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Unformatted text preview: 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 ending inventory 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 ending inventory 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 ending inventory using the perpetual method and average cost. Solution: See class notes. Gross Profit Method A. This method is used to estimate ending inventory 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) - Ending Inventory (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 = Gross Profit, or CGS = Net Sales - Gross Profit Note: Net Sales is obtainable from the accounting records; and Gross Profit can be estimated by multiplying Net Sales by the Gross Profit Percentage. This gives CGS that is substituted in the first equation to get EI. C. Example: Secret Garden wants to estimate its ending inventory 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 gross profit was: Net Sales Cost of goods sold Gross Profit $6,000 4,500 1,500 Required: (1) Calculate the gross profit percentage; and (2) ending inventory using the gross profit method. Solution: See class notes. III. Retail Inventory Methods A. This method can also be used to estimate ending inventory. It is often used by retailers to value their ending inventory 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 ending inventory using the average cost version of the retail inventory method. Solution: See class notes. ...
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- Spring '08