periodic
  • 39. Jan. 1 Beginning Inventory 200 units @ $9 Mar. 10 Purchase300 units @ $10 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year Lifo Periodic Using lifo, the most recent batch purchased is considered the first batch of merchandise sold.
  • 40. Jan. 1 Beginning Inventory 200 units @ $9 Mar. 10 Purchase300 units @ $10 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year Lifo Periodic Assume again that 700 units were sold during the year.
  • 41. 200 units @ $9 300 units @ $10 400 units @ $11 100 units @ $12 1,000 units available for sale during year Lifo Periodic Sold these 100 Sold these 400 Sold 200 of these100 units @ $10 = $1,800 Jan. 1 = 3,000 Mar. 10 = 4,400 Sept. 21 = 1,200 Nov. 18 $10,400 0 0 1,000 Ending Inventory $2,800
  • 42. Cost of merchandise available for sale $10,400 Less ending inventory 2,800 Cost of merchandise sold $ 7,600 Lifo Periodic
  • 43. Jan. 1 200 units at $9 Summary of Lifo Periodic Mar. 10 300 units at $10 Sep. 21 400 units at $11 Nov. 18 100 units at $12 $1,800 $3,000 $4,400 $1,200 $1,800 $1,000 Cost of Merchandise Sold 200 units at $9 $10,400 $4,400 $1,200 $2,800 $7,600 100 units at $10 200 units at $10 400 units at $11 100 units at $12 $2,000 700 units 1,000 units 300 units Purchases Merchandise Available for Sale $1,800 Merchandise Inventory
  • 44. Average Periodic
  • 45. Jan. 1 Beginning Inventory 200 units @ $9 Mar. 10 Purchase300 units @ $10 400 units @ $11 Sept. 21 Purchase 100 units @ $12 Nov. 18 Purchase 1,000 units available for sale during year The average cost periodic method is based on the average cost of identical units. Average Cost Periodic
  • 46. Average Cost Periodic 200 units @ $9 = $ 1,800 1,000 units available for sale during year 300 units @ $10 = $ 3,000 400 units @ $11 = $ 4,400 100 units @ $11 = $ 1,200 $10,400 Cost of merchandise available for sale
  • 47. Cost of Merchandise Available for Sale Units Available for Sale During Year = Average Unit Cost $10,400 1,000 Units = $10.40 per Unit Average Cost Periodic
  • 48. Cost of merchandise available for sale $10,400 Less ending inventory ($10.40 x 300) 3,120 Cost of merchandise sold $ 7,280 To verify this amount, multiply 700 units sold times $10.40 to get the same $7,280. Average Cost Periodic
  • 49. Inventory Turnover
  • 50. Inventory Turnover SUPERVALU Zale Cost of merchandise sold $15,620,127,000 $ 737,188,000 Inventories: Beginning of year $1,115,529,000 $478,467,000 End of year 1,067,837,000 571,669,000 Total $2,183,366,000 $1,050,136,000 Average $1,091,683,000 $525,068,000 Inventory turnover 14.3 times 1.4 times Use: Inventory turnover measures the relationship between the volume of goods sold and the amount of inventory carried during the period.
  • 51. Average daily cost of merchandise sold: $15,620,127,000/365 $42,794,868 $737,188,000/365 $2,019,693 Ending inventory $1,067,837,000 $571,669,000 Number of Days’ Sales in Inventory SUPERVALU Zale Average selling period 25 days 283 days Use: To assess the efficiency in the management of inventory
  • 52. Universidad Cuauhtémoc Campus Aguascalientes Questions? Maestría en Administración

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