C8 - 1
Learning Objectives
Power Notes
1,Internal Control of Inventories
2,Effect of Inventory Errors
3,Inventory Cost Flow Assumptions
4,Perpetual Inventory Costing Methods
5,Periodic Inventory Costing Methods
6,Comparing Inventory Costing Methods
7,Inventory Valuation Other Than Cost
8,Balance Sheet Presentation of Merchandise
9,Estimating Inventory Cost
10,Financial Analysis and Interpretation
Chapter F8
Inventories
C8
C8 - 2
Inventory Control and Relationships
Perpetual Inventory Accounting
LIFO and FIFO Cost Flow Assumptions
Inventory at Lower-of-Cost-or-Market
Retail and Gross Profit Methods
Inventory Turnover Ratio
Slide # Power Note Topics
3
7
23
31
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37
Power NotesChapter F8
Inventories
Note,To select a topic,type the slide # and press Enter.
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Why is Inventory Control Important?
Inventory is a significant asset and for many
companies the largest asset.
Inventory is central to the main activity of
merchandising and manufacturing companies.
Mistakes in determining inventory cost can
cause critical errors in financial statements.
Inventory must be protected from external
risks ( such as fire and theft) and internal fraud
by employees.
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LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
COSTS &
EXPENSES
Inventory Costs and Relationships
Merchandise
Inventory
Cost of
Mdse,Sold
If merchandise inventory is,,,,,,,overstated
Cost of merchandise sold is,,,,,,
Gross profit and net income are,,,
Ending owner’s equity is,,,,,,,,,
understated
overstated
overstated
Net Income
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LIABILITIES
OWNER’S
EQUITY
REVENUES
ASSETS
COSTS &
EXPENSES
Inventory Costs and Relationships
Merchandise
Inventory
Cost of
Mdse,Sold
If merchandise inventory is,,,,,,,understated
Cost of merchandise sold is,,,,,,
Gross profit and net income are,,,
Ending owner’s equity is,,,,,,,,,
overstated
understated
understated
Net Income
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Merchandising and Inventory
Merchandising involves selling inventory.
Inventory is usually an important asset.
Inventory must be accounted for periodically
or perpetually.
Traditional periodic method is often being
replaced by perpetual inventory accounting.
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Continuous determination of inventory value
Continuous determination of gross profit
Affordable with computers,scanners,and bar
codes on most products
Perpetual inventory accounting provides
management controls.
Managers know which items are selling fastest
and the profit margin on those items.
Advantages of Using Perpetual Inventory
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Perpetual Inventory Costs
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse,Sold
Item 127B Units Cost Price
Jan,1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
Sale price assumptions are added to
demonstrate journal entries and ease
of calculating gross profit.
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Jan,1 10 20 200
4 7 20 140 3 20 60
Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
The sale of 7 units leaves a balance of 3 units.
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Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Because the purchase price of $21 is different than the
cost of the previous 3 units on hand,the inventory
balance of 11 units is accounted for separately,
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Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Of the 4 units sold,3 come from the
first units in (FIFO) at a cost of $20.
Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147
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Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147
28 2 21 42 5 21 105
Sold 2 units from the 7 units on
hand,No allocation is necessary.
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Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147
28 2 21 42 5 21 105
30 10 22 220 5 21 105
10 22 220
Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse,Sold Inventory
Balance Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Totals 18 $388 13 $263 15 $325
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Totals 18 $388 13 $263 15 $325
Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147
28 2 21 42 5 21 105
30 10 22 220 5 21 105
10 22 220
Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
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Date Description Debit Credit
FIFO Perpetual Inventory Accounting
Accounts Receivable 390
Sales 390
Cost of Merchandise Sold 263
Merchandise Inventory 263
Gross Profit = Sales ($390) minus
Cost of Merchandise Sold ($263) = $127
Jan,31
To record January sales of item 127B.
(7 units@$30,4 units@$30,2 units@$30)
To record cost of January sales of item 127B.
Jan,31
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Purchases Cost of Mdse,Sold Inventory
Balance Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Item 127B
LIFO Perpetual Inventory Account
Jan,1 10 20 200
4 7 20 140 3 20 60
The sale of 7 units leaves a balance of 3 units.
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Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
Item 127B
LIFO Perpetual Inventory Account
The purchase price of $21 is different than the cost of
the previous 3 units on hand; therefore,the inventory
balance of 11 units is accounted for separately,
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Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
Item 127B
LIFO Perpetual Inventory Account
Of the 4 units sold,all come from the
last units in (LIFO) at a cost of $21.
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Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
Item 127B
LIFO Perpetual Inventory Account
Of the 2 units sold,all come from the last units in
(LIFO) at a cost of $21,leaving 2 units from that group.
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Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
30 10 22 220 3 20 60
2 21 42
10 22 220
Item 127B
LIFO Perpetual Inventory Account
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Purchases Cost of Mdse,Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty,Cost Cost Qty,Cost Cost Qty,Cost Cost
Jan,1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
30 10 22 220 3 20 60
2 21 42
10 22 220
Item 127B
Totals 18 $388 13 $266 15 $322
LIFO Perpetual Inventory Account
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Date Description Debit Credit
LIFO Perpetual Inventory Accounting
Accounts Receivable 390
Sales 390
Cost of Merchandise Sold 266
Merchandise Inventory 266
Gross Profit = Sales ($390) minus
Cost of Merchandise Sold ($266) = $124
Jan,31
To record January sales of item 127B.
(7 units@$30,4 units@$30,2 units@$30)
To record cost of January sales of item 127B.
Jan,31
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Jan,1
200 units at $9
First-In,First-Out Flow of Costs
Mar,10
300 units at $10
Sep,21
400 units at $11
Nov,18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale
$10,400
Using FIFO costing,
which units are assumed
to be sold first?
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Jan,1
200 units at $9
First-In,First-Out Flow of Costs
Mar,10
300 units at $10
Sep,21
400 units at $11
Nov,18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale
$1,800
$3,000
$2,200
Cost of
Merchandise
Sold
200 units at $9
$10,400
$7,000
300 units at $10
200 units at $11
FIFO cost flow assumes
merchandise acquired
first is sold first.
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Jan,1
200 units at $9
First-In,First-Out Flow of Costs
Mar,10
300 units at $10
Sep,21
400 units at $11
Nov,18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale
$1,800
$3,000
$2,200
Cost of
Merchandise
Sold
200 units at $9
$10,400 $2,200
$1,200
$7,000
Merchandise
Inventory
$3,400
300 units at $10
200 units at $11
200 units at $11
100 units at $12
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Jan,1
200 units at $9
First-In,First-Out Flow of Costs
Mar,10
300 units at $10
Sep,21
400 units at $11
Nov,18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale
$1,800
$3,000
$2,200
Cost of
Merchandise
Sold
200 units at $9
$10,400 $2,200
$1,200
$7,000
Merchandise
Inventory
$3,400
300 units at $10
200 units at $11
200 units at $11
100 units at $12
700 units
1,000 units
300 units
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Jan,1
200 units at $9
Last-In,First-Out Flow of Costs
Mar,10
300 units at $10
Sep,21
400 units at $11
Nov,18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale
$10,4001,000 units total
Using LIFO costing,
which units are assumed
to be sold first?
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Jan,1
200 units at $9
Last-In,First-Out Flow of Costs
Mar,10
300 units at $10
Sep,21
400 units at $11
Nov,18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale
Cost of
Merchandise
Sold
$10,400
$4,400
$1,200
$7,600
200 units at $10
400 units at $11
100 units at $12
$2,000
LIFO cost flow assumes
merchandise acquired
last is sold first.
1,000 units total
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Jan,1
200 units at $9
Last-In,First-Out Flow of Costs
Mar,10
300 units at $10
Sep,21
400 units at $11
Nov,18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale $1,800
$1,000
Cost of
Merchandise
Sold
200 units at $9
$10,400
$4,400
$1,200
$2,800
Merchandise
Inventory
$7,600
100 units at $10
200 units at $10
400 units at $11
100 units at $12
$2,000
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Jan,1
200 units at $9
Last-In,First-Out Flow of Costs
Mar,10
300 units at $10
Sep,21
400 units at $11
Nov,18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale $1,800
$1,000
Cost of
Merchandise
Sold
200 units at $9
$10,400
$4,400
$1,200
$2,800
Merchandise
Inventory
$7,600
100 units at $10
200 units at $10
400 units at $11
100 units at $12
$2,000
700 units
1,000 units
300 units
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$ 3,800
2,700
4,650
3,920
Total $15,520 $15,472 $15,070
The market decline is either:
1,Based on total inventory ($15,520 – $15,472) = $48
2,Based on individual items ($15,520 – $15,070) = $450
The decline is reported on the income statement as a
separate item or included in the cost of merchandise sold.
Valuation of Inventory at Lower-of-Cost-or-Market
A 400 $10.25 $ 9.50 $ 4,100 $ 3,800
B 120 22.50 24.10 2,700 2,892
C 600 8.00 7.75 4,800 4,650
D 280 14.00 14.75 3,920 4,130
Unit Unit
Inventory Cost Market Total Total Lower
Item Quantity Price Price Cost Market C or M
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Assets
Current assets:
Cash $ 19,400
Accounts receivable $80,000
Less allowance 3,000 77,000
Merchandise inventory
at lower of cost (first-in,
first-out method) or market 216,300
Afro-Arts
Balance Sheet
December 31,2004
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Retail Method of Estimating Inventory Cost
Retail method is based on relationship between cost
of merchandise available for sale and the retail price.
Retail prices of all merchandise must be accumulated.
Inventory at retail is calculated as retail price of
merchandise available for sale less sales.
Ratio is calculated as cost divided by retail price.
Inventory at retail price times cost ratio equals
estimated cost of inventory.
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$62,000 $100,000
($62,000 / $100,000 = 62%)
$30,000
($30,000 x 62%) $18,600
Retail Inventory Method Calculation
Cost Retail
Merchandise inventory,January 1 $19,400 $36,000
Purchases in January (net) 42,600 64,000
Merchandise available for sale
Ratio of cost to retail price:
Sales for January (net) 70,000
Merchandise inventory,January 31,at retail
Merchandise inventory,January 31,at est,cost
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Gross Profit Method of Estimating Inventory Cost
1,A gross profit percentage rate is estimated based on
previous experience adjusted for known changes.
2,Estimated gross profit is calculated by multiplying the
estimated gross profit rate times the actual net sales.
3,Estimated cost of merchandise sold is calculated by
subtracting the gross profit from actual sales.
4,The cost of merchandise sold estimate is deducted
from actual merchandise available for sale to determine
the estimated cost of merchandise inventory.
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Merchandise inventory,January 1 $ 57,000
Purchases in January (net) 180,000
Merchandise available for sale
Sales in January (net) $250,000
Less,Estimated gross profit
Estimated cost of merchandise sold
Estimated merchandise inventory,January 31
Gross Profit Method Calculation
$237,000
($250,000 x 30%) 75,000
175,000
$ 62,000
Many firms generate a surprisingly stable and predictable
gross profit as a percentage of sales.
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Inventory Turnover Ratios
SUPERVALU Zale
Cost of goods sold $15,620,127,000 $ 737,188,000
Inventories:
Beginning of year $1,115,529,000 $478,467,000
End of year 1,067,837,000 571,669,000
Average $1,091,683,000 $525,068,000
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Inventory Turnover Ratios
SUPERVALU Zale
Cost of goods sold $15,620,127,000 $ 737,188,000
Inventories:
Beginning of year $1,115,529,000 $478,467,000
End of year 1,067,837,000 571,669,000
Average $1,091,683,000 $525,068,000
Inventory turnover 14.3 times 1.4 times
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Inventory Turnover Ratios
SUPERVALU La-Z-Boy
Cost of goods sold $15,620,127,000 $ 737,188,000
Inventories:
Beginning of year $1,115,529,000 $478,467,000
End of year 1,067,837,000 571,669,000
Average $1,091,683,000 $525,068,000
Inventory turnover 14.3 times 1.4 times
Average selling period 25 days 283 days
Use,To assess the efficiency in the
management of inventory
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This is the last slide in Chapter F8,
Power Notes
Inventories
Chapter F8