The document outlines key concepts related to inventory valuation in Intermediate Accounting II, focusing on classifications, cost flow assumptions, and inventory systems. It explains the differences between perpetual and periodic inventory systems, detailing how to record transactions and calculate cost of goods sold. Additionally, it discusses various cost flow assumptions, including FIFO, LIFO, and weighted average methods, along with examples for practical understanding.
The document outlines key concepts related to inventory valuation in Intermediate Accounting II, focusing on classifications, cost flow assumptions, and inventory systems. It explains the differences between perpetual and periodic inventory systems, detailing how to record transactions and calculate cost of goods sold. Additionally, it discusses various cost flow assumptions, including FIFO, LIFO, and weighted average methods, along with examples for practical understanding.
The document outlines key concepts related to inventory valuation in Intermediate Accounting II, focusing on classifications, cost flow assumptions, and inventory systems. It explains the differences between perpetual and periodic inventory systems, detailing how to record transactions and calculate cost of goods sold. Additionally, it discusses various cost flow assumptions, including FIFO, LIFO, and weighted average methods, along with examples for practical understanding.
The document outlines key concepts related to inventory valuation in Intermediate Accounting II, focusing on classifications, cost flow assumptions, and inventory systems. It explains the differences between perpetual and periodic inventory systems, detailing how to record transactions and calculate cost of goods sold. Additionally, it discusses various cost flow assumptions, including FIFO, LIFO, and weighted average methods, along with examples for practical understanding.
Accounting II Lecturer: Ahmed Yazin Faculty Of: Business Admiration Department of: Accounting Semester : 7 Valuation of Inventories: 8 A Cost-Basis Approach
Intermediate Accounting 14th Edition
Kieso, Weygandt, and Warfield
INVENTORY ISSUES • Identify major classifications of inventory. • Inventories are asset items that a company holds for sale in the ordinary course of business, or goods that it will use or consume in the production of goods to be sold. • The investment in inventories is frequently the largest current asset of merchandising (retail) and manufacturing businesses. • Only one inventory account, Merchandise Inventory, appears in the financial statements. • Manufacturing concerns, on the other hand, produce goods to sell to merchandising firms. Merchandising Company Classification Illustration 8-1
One inventory account.
Purchase goods in form ready for sale.
LO 1 Identify major classifications of inventory.
Manufacturing Company Classification Illustration 8-1
Three accounts
Raw materials
Work in process
Finished goods Inventory Cost Flow Companies that sell or produce goods report inventory and cost of goods sold at the end of each accounting period. The flow of costs for a company is as follows:
Companies use one of two types of systems for maintaining
inventory records — perpetual system or periodic system. Inventory Cost Flow Perpetual System 1. Purchases of merchandise are debited to Inventory. 2. Freight-in is debited to Inventory. Purchase returns and allowances and purchase discounts are credited to Inventory. 3. Cost of goods sold is debited and Inventory is credited for each sale. 4. Subsidiary records show quantity and cost of each type of inventory on hand. The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold. Inventory Cost Flow Periodic System 1. Purchases of merchandise are debited to Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold:
Beginning inventory $ 100,000
Purchases, net 800,000 Goods available for sale 900,000 Ending inventory 125,000 Cost of goods sold $ 775,000 Inventory Cost Flow Illustration: East Company had the following transactions during the current year.
Record these transactions using the Perpetual and
Periodic systems. Inventory Cost Flow
LO 2 Inventory Cost Flow Illustration: Assume that at the end of the reporting period, the perpetual inventory account reported an inventory balance of $4,000. However, a physical count indicates inventory of $3,800 is actually on hand. The entry to record the necessary write-down is as follows.
Inventory Over and Short 200
Inventory 200
Note: Inventory Over and Short adjusts Cost of Goods Sold. In practice, companies sometimes report Inventory Over and Short in the “Other income and expense” section of the income statement. Costs Included in Inventory Product Costs Costs directly connected with bringing the goods to the buyer’s place of business and converting such goods to a salable condition.
Period Costs Generally selling, general, and administrative expenses.
Treatment of Purchase Discounts
Gross vs. Net Method Costs Included in Inventory Treatment of Purchase Discounts Illustration 8-11
**
* $4,000 x 2% = $80 ** $10,000 x 98% = $9,800 LO 4
Which Cost Flow Assumption to Adopt?
Specific Identification --- Average Cost
LIFO --- FIFO
Cost Flow Assumption Adopted
does not need to equal Physical Movement of Goods
Method adopted should be one that most clearly reflects periodic income.
LO5 Describe and compare the cost flow assumptions
used to account for inventories. Cost Flow Assumptions EXAMPLE: Call-Mart Inc. had the following transactions in its first month of operations.
Calculate Goods Available for Sale
Beginning inventory (2,000 x $4) $ 8,000 Purchases: 6,000 x $4.40 26,400 2,000 x 4.75 9,500 Goods available for sale $43,900 Continue……….
• Instructions Calculate the value assigned to ending inventory and cost of goods sold if Call-Mart uses: a) Specific Identification Method b) Weighted Average c) FIFO And d) LIFO Specific Identification Illustration: Assume that Call-Mart Inc.’s 6,000 units of inventory consists of 1,000 units from the March 2 purchase, 3,000 from the March 15 purchase, and 2,000 from the March 30 purchase. Compute the amount of ending inventory and cost of goods sold. Average Cost Weighted Average Moving Average Moving Average
In this method, Call-Mart computes a new average
unit cost each time it makes a purchase. First-In, First-Out (FIFO)
Periodic Method
Determine cost of ending inventory by taking the cost of the most
recent purchase and working back until it accounts for all units in the inventory. First-In, First-Out (FIFO)
Perpetual Method
In all cases where FIFO is used, the inventory and cost of
goods sold would be the same at the end of the month whether a perpetual or periodic system is used. Last-In, First-Out (LIFO)
Periodic Method Illustration 8-17
The cost of the total quantity sold or issued during the
month comes from the most recent purchases. Last-In, First-Out (LIFO)
Perpetual Method Illustration 8-18
The LIFO method results in different ending inventory and cost
of goods sold amounts than the amounts calculated under the periodic method. LO5 Describe and compare the cost flow assumptions used to account for inventories. EXERCISE • Daallo Company uses both Perpetual and Periodic inventory systems and has the following inventory, purchases, and sales data for the month of March. • The physical inventory count on March 31 shows 500 units on hand. INSTRUCTIONS • Use Under a perpetual inventory system or Periodic inventory System, determining the cost of inventory on hand at March 31 and the cost of goods sold for March under: a) FIFO Method, b) LIFO Method and c) Weighted Average Method (WAM).
