This document provides an overview of inventory accounting concepts including internal controls over inventory, the effects of inventory errors on financial statements, inventory cost flow assumptions (FIFO, LIFO, average cost), perpetual and periodic inventory systems, and inventory costing methods. It includes examples demonstrating the calculation of inventory costs and ending inventory balances under perpetual and periodic systems using FIFO, LIFO, and average costing methods.

1. Chapter 9 Inventories Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 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.

2. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3. 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. Objectives After studying this chapter, you should be able to:

4. 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. Objectives

5. 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. Objectives

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

9. 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

10. FIFO Purchased goods Sold goods Inventory Cost Flow Assumptions

11. Purchased goods Sold goods Inventory Cost Flow Assumptions LIFO

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

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

14. 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

15. Fifo Perpetual

16. 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.

17. 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.

18. 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 Jan. 1 10 20 200 On January 4, 7 units of Item 127B are sold at $30 each. The sale of 7 units leaves a balance of 3 units.

19. 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.

20. 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.

21. FIFO Perpetual Inventory Account On January 22, the firm sold four units for $31 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

22. 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 On January 22, the firm sold four units for $31 each. Of the four units sold, three are from the first units in (fifo) at a cost of $20.

23. 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

24. 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.

25. 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

26. 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.

27. Lifo Perpetual

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 The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.

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 On January 4, the firm sold 7 units at $30 each.

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 On January 10, the firm purchased eight units at $21 each. Note that a new layer is formed.

31. 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.

32. 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

33. 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

34. 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

35. Fifo Periodic

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

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

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

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

41. 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

42. Lifo Periodic

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

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

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

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

47. 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 Cost of Merchandise Sold

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

49. 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 1,000 units available for sale during year

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

51. 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

54. Estimating Inventory Cost

56. Retail Inventory Method Step 1: Determine the ratio of cost to the retail price. Cost Retail Merchandise inventory, Jan. 1 $19,400 $ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale $62,000 $100,000 Ratio of cost to retail price = = 62% $62,000 $100,000

57. Retail Inventory Method Step 2: Determine the ending inventory at retail. Sales for January (net) 70,000 Merchandise inventory, January 31, at retail $ 30,000 Cost Retail Merchandise inventory, Jan. 1 $19,400 $ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale $62,000 $100,000

58. Retail Inventory Method Step 3: Calculate the estimated inventory at cost. Merchandise inventory, January 31, at cost ($30,000 x 62%) $18,600 Sales for January (net) 70,000 Merchandise inventory, January 31, at retail $ 30,000 Cost Retail Merchandise inventory, Jan. 1 $19,400 $ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale $62,000 $100,000

60. Merchandise inventory, January 1 $ 57,000 Purchases in January (net) 180,000 Merchandise available for sale Sales in January (net) $250,000 Less: Estimated gross profit Estimated cost of merchandise sold Estimated merchandise inventory, January 31 ($250,000 x 30%) 75,000 175,000 $ 62,000 Gross Profit Method The gross profit method is useful for estimating inventories for monthly or quarterly financial statements in a periodic inventory system. $237,000

61. 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 Use: Inventory turnover measures the relationship between the volume of goods sold and the amount of inventory carried during the period. Inventory turnover 14.3 times 1.4 times

62. 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 Use: To assess the efficiency in the management of inventory Average selling period 25 days 283 days

63. The End Chapter 9