How does the inventory T Account look under these two methods Perpetual method

How does the inventory t account look under these two

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How does the inventory T-Account look under these two methods? Perpetual method Periodic Method Now, let’s say on June 30 we did our physical inventory, and found only 850 units on hand. What happens? Perpetual method Periodic Method Perpetual method Periodic Method 20
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Question: How do we know which items we sold for costing purposes? Specific Identification – FIFO – LIFO – Average Cost – 21
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Doing the Math 10/1 Purchases 20 units at $1 each $20 10/6 Purchases 10 units at $2 each $20 10/15 Sells 25 units for $5 each $125 10/19 Purchases 20 units for $4 each $80 10/22 Sells 10 units for $5 each $50 FIFO 22
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LIFO Average Cost 23
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Inventory Method Assumptions in Practice 10/1 Purchases 20 units at $1 each $20 10/6 Purchases 10 units at $2 each $20 10/15 Sells 25 units for $5 each $125 10/19 Purchases 20 units for $4 each $80 10/22 Sells 10 units for $5 each $50 Ending Inventory: 15 units that cost….? FIFO LIFO Average Sales COGS Gross Profit SGA Expenses (30) (30) (30) Income Before Taxes Income Tax (40%) Income After Taxes Ending Inventory Cost of Goods Sold Total Purchase Cost 24
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But…. Assuming all above transactions are in cash: FIFO LIFO Average Beginning Cash 100 100 100 Less: Purchases Plus: Sales Less: Expenses Less: Taxes Ending Cash 25
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Dollar Value LIFO Step 1: For each inventory pool, take a physical inventory and multiply the actual units on hand by year-end prices. The result is the dollar value of inventory at current price. Step 2: Convert the dollar value of ending inventory at current price (result of step one) into base-year price by dividing it by the current price index. This yields a dollar value of inventory at base- year price. Step 3: Compare ending inventory at base-year price to beginning inventory at base-year price (from the prior year’s calculations). *If the dollar value of ending inventory (at base-year prices) is higher than beginning inventory, add a new layer! Multiply the difference by the current year price index, and add this amount to the beginning-of-year inventory. *If the dollar value of ending inventory (at base year prices) is lower than beginning inventory, reduce the value of inventory! Multiply the difference (decrease) by the price index in effect at the time that inventory was ‘added,’ and subtract that amount from beginning-of-year inventory. 26
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Dollar value LIFO example The following describes the inventory of Davecorp over the period from 2001 to 2004: Date Dollar value of inventory at current (Y/E prices) Price Index 2001 3000 1.00 2002 3850 1.10 2003 3910 1.15 2004 4875 1.25 Y/E Inventory at Base Price Change in Inventory Index B/S Adjustment Y/E Inventory at DVL Value 2001 __________ __________ ______ __________ ____________ 2002 __________ __________ ______ __________ ____________ 2003 __________ __________ ______ __________ ____________ 2004 __________ __________ ______ __________ ____________ 27
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Lower of Cost or Market (LCM) General rule: There are three “market” values to choose from: Replacement Cost Net Realizable Value Net Realizable Value minus normal profit Which one do you use? The middle one! Here is the inventory valuation for Dave’s Donut Holes (and Fritters Too!) Item Historical Cost Net Realizable Value Replacement Cost NRV – normal profit Item by Item LCM Raspberry 200 216 160 180 180 Apple 250 300 280 240 250 Coconut 180 190 135 130 135 Fritters
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