FIFO& LIFO - Accounting for Inventories Inventories Inventory Costs Inventory All expenditures incurred Inventory Costs Inventory All

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Unformatted text preview: Accounting for Inventories Inventories Inventory Costs Inventory All expenditures incurred Inventory Costs Inventory All expenditures incurred to All bring the item to its bring Inventory Costs Inventory All expenditures incurred to All bring the item to its existing condition and location location Costs include Costs s Invoice cost s Shipping s Cash discounts s Purchases allowances Inventory Systems - Periodic Inventory s Compute Compute inventory balance at end of each accounting period of s Compute cost of goods sold at Compute accounting period end accounting Inventory Systems - Perpetual Inventory s Compute Compute cost of goods sold at each sale each s Compute new inventory balance at Compute each sale each Cost Flow Assumptions Cost s Only 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 system Cost Flow Assumptions Cost s With With other inventory cost methods, we make an assumption of the movement of costs through the accounting system. accounting s This "flow" of costs through the This system need not match the movement of product through the business. business. Cost Flow Assumptions Cost s First-In, First-Out Cost Flow Assumptions Cost s First-In, – First-Out Earliest goods assumed to be first Earliest units sold units Cost Flow Assumptions Cost s First-In, First-Out Earliest goods assumed to be first Earliest units sold units – Inventory made up of latest goods Inventory acquired acquired – Cost Flow Assumptions Cost s Last-In, First-Out Cost Flow Assumptions Cost s Last-In, – First-Out Newest goods assumed to be first Newest units sold units Cost Flow Assumptions Cost s Last-In, First-Out Newest goods assumed to be first Newest units sold units – Inventory made up of earliest goods Inventory acquired acquired – Cost Flow Assumptions Cost s Average cost Cost Flow Assumptions Cost s Average – cost Cost of items sold is the weighted Cost average of costs incurred average Cost Flow Assumptions Cost s Average cost Cost of items sold is the weighted Cost average of costs incurred average – Inventory is the weighted average of Inventory costs incurred costs – Inventory Example Data Inventory Jan. 1 Beg Inven. 200 $4.00 Apr. 10 Purchase 700 5.00 Oct. 23 Purchase 400 6.00 Available 1,300 Merchandise Sales May 5 500 Dec. 19 300 Total 800 $ 800.00 3,500.00 2,400.00 $6,700.00 First-In First-Out First-In Newest layer $6.00 First-In First-Out First-In Newest layer 400 units @ $6.00 $2,400 First-In First-Out First-In Newest layer 400 units @ $6.00 $2,400 Next newest layer $5.00 First-In First-Out First-In Newest layer 400 units @ $6.00 $2,400 Next newest layer 100 units @ $5.00 500 First-In First-Out First-In Newest layer 400 units @ $6.00 $2,400 Next newest layer 100 units @ $5.00 500 Total cost $2,900 First-In First-Out First-In Cost of Goods Sold Beginning Inventory $ 800 First-In First-Out First-In Cost of Goods Sold Beginning Inventory $ 800 Purchases 5,900 Cost of goods available Cost for sale $6,700 for First-In First-Out First-In Cost of Goods Sold Beginning Inventory $ 800 Purchases 5,900 Cost of goods available Cost for sale $6,700 for Deduct: Ending Inventory 2,900 Cost of goods sold $3,800 First-In First-Out First-In Proof of cost of goods sold: Oldest cost layer 200 units @ $4.00 $ 800 First-In First-Out First-In Proof of cost of goods sold: Oldest cost layer 200 units @ $4.00 $ 800 Next oldest layer 600 units @ $5.00 3,000 Total $3,800 Last-In First-Out Last-In Oldest layer $4.00 Last-In First-Out Last-In Oldest layer 200 units @ $4.00 $ 800 Last-In First-Out Last-In Oldest layer 200 units @ $4.00 Next oldest layer $5.00 $ 800 Last-In First-Out Last-In Oldest layer 200 units @ $4.00 Next oldest layer 300 units @ $5.00 $ 800 1,500 Last-In First-Out Last-In Oldest layer 200 units @ $4.00 Next oldest layer 300 units @ $5.00 Total cost $ 800 1,500 $2,300 Last-In First-Out Last-In LIFO Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Last-In First-Out Last-In LIFO Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchase 5,900 Cost of goods available $6,700 Last-In First-Out Last-In LIFO Periodic Inventory Cost of goods sold: Beginning inventory Purchase Cost of goods available Deduct: Ending inventory Cost of goods sold $ 800 5,900 $6,700 2,300 $4,400 Last-In First-Out Last-In LIFO Periodic Inventory Proof of Cost of Goods Sold Last-In First-Out Last-In LIFO Periodic Inventory Proof of Cost of Goods Sold Newest cost layer 400 units @ $6.00 $2,400 Last-In First-Out Last-In LIFO Periodic Inventory Proof of Cost of Goods Sold Newest cost layer 400 units @ $6.00 Next newest layer 400 units @ $5.00 Total cost $2,400 2,000 $4,400 Weighted Average Weighted Periodic Inventory Weighted average cost equals Cost of goods available for sale $6,700 divided by Total units available 1,300 equals Weighted average cost per unit $5.1538 Weighted Average Weighted Periodic Inventory December 31 Inventory 500 units x $5.1538 = $2,577 500 Weighted Average Weighted Periodic Inventory Cost of goods sold: Weighted Average Weighted Periodic Inventory Cost of goods sold: Beginning inventory Purchases Cost of goods available $ 800 5,900 $6,700 Weighted Average Weighted Periodic Inventory Cost of goods sold: Beginning inventory Purchases Cost of goods available Deduct: Ending inventory Cost of goods sold $ 800 5,900 $6,700 2,577 $4,123 Weighted Average Weighted Periodic Inventory Proof of cost of goods sold 800 units x $5.1538 = $4,123 800 Income Statement Comparison Periodic Inventory Periodic FIFO Sales $8,000 CGS 3,800 GM $4,200 Op. expense 1,000 Net income $3,200 LIFO $8,000 4,400 $3,600 1,000 $2,600 WA $8,000 4,123 $3,877 1,000 $2,877 Last-In First-Out Last-In LIFO - Perpetual Inventory 200 x $4 $800 Last-In First-Out Last-In LIFO - Perpetual Inventory 4/4 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300 Last-In First-Out Last-In LIFO - Perpetual Inventory 4/4 5/5 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300 700 $5 500 x $5 $2500 200 x $4 $800 500 $5 200 x $5 1000 $1800 Last-In First-Out Last-In LIFO - Perpetual Inventory 4/4 700 x $5 5/5 10/23 400 x $6 $3500 200 x $4 $800 700 x $5 3500 $4300 500 x $5 $2500 200 x $4 $800 200 x $5 1000 $1800 $2400 200 x $4 $800 200 x $5 1000 400 x $6 2400 $4200 Last-In First-Out Last-In LIFO - Perpetual Inventory 4/4 700 x $5 5/5 10/23 400 x $6 12/19 $3500 200 x $4 $800 700 x $5 3500 500 x $5 $2500 200 x $4 $800 200 x $5 1000 $2400 200 x $4 $800 200 x $5 1000 400 x $6 2400 400 $6 300x $6 $1800 200 x $4 $800 200 x $5 1000 100 x $6 600 $4300 $1800 $4200 $2400 Last-In First-Out Last-In LIFO - Perpetual Inventory 4/4 700 x $5 5/5 10/23 400 x $6 12/19 Cost of goods sold $3500 200 x $4 $800 700 x $5 3500 500 x $5 $2500 200 x $4 $800 200 x $5 1000 $2400 200 x $4 $800 200 x $5 1000 400 x $6 2400 300x $6 $1800 200 x $4 $800 200 x $5 1000 100 x $6 600 $4300 $1800 $4200 $2400 $4300 Lower of Cost or Market Lower Class A Item 1 Item Item 2 Item Cost $100 80 Mkt $120 70 Class B Item 6 Item $50 $65 Item 7 Item 40 20 LCM Lower of Cost or Market - By Item Lower Class A Item 1 Item Cost $100 Mkt $120 LCM $100 Lower of Cost or Market - By Item Lower Class A Item 1 Item Item 2 Item Cost $100 80 Mkt $120 70 LCM $100 70 Lower of Cost or Market - By Item Lower Class A Item 1 Item Item 2 Item Class B Item 6 Item Cost $100 80 Mkt $120 70 LCM $100 70 $50 $65 50 Lower of Cost or Market - By Item Lower Class A Item 1 Item Item 2 Item Class B Item 6 Item Item 7 Item Total Cost $100 80 Mkt $120 70 LCM $100 70 $50 40 $65 20 50 20 $240 Lower of Cost or Market - By Class Lower Class A Item 1 Item Item 2 Item Total Total Cost $100 80 $180 Mkt $120 70 $190 LCM $180 Lower of Cost or Market - By Class Lower Class A Item 1 Item Item 2 Item Total Total Class B Item 6 Item Item 7 Item Total Total Total Cost $100 80 $180 Mkt $120 70 $190 $50 40 $90 $65 20 $85 LCM $180 85 $265 Lower of Cost or Market- By Total Lower Class A Item 1 Item Item 2 Item Class B Item 6 Item Item 7 Item Total Cost $100 80 Mkt $120 70 50 40 $270 40 20 $275 LCM $270 Gross Margin Method Gross Logic of Income Statement Net Sales Cost of goods sold: Begin inv Begin Net purchases Net Cost goods avail Cost End inv End Gross margin $70 $5 50 $55 10 45 $25 Gross Margin Method Gross Inventory Estimation Cost of goods available: Begin inv Begin 20,000 20,000 Net purchases Net 135,000 135,000 Cost of goods available Cost $155,000 Deduct cost of goods sold: $ Gross Margin Method Gross Inventory Estimation Cost of goods available $155,000 Net sales $150,000 Multiply by (1 - Gross margin rate) (1 - 0.30) x 0.70 0.70 Est cost of goods sold 105,000 Gross Margin Method Proof of Answer Proof Net sales $150,000 Cost of goods sold Begin inv Begin Net purchases Net CGAS CGAS End inv End Cost of goods sold Cost $ 20,000 135,000 135,000 $155,000 50,000 50,000 Inventory Errors Inventory An error in the computation of An inventory at the end of one period inventory Inventory Errors Inventory An error in the computation of An inventory at the end of one period causes an error in assets and owner’s equity at the end of that period period Inventory Errors Inventory An error in the computation of An inventory at the end of one period causes an error in assets and owner’s equity at the end of that period period and an error in income for two and periods. periods Effect of Inventory Errors Effect s Overstatement Overstatement of inventory at end of period 1 of – Causes an overstatement of net Causes income for period 1 income Effect of Inventory Errors Effect s Overstatement Overstatement of inventory at end of period 1 of Causes an overstatement of net Causes income for period 1 income – and an overstatement of assets and and owner's equity at period 1 end owner's – Effect of Inventory Errors Effect s Overstatement Overstatement of inventory at end of period 1 of – Causes an understatement of net Causes income for period 2 income Effect of Inventory Errors Effect s Overstatement Overstatement of inventory at end of period 1 of Causes an understatement of net Causes income for period 2 income – BUT assets and owner's equity at BUT period 2 end will be correct period – Effect of Inventory Errors Effect s Understatement Understatement of inventory at end of period 1 of – Causes an understatement of net Causes income for period 1 income Effect of Inventory Errors Effect s Understatement Understatement of inventory at end of period 1 of Causes an understatement of net Causes income for period 1 income – and an understatement of assets and and owner's equity at period 1 end owner's – Effect of Inventory Errors Effect s Understatement Understatement of inventory at end of period 1 of – Causes an overstatement of net Causes income for period 2 income Effect of Inventory Errors Effect s Understatement Understatement of inventory at end of period 1 of Causes an overstatement of net Causes income for period 2 income – BUT assets and owner's equity at BUT period 2 end will be correct period – ...
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This note was uploaded on 04/02/2012 for the course ACCT 2301 taught by Professor Floyd during the Spring '08 term at Austin Community College.

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