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### ACT 230 Lec 13

Course: ACT 230, Spring 2008
School: N. Michigan
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Word Count: 455

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Other Inventory Issues by Joel E. Thompson I. Cost Flow Assumptions - Perpetual Basis A. FIFO - First-in, First-out. Example: Suppose that Secret Garden has the following purchases and sales of fertilizer: Purchases May 1, 10 bags at \$3 each; May 5, 15 bags at \$4 each; May 15, 12 bags at \$5 each. Sales May 10, 23 bags May 20, 11 bags Required: Calculate cost of goods sold and &lt;a...

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Other Inventory Issues by Joel E. Thompson I. Cost Flow Assumptions - Perpetual Basis A. FIFO - First-in, First-out. Example: Suppose that Secret Garden has the following purchases and sales of fertilizer: Purchases May 1, 10 bags at \$3 each; May 5, 15 bags at \$4 each; May 15, 12 bags at \$5 each. Sales May 10, 23 bags May 20, 11 bags Required: Calculate cost of goods sold and <a href="/keyword/ending-inventory/" >ending inventory</a> using the perpetual basis and FIFO. Solution: See class notes. Note: The results of FIFO are always the same under the perpetual and periodic basis. B. LIFO - Last-in, First-out. Example: Use the data for Secret Garden above. Required: Calculate cost of goods sold and <a href="/keyword/ending-inventory/" >ending inventory</a> using the perpetual method and LIFO. Solution: See class notes. C. Average Cost - Moving average. Example: Use the data for Secret Garden above. Required: Calculate cost of goods sold and <a href="/keyword/ending-inventory/" >ending inventory</a> using the perpetual method and average cost. Solution: See class notes. <a href="/keyword/gross-profit/" >gross profit</a> Method A. This method is used to estimate <a href="/keyword/ending-inventory/" >ending inventory</a> on a periodic basis when a physical count is not practical (e.g., end of month or quarter) or possible (inventory destroyed by fire). B. Logic 1. On a periodic basis, Cost of Goods Sold (CGS) = Beginning Inventory (BI) + Cost of Goods Purchased (CP) - <a href="/keyword/ending-inventory/" >ending inventory</a> (EI), or CGS = BI + CP - EI, or EI = BI + CP - CGS Note: BI and CP are available from accounting records. II. 2. Also, Net Sales - CGS = <a href="/keyword/gross-profit/" >gross profit</a> , or CGS = Net Sales - <a href="/keyword/gross-profit/" >gross profit</a> Note: Net Sales is obtainable from the accounting records; and <a href="/keyword/gross-profit/" >gross profit</a> can be estimated by multiplying Net Sales by the <a href="/keyword/gross-profit/" >gross profit</a> Percentage. This gives CGS that is substituted in the first equation to get EI. C. Example: Secret Garden wants to estimate its <a href="/keyword/ending-inventory/" >ending inventory</a> at the end of January. It compiled the following information from its accounting records: Beginning Inventory, \$1,000; Cost of Goods Purchased, \$8,000; Net Sales, \$10,000. Prior January's <a href="/keyword/gross-profit/" >gross profit</a> was: Net Sales Cost of goods sold <a href="/keyword/gross-profit/" >gross profit</a> \$6,000 4,500 1,500 Required: (1) Calculate the <a href="/keyword/gross-profit/" >gross profit</a> percentage; and (2) <a href="/keyword/ending-inventory/" >ending inventory</a> using the <a href="/keyword/gross-profit/" >gross profit</a> method. Solution: See class notes. III. Retail Inventory Methods A. This method can also be used to estimate <a href="/keyword/ending-inventory/" >ending inventory</a> . It is often used by retailers to value their <a href="/keyword/ending-inventory/" >ending inventory</a> for annual financial reporting (the inventory is counted, valued at retail, and converted to cost using a retail inventory method). B. There are several versions of the retail inventory method. Your book illustrates the average cost method. C. Example: Suppose that in the previous example the retail value of the beginning inventory is \$1,500 and the retail value for the Cost of Goods Purchased is \$11,000. Required: Calculate Secret Garden's <a href="/keyword/ending-inventory/" >ending inventory</a> using the average cost version of the retail inventory method. Solution: See class notes.
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N. Michigan - ACT - 230
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