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PREPARED BY: UMESH TIBREWAL
 Inventories are assets held:
1. For sale in the ordinary course of business
2. In the process of production for such sal...
Types of Inventory
Inventory comes in many
shapes and sizes such
as:
◦ Raw materials –
purchased items or
extracted materi...
Accounting Principles Related to Inventory
 Consistency
 Companies should use same inventory
method from period to perio...
COST OF INVENTORY
All expenditures incurred to
bring the item to its
existing condition and
location
Purchase price
+ Freight-in
- Purchase returns
- Purchase Discounts
= Net cost of purchases
- Purchase allowances
Transpor...
Sales revenue
- Sales returns
- Sales Discounts
= Net Sales
- Sales allowances
Unsuitable goods
returned to company
Reduct...
• Invoice cost
• Shipping
• Cash discounts
• Purchases allowances
HOW TO ACCOUNT FOR INVENTORY
PURCHASES, SALES AND REPORTING?
 Applying either the periodic inventory
system or the perpet...
Inventory Systems -
Periodic
 Compute inventory balance at end of
each accounting period
 Compute cost of goods sold at ...
Compute cost of goods sold at each
sale
Compute new inventory balance at
each sale
Perpetual system Periodic System
At purchase
Inventory xxx Purchases xxx
A/P xxx A/P xxx
At sale:
CGS xxx None
Inventory x...
Cost Flow Assumptions
 Only with specific identification do we
attempt to match the actual movement of
product through th...
Cost Flow Assumptions(Contd.)
 This "flow" of costs through the system need
not match the movement of product through
the...
COST FLOW ASSUMPTIONS
 FIRST-IN, FIRST-OUT(FIFO)
Earliest goods assumed to be first units
sold
Inventory made up of lat...
Purchased
goods
Sold
goods
Cost Flow Assumptions
First-in, First-out (FIFO) Method
Step 1: Assign the cost of the beginning
inventory to cost of goods sold.
1st
in
First-in, First-out (FIFO) Method
ALLOCATE TO
Ending Cost of
Units Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 300 $...
First-in, First-out (FIFO) Method
Step 2: Continue to work forward until you
assign the total number of units sold
during ...
First-in, First-out (FIFO) Method
ALLOCATE TO
Ending Cost of
Units Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 300 $...
COST FLOW ASSUMPTIONS
 LAST-IN, FIRST-OUT(LIFO)
Newest goods assumed to be first units
sold
Inventory made up of earlie...
Purchased
goods
Sold
goods
Cost Flow Assumptions
Last-in, First-out (LIFO) Method
Step 1: Assign the cost of the last units
purchased to cost of goods sold.
1st
in
Last-in, First-out (LIFO) Method
ALLOCATE TO
Ending Cost of
Units Cost Inventory Goods Sold
1/1 500 $10
1/20 300 $11
4/8 4...
1st
in
Step 2: Work backwards until you assign the
total number of units sold during the
period to cost of goods sold (all...
Last-in, First-out (LIFO) Method
ALLOCATE TO
Ending Cost of
Units Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 100 / ...
COST FLOW ASSUMPTIONS
 AVERAGE COST
Cost of items sold is the weighted average
of costs incurred
Inventory is the weigh...
Purchased
goods
Sold
goods
Cost Flow Assumptions
Weighted Average Method
Step 1: Calculate the cost of goods
available for sale.
Weighted Average Method
Date purchased Units Cost Total cost
Beg. inventory 500 $10 $ 5,000
1/20 300 11 3,300
4/8 400 12 4...
Weighted Average Method
Step 2: Divide the cost of goods available
for sale by the total units to
determine the weighted a...
Weighted Average Method
Cost of Goods Available for Sale
Units Available for Sale
$17,100
1,500
= $11.40/unit
Weighted Average Method
Step 3: Calculate ending inventory and
cost of goods sold by multiplying
the weighted average cost...
Weighted Average Method
ALLOCATE TO
Ending Cost of
Inventory Goods Sold
Units on hand 600
Units sold 900
Weighted average ...
Comparison of Costing Methods
Cost of
Goods
Sold
Ending
Inventory
11,000
6,840
7,600
10,260
9,500
17,100
17,000
17,100
Wei...
40%
30%
20%
10%
0%
43%
34%
19%
4%
Fifo Lifo Average Other
Accounting for inventories
Accounting for inventories
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Accounting for inventories

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Accounting for inventories

  1. 1. PREPARED BY: UMESH TIBREWAL
  2. 2.  Inventories are assets held: 1. For sale in the ordinary course of business 2. In the process of production for such sale 3. In the form of materials or supplies to be consumed in the production process or in the rendering of services
  3. 3. Types of Inventory Inventory comes in many shapes and sizes such as: ◦ Raw materials – purchased items or extracted materials transformed into components or products ◦ Components – parts or subassemblies used in final product ◦ Work-in-process – items in process throughout the plant ◦ Finished goods – products sold to customers ◦ Distribution inventory – finished goods in the distribution system
  4. 4. Accounting Principles Related to Inventory  Consistency  Companies should use same inventory method from period to period  Disclosure  Companies should disclose inventory method used  Conservatism  Companies should “write down” inventory if market price falls below cost
  5. 5. COST OF INVENTORY All expenditures incurred to bring the item to its existing condition and location
  6. 6. Purchase price + Freight-in - Purchase returns - Purchase Discounts = Net cost of purchases - Purchase allowances Transportation costs Unsuitable goods returned to seller Reduction in amount owed For early payment
  7. 7. Sales revenue - Sales returns - Sales Discounts = Net Sales - Sales allowances Unsuitable goods returned to company Reduction in amount owed For early payment
  8. 8. • Invoice cost • Shipping • Cash discounts • Purchases allowances
  9. 9. HOW TO ACCOUNT FOR INVENTORY PURCHASES, SALES AND REPORTING?  Applying either the periodic inventory system or the perpetual inventory system and select a cost flow assumption to determine the value of inventories.  Both inventory systems require a physical count of inventory at the end of a period to determine the units which can be included in the inventory count.
  10. 10. Inventory Systems - Periodic  Compute inventory balance at end of each accounting period  Compute cost of goods sold at the end of accounting period
  11. 11. Compute cost of goods sold at each sale Compute new inventory balance at each sale
  12. 12. Perpetual system Periodic System At purchase Inventory xxx Purchases xxx A/P xxx A/P xxx At sale: CGS xxx None Inventory xxx A/R xxx A/R xxx Sales xxx Sales xxx 13
  13. 13. Cost Flow Assumptions  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  With other inventory cost methods, we make an assumption of the movement of costs through the accounting system.
  14. 14. Cost Flow Assumptions(Contd.)  This "flow" of costs through the system need not match the movement of product through the business
  15. 15. COST FLOW ASSUMPTIONS  FIRST-IN, FIRST-OUT(FIFO) Earliest goods assumed to be first units sold Inventory made up of latest goods acquired
  16. 16. Purchased goods Sold goods Cost Flow Assumptions
  17. 17. First-in, First-out (FIFO) Method Step 1: Assign the cost of the beginning inventory to cost of goods sold. 1st in
  18. 18. First-in, First-out (FIFO) Method ALLOCATE TO Ending Cost of Units Cost Inventory Goods Sold 1/1 500 $10 $5,000 1/20 300 $11 4/8 400 $12 9/5 200 $13 12/12 100 $14
  19. 19. First-in, First-out (FIFO) Method Step 2: Continue to work forward until you assign the total number of units sold during the period to cost of goods sold. Allocate the remaining costs to ending inventory. 2nd 3rd etc.
  20. 20. First-in, First-out (FIFO) Method ALLOCATE TO Ending Cost of Units Cost Inventory Goods Sold 1/1 500 $10 $5,000 1/20 300 $11 3,300 4/8 300 / 100 $12 $3,600 1,200 9/5 200 $13 2,600 12/12 100 $14 1,400 TOTALS $7,600 $9,500
  21. 21. COST FLOW ASSUMPTIONS  LAST-IN, FIRST-OUT(LIFO) Newest goods assumed to be first units sold Inventory made up of earliest goods acquired
  22. 22. Purchased goods Sold goods Cost Flow Assumptions
  23. 23. Last-in, First-out (LIFO) Method Step 1: Assign the cost of the last units purchased to cost of goods sold. 1st in
  24. 24. Last-in, First-out (LIFO) Method ALLOCATE TO Ending Cost of Units Cost Inventory Goods Sold 1/1 500 $10 1/20 300 $11 4/8 400 $12 9/5 200 $13 12/12 100 $14 $1,400
  25. 25. 1st in Step 2: Work backwards until you assign the total number of units sold during the period to cost of goods sold (allocate the remaining costs to ending inventory). Last-in, First-out (LIFO) Method
  26. 26. Last-in, First-out (LIFO) Method ALLOCATE TO Ending Cost of Units Cost Inventory Goods Sold 1/1 500 $10 $5,000 1/20 100 / 200 $11 1,100 $ 2,200 4/8 400 $12 4,800 9/5 200 $13 2,600 12/12 100 $14 1,400 TOTALS $6,100 $11,000
  27. 27. COST FLOW ASSUMPTIONS  AVERAGE COST Cost of items sold is the weighted average of costs incurred Inventory is the weighted average of costs incurred
  28. 28. Purchased goods Sold goods Cost Flow Assumptions
  29. 29. Weighted Average Method Step 1: Calculate the cost of goods available for sale.
  30. 30. Weighted Average Method Date purchased Units Cost Total cost Beg. inventory 500 $10 $ 5,000 1/20 300 11 3,300 4/8 400 12 4,800 9/5 200 13 2,600 12/12 100 14 1,400 Cost of goods available for sale 1,500 $17,100
  31. 31. Weighted Average Method Step 2: Divide the cost of goods available for sale by the total units to determine the weighted average cost per unit.
  32. 32. Weighted Average Method Cost of Goods Available for Sale Units Available for Sale $17,100 1,500 = $11.40/unit
  33. 33. Weighted Average Method Step 3: Calculate ending inventory and cost of goods sold by multiplying the weighted average cost per unit by the number of units in ending inventory and the number of units sold. Avg. Cost No. of Units
  34. 34. Weighted Average Method ALLOCATE TO Ending Cost of Inventory Goods Sold Units on hand 600 Units sold 900 Weighted average cost $11.40 $ 11.40 Total cost of goods available of $17,100 allocated: $6,840 $10,260
  35. 35. Comparison of Costing Methods Cost of Goods Sold Ending Inventory 11,000 6,840 7,600 10,260 9,500 17,100 17,000 17,100 Weighted Average FIFO LIFO Goods Available for Sale 6,100
  36. 36. 40% 30% 20% 10% 0% 43% 34% 19% 4% Fifo Lifo Average Other

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