3. inventories

Universidad Cuauhtémoc

Campus Aguascalientes

InventoriesAnálisis de Costos

Maestría en Administración

Contents

Inventory Control Importance

Effects of Inventory in Financial Statements

Inventory Costing Methods

1. FIFO Perpetual (First In First Out)

2. LIFO Perpetual (Last In First Out)

3. FIFO Periodic

4. LIFO Periodic

5. Average Periodic

Inventory Turn Over

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.

Receiving

report

Purchase

order

Invoice

AGREE

JOURNAL

DescriptionNov. 9

Post.

Ref.Date

Inventory 1 222 00

Accounts Payable—XYZ Co. 1 222 00

Purchased merchandise on

account.

LIABILITIES

STOCK-

HOLDERS’

EQUITY

REVENUES

ASSETS

COSTS &

EXPENSES

Effect of Inventory Errors on

Financial Statements

Merchandise

Inventory

Cost of

Merchandise Sold

If merchandise inventory is . . . . . . .

Cost of merchandise sold is . . . . . .

Gross profit and net income are . . .

Total stockholders’ equity is . . . . .

overstated

understated

overstated

overstated

Net Income

If merchandise inventory is . . . . . . .

Cost of merchandise sold is . . . . . .

Gross profit and net income are . . .

Ending owner’s equity is . . . . . . . . .

understated

overstated

understated

understated

Effect of Inventory Errors on

Financial Statements

Purchased

goods

Sold

goods

Inventory Cost Flow Assumptions

Purchased

goods

Sold

goods

Inventory Cost Flow Assumptions

Purchased

goods

Sold

goods

Inventory Cost Flow Assumptions

Purchased

goodsSold

goods

Inventory Cost Flow Assumptions

Inventory Costing Methods

40%

30%

20%

10%

0%

43%

34%

19%

4%

Fifo Lifo Average Other

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

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

The firm begins the year with 10

units of Item 127B on hand at a

total cost of $200.

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

FIFO Perpetual Inventory Account

On January 4, 7 units of Item

127B are sold at $30 each.

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.

Jan. 1 10 20 200

4 7 20 140 3 20 60

Jan. 1 10 20 200

On January 4, 7 units of Item

127B are sold at $30 each.

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

FIFO Perpetual Inventory Account

On January 10, the firm purchased

eight units at $21 each.

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

On January 10, the firm

purchased eight units at $21 each.

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.

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

FIFO Perpetual Inventory Account

On January 22, the firm sold

four units for $31 each.

Item 127B

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

FIFO Perpetual Inventory Account

22 3 20 60

1 21 21 7 21 147

Of the four units sold, three are

from the first units in (fifo) at a

cost of $20.

On January 22, the

firm sold four units

for $31 each.

FIFO Perpetual Inventory Account

On January 28, the firm

sold two units at $32.

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

Item 127B

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

FIFO Perpetual Inventory Account

22 3 20 60

1 21 21 7 21 147

28 2 21 42 5 21 105

On January 28, the firm

sold two units at $32.

FIFO Perpetual Inventory Account

On January 30, purchased ten additional

units of Item 127B at $22 each.

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

Item 127B

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

FIFO Perpetual Inventory Account

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

Totals 18 $388 13 $263 15 $325

On January 30, purchased

ten additional units of Item

127B at $22 each.

Item 127B

LIFO 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

The firm begins the year with

10 units of Item 127B on

hand at a total cost of $200.

Item 127B

LIFO 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

On January 4, the firm sold

7 units at $30 each.

Item 127B

LIFO 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

On January 10, the

firm purchased eight

units at $21 each.

Note that a new

layer is formed.

Item 127B

LIFO 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

On January 22, the

firm sells four

units at $31 each.

22 4 21 84 3 20 60

4 21 84

Of the 4 units sold, all come

from the most recent purchase

at a cost of $21 each.

Item 127B

LIFO 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

On January 28, sold

two units at $32 each.

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

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

On January 30, purchase

10 units at $22 each.

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

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

Totals 18 $388 13 $266 15 $322

Fifo

Periodic

Jan. 1 Beginning

Inventory200 units @ $9

Mar. 10 Purchase300 units @ $10

400 units @ $11 Sept. 21 Purchase

100 units @ $12 Nov. 18 Purchase

1,000 units available

for sale during

year

Fifo Periodic

Fifo Periodic

200 units @ $9

300 units @ $10

400 units @ $11

100 units @ $12

1,000 units available

for sale during

year

$10,400

= $1,800 Jan. 1

= 3,000 Mar. 10

= 4,400 Sept. 21

= 1,200 Nov. 18

Cost of merchandise

available for sale

Fifo Periodic

A physical count on

December 31 reveals that

700 of the 1,000 units

have been sold.

Using fifo, the first units

purchased are theoretically the

first units sold. We begin the

count with January 1.

Fifo Periodic

200 units @ $9

300 units @ $10

400 units @ $11

100 units @ $12

1,000 units available

for sale during

year

$10,400

= $1,800 Jan. 1

= 3,000 Mar. 10

= 4,400 Sept. 21

= 1,200 Nov. 18

Sold these 200

Sold these 300

Sold 200 of these200 units @ $11

= $ 0 Jan. 1

= 0 Mar. 10

= 2,200 Sept. 21

$ 3,400

Ending inventory

Cost of merchandise available for sale $10,400

Less ending inventory 3,400

Cost of merchandise sold $ 7,000

Fifo Periodic

Jan. 1

200 units at $9

Summary of Fifo Periodic

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

MerchandiseAvailablefor Sale

$1,800

$3,000

$2,200

Cost ofMerchandise

Sold

200 units at $9

$10,400$2,200

$1,200

$7,000

MerchandiseInventory

$3,400

300 units at $10

200 units at $11

200 units at $11

100 units at $121,000 units

700 units

300 units

Lifo

Periodic

Jan. 1 Beginning

Inventory200 units @ $9

Mar. 10 Purchase300 units @ $10

400 units @ $11 Sept. 21 Purchase

100 units @ $12 Nov. 18 Purchase

1,000 units available

for sale during

year

Lifo Periodic

Using lifo, the most recent batch

purchased is considered the first

batch of merchandise sold.

Jan. 1 Beginning

Inventory200 units @ $9

Mar. 10 Purchase300 units @ $10

400 units @ $11 Sept. 21 Purchase

100 units @ $12 Nov. 18 Purchase

1,000 units available

for sale during

year

Lifo Periodic

Assume again that

700 units were sold

during the year.

200 units @ $9

300 units @ $10

400 units @ $11

100 units @ $12

1,000 units available

for sale during

year

Lifo Periodic

Sold these 100

Sold these 400

Sold 200 of these100 units @ $10

= $1,800 Jan. 1

= 3,000 Mar. 10

= 4,400 Sept. 21

= 1,200 Nov. 18

$10,400

0

0

1,000

Ending Inventory

$2,800

Cost of merchandise available for sale $10,400

Less ending inventory 2,800

Cost of merchandise sold $ 7,600

Lifo Periodic

Jan. 1

200 units at $9

Summary of Lifo Periodic

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

$1,800

$1,000

Cost ofMerchandise

Sold

200 units at $9

$10,400

$4,400

$1,200

$2,800

$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

Purchases

MerchandiseAvailablefor Sale

$1,800

Merchandise Inventory

Average

Periodic

Jan. 1 Beginning

Inventory200 units @ $9

Mar. 10 Purchase300 units @ $10

400 units @ $11 Sept. 21 Purchase

100 units @ $12 Nov. 18 Purchase

1,000 units available

for sale during

year

The average cost

periodic method is based

on the average cost of

identical units.

Average Cost Periodic

Average Cost Periodic

200 units @ $9 = $ 1,800

1,000 units available

for sale during

year

300 units @ $10 = $ 3,000

400 units @ $11 = $ 4,400

100 units @ $11 = $ 1,200

$10,400 Cost of merchandise available for sale

Cost of Merchandise

Available for Sale

Units Available for Sale

During Year

= Average Unit Cost

$10,400

1,000 Units= $10.40 per Unit

Average Cost Periodic

Cost of merchandise available for sale $10,400

Less ending inventory ($10.40 x 300) 3,120

Cost of merchandise sold $ 7,280

To verify this

amount, multiply

700 units sold

times $10.40 to get

the same $7,280.

Average Cost Periodic

Inventory

Turnover

Inventory Turnover

SUPERVALU Zale

Cost of merchandise 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

Total $2,183,366,000 $1,050,136,000

Average $1,091,683,000 $525,068,000

Inventory turnover 14.3 times 1.4 times

Use: Inventory turnover measures the relationship

between the volume of goods sold and the

amount of inventory carried during the period.

Average daily cost of

merchandise sold:

$15,620,127,000/365 $42,794,868

$737,188,000/365 $2,019,693

Ending inventory $1,067,837,000 $571,669,000

Number of Days’ Sales in Inventory

SUPERVALU Zale

Average selling period 25 days 283 days

Use: To assess the efficiency in the

management of inventory

Universidad Cuauhtémoc

Campus Aguascalientes

Questions?

Maestría en Administración