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Inventory Accounting Methods

The document discusses different inventory costing methods used to calculate cost of goods sold. It covers periodic inventory methods which involve taking a physical count of inventory and making adjustments. Perpetual inventory methods make continuous adjustments as items are received and sold. The retail method calculates cost of goods sold using a cost-to-retail percentage. Other topics include flow of costs through raw materials, work-in-process, and finished goods inventories and specific identification, average cost, FIFO, and LIFO inventory costing methods.

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Wahjueczski Ruben
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52 views24 pages

Inventory Accounting Methods

The document discusses different inventory costing methods used to calculate cost of goods sold. It covers periodic inventory methods which involve taking a physical count of inventory and making adjustments. Perpetual inventory methods make continuous adjustments as items are received and sold. The retail method calculates cost of goods sold using a cost-to-retail percentage. Other topics include flow of costs through raw materials, work-in-process, and finished goods inventories and specific identification, average cost, FIFO, and LIFO inventory costing methods.

Uploaded by

Wahjueczski Ruben
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Cost of Sales

6
and
Inventories
Part One: Financial Accounting

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Merchandise Inventory and Flows Slide 6-1

Ending
inventory
$?
Purchases
Available $7,400
for sale
Cost of
$11,400
goods sold
$?
Beginning
$4,000 inventory

Inventory reservoir
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Periodic Inventory Method Slide 6-2

Beginning
Beginning inventory
inventory $$ 4,000
4,000
Plus:
Plus: Purchases
Purchases 7,400
7,400
Equals:
Equals: Goods
Goods available
available for
for sale
sale 11,400
11,400
Less:
Less: Ending
Ending inventory
inventory 2,000
2,000
Cost
Cost of
of goods
goods sold
sold $$ 9,400
9,400

In
In the
the periodic
periodic inventory
inventory method
method aa physical
physical count
count isis
made
made of
of merchandise
merchandise inin the
the ending
ending inventory.
inventory.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Periodic Inventory Method Slide 6-3

Beginning inventory $ 4,000


Plus Purchases, gross $7,000
Freight-in 600
7,600
Less: Purchase returns 200
Net purchases 7,400
Goods available for sale 11,400
Less: Ending inventory 2,000
Cost of goods sold $ 9,400

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Periodic Inventory Method Slide 6-4

Entries

First, close the beginning inventory amount:


Cost of Goods Sold 4,000
Merchandise Inventory 4,000
Next, close Purchases, Purchases Returns, and Freight-In
accounts.
Cost of Goods Sold 7,400
Purchase Return 200
Purchases 7,000
Freight-In 600

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Periodic Inventory Method Slide 6-5

Entries

The new balance from the physical inventory is entered:


Merchandise Inventory 2,000
Cost of Goods Sold 2,000

Finally, Cost of Goods Sold is closed:


Income Summary 9,400
Cost of Goods Sold 9,400

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Perpetual Inventory Method Slide 6-6

Entries

For purchases:
Merchandise Inventory 7,000
Cost of Goods Sold 7,000
For shipment to customers:
Cost of Goods Sold 8,800
Merchandise Inventory 8,800
For purchase returns:
Accounts Payable 200
Merchandise Inventory 200

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Perpetual Inventory Method Slide 6-7

Item: Cassette Deck, Model S150 Unit: Each


Date Receipts Shipments Balance
Unit Unit Unit
Units Cost Total Units Cost Total Units Cost
Total
Jan. 2 40 100 100 4,000
12 32 100 3,200 8 100 800
14 10 100 1,000 18 100 1,800
25 4 100 400 22 100 2,200
31 2 100 200 20 100 2,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Retail Method Slide 6-8

At Cost At Retail
Beginning inventory $ 4,000 $ 6,000
Purchases 7,000 10,000
Goods available for sale $11,000 $16,000

$11,000/$16,000 =69%

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Retail Method Slide 6-9

At Cost At Retail
Beginning inventory $ 4,000 $ 6,000
Purchases 7,000 10,000
Goods available for sale $11,000 $16,000
Sales 13,000
Ending inventory at retail $ 3,000
Ending inventory at cost $ 2,070

$3,000 x .69
Cost
Cost of
of goods
goods sold:
sold: $13,000
$13,000 xx .69
.69 == $8,970
$8,970
Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999
Flow of Cost Through Inventories Slide 6-10

Materials Inventory
Balance, Jan 1 154
Purchases 273

Work in Process Inventory

Balance, Jan 1 19

Finished Goods Inventory


Balance, Jan 1 69

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Flow of Cost Through Inventories Slide 6-11

Materials Inventory
Balance, Jan 1 154 264
Purchases 273

Work in Process Inventory


Balance, Jan 1 19
Materials used 264
Conversion cost 330
Finished Goods Inventory
Balance, Jan 1 69

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Flow of Cost Through Inventories Slide 6-12

Materials Inventory
Balance, Jan 1 154 264
Purchases 273

Work in Process Inventory


Balance, Jan 1 19 570
Materials used 264
Conversion cost 330
Finished Goods Inventory
Balance, Jan 1 69 573 Cost of Goods Sold
Goods manufactured 570

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-13

 Specific identification
 Average cost
 First-in, first-out (FIFO)
 Last-in, first-out (LIFO)

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-14

Basic
Basic Data
Data

Units
Units Unit
UnitCost
Cost Total
TotalCost
Cost
Inventory,
Inventory,January
January11 100
100 $8
$8 $$ 800
800
Purchased
PurchasedJune
June11 60
60 99 540
540
Purchased
PurchasedOctober
October11 80
80 10
10 800
800
Goods
Goodsavailable
availablefor
forsale
sale 240
240 $2,140
$2,140
Goods
Goodssold
sold 150
150
Ending
Endinginventory
inventory 90
90

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-15

Specific
Specific Identification
Identification Method
Method

Units
Units Unit
UnitCost
Cost Total
TotalCost
Cost
SOLD 100
Inventory,
Inventory,January
January11 100
100 $8
$8 $$ 800
800
Purchased
PurchasedJune
June11 60
SOLD6050 99 540
540
Purchased
PurchasedOctober
October11 80
80 10
10 800
800
Goods
Goodsavailable
availablefor
forsale
sale 240
240 $2,140
$2,140
Goods
Goodssold
sold 150
150
Ending
Endinginventory
inventory 90
90

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-16

Specific
Specific Identification
Identification Method
Method

Units
Units Unit
UnitCost
Cost Total
TotalCost
Cost
Purchased
PurchasedJune
June11 10
10 $$ 99 $$ 90
90
Purchased
PurchasedOctober
October11 80
80 10
10 800
800
Ending
Endinginventory
inventory 90
90 $890
$890

Cost
Cost of
of goods
goods sold
sold == (100
(100 xx $8)
$8) ++ (50
(50 xx $9)
$9) == $1,250
$1,250

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-17

Average
Average Cost
Cost Method
Method

Units
Units Unit
UnitCost
Cost Total
TotalCost
Cost
Inventory,
Inventory,January
January11 100
100 $8
$8 $$ 800
800
Purchased
PurchasedJune
June11 60
60 99 540
540
Purchased
PurchasedOctober
October11 80
80 10
10 800
800
Goods
Goodsavailable
availablefor
forsale
sale 240
240 $8.917
$8.917 $2,140
$2,140
Ending
Ending inventory:
inventory: 90
90 xx $8.917
$8.917 == $802
$802
Cost
Cost of
of goods
goods sold:
sold: 150 $2,140
150 xx $8.917
$2,140== $1,338
$8.917 $1,338
240
240

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-18

FIFO
FIFO

Units
Units Unit
UnitCost
Cost Total
TotalCost
Cost
Inventory,
Inventory,January
January11 Sold 100
100
100 $8
$8 $$ 800
800
Purchased
PurchasedJune
June11 Sold60
6050 99 540
540
Purchased
PurchasedOctober
October11 80
80 10
10 800
800
Goods
Goodsavailable
availablefor
forsale
sale 240
240 $2,140
$2,140
Goods
Goodssold
sold 150
150
Ending
Endinginventory
inventory 90
90

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-19

FIFO
FIFO

Units
Units Unit
UnitCost
Cost Total
TotalCost
Cost
Purchased
PurchasedJune
June11 10
10 99 90
90
Purchased
PurchasedOctober
October11 80
80 10
10 800
800
Ending
Endinginventory
inventory 90
90 $890
$890

Cost
Cost of
of goods
goods sold:
sold: (100
(100 xx $8)
$8) ++ (50
(50 xx $9)
$9) == $1,250
$1,250

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-20

LIFO
LIFO

Units
Units Unit
UnitCost
Cost Total
TotalCost
Cost
Inventory,
Inventory,January
January11 100
Sold
10010 $8
$8 $$ 800
800
Purchased
PurchasedJune
June11 Sold6060
60 99 540
540
Purchased
PurchasedOctober
October11 Sold8080
80 10
10 800
800
Goods
Goodsavailable
availablefor
forsale
sale 240
240 $2,140
$2,140
Goods
Goodssold
sold 150
150
Ending
Endinginventory
inventory 90
90

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Inventory Costing Methods Slide 6-21

LIFO
LIFO

Units
Units Unit
UnitCost
Cost Total
TotalCost
Cost
Inventory,
Inventory,January
January11 90
90 $8
$8 $720
$720

Ending
inventory
Cost
Cost of
of goods
goods sold:
sold: (80
(80 xx $10)
$10) ++ (60
(60 xx $9)
$9) ++ (10
(10 xx $8)
$8)
== $1,420
$1,420

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Comparison of Method Slide 6-22

Cost of Ending
Goods Sold Inventory Total

FIFO
FIFO $1,250
$1,250 $890
$890 $2,140
$2,140
Average
Averagecost
cost 1,338
1,338 802
802 2,140
2,140
LIFO
LIFO 1,420
1,420 720
720 2,140
2,140

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999


Chapter 6

The End

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999

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