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© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
1
Lecture Extention: Inventory Demonstration
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
2
P
EI
BI
Importance of Inventory
COGS
GAFS
To Balance Sheet
To IncomeStatement
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
3
Arbitrary Assumptions Concerning Cost Flow
• in order expenditures were made -- FIFO
• in reverse order in which expenditures were made -- LIFO
• average of expenditures
4
Balance Sheet Income Statement
MI COGS
First In … First OUT
Latest Ite
ms Left O
ver
Time Time Time Time Time Time Time Time Time
5
Balance Sheet Income Statement
MI COGS
Las
t In
Firs
t OU
TOldest Item
s Left
Time Time Time Time Time Time Time Time Time
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
6
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
7
January
December
Assumption
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8
FIFO
????
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
9
FIFO
????
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
10
LIFO
????
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
11
LIFO
????
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
12
Looking for what?
EndingInventory
Cost ofGoodsSold
Which
Method?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
13
Balance Sheet Income Statement
MI COGS
First In … First OUT
Latest Ite
ms Left O
ver
Time Time Time Time Time Time Time Time Time
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
14
COGS
EI
FIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
15
Looking for what?
EndingInventory
Cost ofGoodsSold
Which
Method?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
16
Balance Sheet Income Statement
MI COGS
Las
t In
Firs
t OU
TOldest Item
s Left
Time Time Time Time Time Time Time Time Time
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
17
EI
COGS
LIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 18
Inventory Demonstration
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 19
Inventory Demonstration
In its first month of operations, AC Company made three purchases of merchandise in the following sequence:
300 units @ $6400 units @ $7300 units @ $8
Assuming there are 450 units on hand, compute the cost of the ending inventory and cost of goods sold under the (1) FIFO method, (2) LIFO method, and (3) average method. AC Company uses a periodic inventory system.
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 20
Inventory Demonstration
In its first month of operations, AC Company made three purchases of merchandise in the following sequence:
300 units @ $6400 units @ $7300 units @ $8
Assuming there are 450 units on hand, compute the cost of the ending inventory and cost of goods sold under the (1) FIFO method, (2) LIFO method, and (3) average method. AC Company uses a periodic inventory system.
RisingPrices?
$6$7$8
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
21
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
? ? ? ?
? ?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
22
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 23
In its first month of operations, AC Company made three purchases of merchandise in the following sequence:
300 units @ $6400 units @ $7300 units @ $8
Assuming there are 450 units on hand, compute the cost of the ending inventory and cost of goods sold under the (1) FIFO method, (2) LIFO method, and (3) average method. AC Company uses a periodic inventory system.
Inventory Demonstration
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 24
Inventory Demonstration
(1) Purchase 300 $6(2) Purchase 400 $7(3) Purchase 300 $8
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 25
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7(3) Purchase 300 $8
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 26
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 27
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 28
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
1,000
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 29
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
1,000 $7,000
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 30
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find EI using FIFO.
? ?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
31
Looking for what?
EndingInventory
Cost ofGoodsSold
Which
Method?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
32
COGS
EI
FIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 33
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find EI using FIFO.
? ?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 34
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Quantity Price Amount
300 $8 $2,400
450
EI under FIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 35
Quantity Price Amount
300 $8 $2,400150 $7 1,050450
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 36
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Quantity Price Amount
300 $8 $2,400150 $7 1,050450 $3,450
EI under FIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
37
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
$3,450
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 38
Inventory Demonstration
In its first month of operations, AC Company made three purchases of merchandise in the following sequence:
300 units @ $6400 units @ $7300 units @ $8
Assuming there are 450 units on hand, compute the cost of the ending inventory and cost of goods sold under the (1) FIFO method, (2) LIFO method, and (3) average method. AC Company uses a periodic inventory system.
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 39
P
EI
BI
COGSGAFS
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 40
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFOCost of Goods Sold
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 41
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFOCost of Goods Sold GAFS $7,000
- E I= COGS
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 42
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFOCost of Goods Sold GAFS $7,000
- E I 3,450= COGS
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 43
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFOCost of Goods Sold GAFS $7,000
- E I 3,450= COGS $3,550
Prove it!
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 44
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find EI using FIFO.
? ?
Cost of Goods Sold
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
45
Looking for what?
EndingInventory
Cost ofGoodsSold
Which
Method?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 46
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFOCost of Goods Sold Quantity Price Amount
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 47
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFOCost of Goods Sold Quantity Price Amount
300 $6 $1,800
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 48
Quantity Price Amount
300 $6 $1,800250 $7 1,750
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFOCost of Goods Sold
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 49
Quantity Price Amount
300 $6 $1,800250 $7 1,750550 $3,550
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under FIFOCost of Goods Sold
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
50
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
$3,450 $3,550
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 51
Inventory Demonstration
In its first month of operations, AC Company made three purchases of merchandise in the following sequence:
300 units @ $6400 units @ $7300 units @ $8
Assuming there are 450 units on hand, compute the cost of the ending inventory and cost of goods sold under the (1) FIFO method, (2) LIFO method, and (3) average method. AC Company uses a periodic inventory system.
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 52
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 53
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find EI using LIFO.
? ?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
54
Looking for what?
EndingInventory
Cost ofGoodsSold
Which
Method?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
55
EI
COGS
LIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 56
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find EI using LIFO.
? ?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 57
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Quantity Price Amount
300 $6 $1,800
450
EI under LIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 58
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Quantity Price Amount
300 $6 $1,800150 $7 1,050450
EI under LIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 59
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Quantity Price Amount
300 $6 $1,800150 $7 1,050450 $2,850
EI under LIFO
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
60
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
$3,450$3,550$2,850
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 61
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under LIFOCost of Goods Sold GAFS $7,000
- E I= COGS
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 62
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under LIFOCost of Goods Sold GAFS $7,000
- E I 2,850= COGS
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 63
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under LIFOCost of Goods Sold GAFS $7,000
- E I 2,850= COGS $4,150
Prove it!
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 64
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find EI using LIFO.
? ?
Cost of Goods Sold
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
65
Looking for what?
EndingInventory
Cost ofGoodsSold
Which
Method?
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 66
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under LIFOCost of Goods Sold Quantity Price Amount
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 67
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under LIFOCost of Goods Sold Quantity Price Amount
300 $8 $2,400
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 68
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under LIFOCost of Goods Sold Quantity Price Amount
300 $8 $2,400250 $7 1,750
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 69
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under LIFOCost of Goods Sold Quantity Price Amount
300 $8 $2,400250 $7 1,750550 $4,150
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
70
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
$3,450
$3,550$2,850
$4,150
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 71
Inventory Demonstration
In its first month of operations, AC Company made three purchases of merchandise in the following sequence:
300 units @ $6400 units @ $7300 units @ $8
Assuming there are 450 units on hand, compute the cost of the ending inventory and cost of goods sold under the (1) FIFO method, (2) LIFO method, and (3) average method. AC Company uses a periodic inventory system.
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 72
Inventory Demonstration
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
1,000 $7,000
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 73
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under AVERAGE
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 74
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find the AVERAGE:
GAFS units =
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 75
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find the AVERAGE:
GAFS units = $7,000
1,000
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 76
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Find the AVERAGE:
GAFS units =
$7,000 1,000 = $7.00
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 77
P
EI
BI
Use AVERAGE for BOTH
COGS
GAFS
Average to Balance Sheet
Average to Income Stmt
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 78
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Quantity Price Amount
450 $7 $3,150
EI under AVERAGE
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
79
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
$3,450
$3,550$2,850
$4,150
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 80
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under AVERAGECost of Goods Sold GAFS $7,000
- E I= COGS
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 81
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under AVERAGECost of Goods Sold GAFS $7,000
- E I 3,150= COGS
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 82
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
EI under AVERAGECost of Goods Sold GAFS $7,000
- E I 3,150= COGS $3,850
Prove it!
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 83
(1) Purchase 300 $6 $1,800(2) Purchase 400 $7 2,800(3) Purchase 300 $8 2,400
Total GAFS 1,000 $7,000
Quantity Price Amount
550 $7 $3,850
EI under AVERAGECost of Goods Sold
© Copyright 2011 by M. Ray Gregg. All Rights Reserved. 84
P
EI
BI
Use AVERAGE for BOTH
COGS
GAFS
Average of $7 to Balance Sheet
Avg of $7 to Income Stmt
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
85
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
$3,450
$3,550$2,850
$4,150
© Copyright 2011 by M. Ray Gregg. All Rights Reserved.
86
