Inventories: Measurement

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.

Inventories:Measurement

8

8-2

Inventory

Those assets that a company:

2. Has in production (work in process) for future sale.

2. Has in production (work in process) for future sale.

1. Intends to sell in the normalcourse of business.

1. Intends to sell in the normalcourse of business.

3. Uses currently in the productionof goods to be sold (raw materials).

3. Uses currently in the productionof goods to be sold (raw materials).

8-3

Types of Inventories

Merchandise Inventory

Merchandise Inventory

Goods acquired for resale

Goods acquired for resale

Manufacturing Inventory

Manufacturing Inventory

•Raw Materials•Work-in-Process•Finished Goods

•Raw Materials•Work-in-Process•Finished Goods

Types of InventoryTypes of Inventory

8-4

Inventory Cost FlowsRaw

Materials

(1) $XX $XX (4)

Work inProcess

FinishedGoods

Cost of GoodSold

DirectLabor

ManufacturingOverhead

$XX $XX (7) $XX $XX (8)

$XX

(2) $XX $XX (5)

(3) $XX $XX (6)

(1) Raw materials purchased

(2) Direct labor incurred

(3) Manufacturing overhead incurred

(4) Raw materials used

(5) Direct labor applied

(6) Manufacturing overhead applied

(7) Work in process transferred to finished goods

(8) Finished goods sold

(1) Raw materials purchased

(2) Direct labor incurred

(3) Manufacturing overhead incurred

(4) Raw materials used

(5) Direct labor applied

(6) Manufacturing overhead applied

(7) Work in process transferred to finished goods

(8) Finished goods sold

8-5

Learning Objective

Explain the difference between aperpetual inventory system and a

periodic inventory system.

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Inventory Methods

Perpetual Inventory System


The inventory account is

continuously updated as

purchases and sales are made.

The inventory account is

continuously updated as

purchases and sales are made.

Periodic Inventory System


The inventory The inventory account is adjusted account is adjusted

at the end of a at the end of a reporting cycle.reporting cycle.

The inventory The inventory account is adjusted account is adjusted

at the end of a at the end of a reporting cycle.reporting cycle.

Two accounting systems are used to record transactions involving inventory:

8-7


Matrix, Inc. purchases on account $600,000 of merchandise for resale to customers.

GENERAL JOURNALDate Description Debit Credit

Inventory 600,000

Accounts Payable 600,000

2006

Returns of inventory are credited to the inventory account.

Discounts on inventory purchases can be recorded using the gross or net method.

Returns of inventory are credited to the inventory account.


8-8


Matrix, Inc. sold, on account, inventory with aretail price of $820,000 and a cost basisof $540,000, to a customer.


Accounts Receivable 820,000

Sales

Cost of Goods Sold 540,000

Inventory

820,000

540,000

2006

8-9

Periodic Cost of Goods Sold Equation

Beginning Inventory+ Net Purchases

Cost of Goods Available for Sale

- Ending Inventory= Cost of Goods Sold

8-10


Matrix, Inc. purchases on account $600,000 of merchandise for resale to customers.


Purchases 600,000

Accounts Payable 600,000

2006

Returns of inventory are credited to the Purchase Returns and Purchase Returns and AllowancesAllowances account.


Returns of inventory are credited to the Purchase Returns and Purchase Returns and AllowancesAllowances account.


8-11


Matrix, Inc. sold on account, inventory with aretail price of $820,000 and a cost basisof $540,000, to a customer.


Accounts Receivable 820,000

Sales 820,000

2006

No entry is made to record Cost of Good Sold. Assuming BeginningInventory of $120,000. A physical count of Ending Inventory shows

a balance of $180,000. Let’s calculate Cost of Goods Sold atthe end of the accounting period.

No entry is made to record Cost of Good Sold. Assuming BeginningInventory of $120,000. A physical count of Ending Inventory shows

a balance of $180,000. Let’s calculate Cost of Goods Sold atthe end of the accounting period.

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Beginning inventory 120,000$ Plus: Purchases 600,000 Cost of goods available for sale 720,000 Less: Ending inventory (180,000) Cost of goods sold 540,000$

Calculation of Cost of Goods Sold

Date Description Debit Credit

12/31/06 Cost of goods sold 540,000 Inventory (ending) 180,000 Inventory (beginning) 120,000 Purchases 600,000

Adjusting entry to determine Cost of Goods Sold

8-13

Comparison of Inventory Systems

8-14

Learning Objective

Explain which physical quantities of goods should be included in inventory.

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What is Included in Inventory?

General RuleAll goods owned by the company on the inventory All goods owned by the company on the inventory

date, regardless of their location.date, regardless of their location.

General RuleAll goods owned by the company on the inventory All goods owned by the company on the inventory

date, regardless of their location.date, regardless of their location.

Goods in TransitGoods in Transit Goods on Consignment

Goods on Consignment

Depends on FOB shipping terms.

Depends on FOB shipping terms.

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Learning Objective

Determine the expenditures that shouldbe included in the cost of inventory.

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Expenditures Included in Inventory

Invoice Price

Invoice Price

Freight-in on

Purchases

Freight-in on

Purchases

+

Purchase Returns

Purchase Returns

Purchase Discounts

Purchase Discounts

8-18

Purchase Discounts

Date Description Debit Credit

10/5/06 Purchases 20,000 Accounts payable 20,000

10/14/06 Accounts payable 14,000 Purchase discounts 280 Cash 13,720

11/4/06 Accounts payable 6,000 Cash 6,000

10/5/06 Purchases 19,600 Accounts payable 19,600

10/14/06 Accounts payable 13,720 Cash 13,720

11/4/06 Accounts payable 5,880 Interest expense 120 Cash 6,000

Net Method

Gross Method

Discount terms are 2/10, n/30.

$14,000x 0.02$ 280

Partial payment not made within the discount period

8-19

Net Method Using Perpetual and Periodic

Matrix, Inc. purchased on account $6,000 of merchandise for resale to customers. The merchandise was purchased subject to a cash discount of 2/10, n/30.

The company incurred $160 in freight-in on the merchandise. Upon inspection, the company found that

$200 of merchandise was damaged and the seller agreed to accept the merchandise return and credit the

account of the company. The inventory was sold for $8,300 on account. Let’s look at the journal entries under both the perpetual and periodic accounting

system assuming Matrix uses the net method to record merchandise purchases.

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Net Method Using Perpetual and PeriodicDescription Debit Credit

Inventory 5,880 Accounts payable 5,880

Inventory 160 Cash 160

Accounts payable 200 Inventory 200

Accounts receivable 8,300 Sales revenue 8,300

Cost of goods sold 5,840 Inventory 5,840

Purchases 5,880 Accounts payable 5,880

Freight-in 160 Cash 160

Accounts payable 200 Purchase returns 200

Accounts receivable 8,300 Sales revenue 8,300

Periodic Inventory Method

Perpetual Inventory Method

Beginning inventory -$ Purchases 5,880$ Less: Returns (200) Plus: Freight-in 160 Net purchases 5,840 Cost of goods available for sale 5,840 Less: Ending inventory - Cost of goods sold 5,840$

8-21

Learning Objective

Differentiate between the specific identification, FIFO, LIFO, and average cost methods used to determine the cost of ending inventory and

cost of goods sold.

8-22

Inventory Cost Flow Methods

Specific cost identification

Average cost

First-in, first-out (FIFO)

Last-in, first-out (LIFO)

Specific cost identification

Average cost

First-in, first-out (FIFO)

Last-in, first-out (LIFO)

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The specific cost of each inventory item must be known.

By selecting specific items from inventory at the time of sale, income can be manipulated.

The specific cost of each inventory item must be known.

By selecting specific items from inventory at the time of sale, income can be manipulated.

Specific Cost Identification

Items are added to inventory at cost when they are purchased.

COGS for each sale is based on the specific cost of the item sold.

Items are added to inventory at cost when they are purchased.

COGS for each sale is based on the specific cost of the item sold.

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Average Cost Method

8-25

Weighted-Average Periodic System

The following schedule shows the frame inventory for Yore Frame, Inc. for September.

The physical inventory count at September 30 shows 600 frames in ending inventory.

Use theUse the periodic weighted-average method to weighted-average method to determine:determine:

(1) Ending inventory cost.(1) Ending inventory cost.

(2) Cost of goods sold.(2) Cost of goods sold.



Use theUse the periodic weighted-average method to weighted-average method to determine:determine:



8-26


Yore Frame, Inc.Frame Inventory

Date Units $/Unit TotalBeg. Inventory 800 22.00$ 17,600.00$

9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00

Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 ?Cost of Goods Sold 1,350 ?

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Now, we have to assign costs to ending inventory and cost of goods sold.

Beginning Inventory (800 units)

Purchases (1,150 units)

Beginning Inventory (800 units)

Purchases (1,150 units)

Available for Sale

(1,950 units)

Available for Sale

(1,950 units)

Ending Inventory(600 units)

Ending Inventory(600 units)

Goods Sold(1,350)

Goods Sold(1,350)

$47,650 ÷ 1,950 = $24.4359 weighted-average per unit cost

$47,650 ÷ 1,950 = $24.4359 weighted-average per unit cost

8-28




9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00

Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 24.4359 14,661.54 Cost of Goods Sold 1,350 24.4359 32,988.46$

8-29

Moving-Average Perpetual System

The following schedule shows the Frame inventory for Yore Frame, Inc. for September.


Use theUse the perpetual weighted-average method to weighted-average method to determine:determine:



The following schedule shows the Frame inventory for Yore Frame, Inc. for September.


Use theUse the perpetual weighted-average method to weighted-average method to determine:determine:



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9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00

Goods Available for Sale 1,950 Ending Inventory 600 Cost of Goods Sold 1,350


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8-32


$11,600.00 ÷ (800-600+300) = $23.200

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$27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181

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Su

m

8-35

First-In, First-Out

The cost of the oldest inventory items are charged to COGS when goods are sold.

The cost of the newest inventory items remain in ending inventory.

The cost of the oldest inventory items are charged to COGS when goods are sold.

The cost of the newest inventory items remain in ending inventory.

The FIFO method

assumes that items are sold

in the chronological order of their acquisition.

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First-In, First-Out

Even though the periodic and the perpetual

approaches differ in the timing of adjustments to

inventory . . .

. . . COGS and Ending Inventory Cost are the same under both

approaches.

Even though the periodic and the perpetual

approaches differ in the timing of adjustments to

inventory . . .

. . . COGS and Ending Inventory Cost are the same under both

approaches.

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FIFO - Periodic System



Use theUse the periodic FIFO method to determine:FIFO method to determine:





Use theUse the periodic FIFO method to determine:FIFO method to determine:



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9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00

Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 Cost of Goods Sold 1,350


These are the 600 most recently

acquired units.

These are the 600 most recently

acquired units.

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9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00




9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00

Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 16,600.00 Cost of Goods Sold 1,350


8-40



9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00



These are the first 1,350 units acquired.

These are the first 1,350 units acquired.

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9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00




9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00

Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 16,600.00 Cost of Goods Sold 1,350 31,050.00$


8-42

FIFO - Perpetual System



Use theUse the perpetual FIFO method to determine:FIFO method to determine:





Use theUse the perpetual FIFO method to determine:FIFO method to determine:



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9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00


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200

The ending inventory on 9/1 consists of:The ending inventory on 9/1 consists of: 200 units from beginning inventory @ $22.00200 units from beginning inventory @ $22.00


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200


300 units from the 9/3 purchase @ $24.00300 units from the 9/3 purchase @ $24.00



8-46


200

The ending inventory on 9/10 consists of:The ending inventory on 9/10 consists of:200 units from the 9/3 purchase @ $24.00200 units from the 9/3 purchase @ $24.00


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200

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250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00


250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00

200

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250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00400 units from the 9/29 purchase @ $28.00400 units from the 9/29 purchase @ $28.00


250 units from the 9/15 purchase @ $25.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00400 units from the 9/29 purchase @ $28.00400 units from the 9/29 purchase @ $28.00

200

8-50


The ending inventory on 9/30 consists of:The ending inventory on 9/30 consists of: 200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00

400 units from the 9/29 purchase @ $28.00.400 units from the 9/29 purchase @ $28.00.

The ending inventory on 9/30 consists of:The ending inventory on 9/30 consists of: 200 units from the 9/21 purchase @ $27.00200 units from the 9/21 purchase @ $27.00


8-51


Note that this is the same COGS computed using the Periodic

approach.

8-52

Last-In, First-Out

Any questions before we run into

LIFO?

8-53

Last-In, First-Out

The cost of the newest inventory items are charged to COGS when goods are sold.

The cost of the oldest inventory items remain in inventory.

The cost of the newest inventory items are charged to COGS when goods are sold.

The cost of the oldest inventory items remain in inventory.

The LIFO method

assumes that the newest

items are sold first, leaving the

older units in inventory.

8-54

Last-In, First-Out

Unlike FIFO, using the LIFO method may

result in COGS and Ending Inventory Cost that differ

under the periodic and perpetual approaches.

Unlike FIFO, using the LIFO method may

result in COGS and Ending Inventory Cost that differ

under the periodic and perpetual approaches.

8-55



Use theUse the periodic LIFO method to determine:LIFO method to determine:





Use theUse the periodic LIFO method to determine:LIFO method to determine:



LIFO - Periodic System

8-56



9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00



These are the 600 oldest units in

inventory.

These are the 600 oldest units in

inventory.

8-57



9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00



200

600 x $22.00

8-58



9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00



600 x $22.00

These are the most recently acquired 1,350

units.

These are the most recently acquired 1,350

units.

200

8-59



9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00

Goods Available for Sale 1,950 47,650.00$ Ending Inventory 600 13,200.00 Cost of Goods Sold 1,350 34,450.00$


$4,400$4,400 + $30,050

200 x $22.00

200

8-60

LIFO - Perpetual System



Use theUse the perpetual LIFO method to determine:LIFO method to determine:





Use theUse the perpetual LIFO method to determine:LIFO method to determine:



8-61




9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00


8-62


In LIFO, we assume that we sell the newest units in inventory first.

In this case, the 600 “newest” units come from beginning inventory,

leaving 200 units in the beginning inventory layer.

In LIFO, we assume that we sell the newest units in inventory first.

In this case, the 600 “newest” units come from beginning inventory,

leaving 200 units in the beginning inventory layer.

200

8-63


The ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00

300 units from the 9/3 purchase @ $24.00

The ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00

300 units from the 9/3 purchase @ $24.00

200

8-64


For the 9/10 sale, we must identify the 300 newest units. They all come from the September 3

purchase.

Note that all of the 9/3 units have been “sold” and Note that all of the 9/3 units have been “sold” and only 200 of the beginning inventory units remain.only 200 of the beginning inventory units remain.

For the 9/10 sale, we must identify the 300 newest units. They all come from the September 3

purchase.

Note that all of the 9/3 units have been “sold” and Note that all of the 9/3 units have been “sold” and only 200 of the beginning inventory units remain.only 200 of the beginning inventory units remain.

200

8-65


The ending inventory on 9/15 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00

The ending inventory on 9/15 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00

200

8-66


The ending inventory on 9/21 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00


200

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400 units from the 9/29 purchase @ $28.00.


400 units from the 9/29 purchase @ $28.00.

200

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150

For the 9/30 sale, we must identify the 450 newest For the 9/30 sale, we must identify the 450 newest units. 400 of them come from the 9/29 purchase. units. 400 of them come from the 9/29 purchase.

The other 50 come from the 9/21 purchase. The other 50 come from the 9/21 purchase.

For the 9/30 sale, we must identify the 450 newest For the 9/30 sale, we must identify the 450 newest units. 400 of them come from the 9/29 purchase. units. 400 of them come from the 9/29 purchase.

The other 50 come from the 9/21 purchase. The other 50 come from the 9/21 purchase.

200

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150

200







8-70

When Prices Are Rising . . .

LIFO Matches high (newer)

costs with current (higher) sales.

Inventory is valued based on low (older) cost basis.

Results in lower taxable income.

Is not officially endorsed by the IASC.

LIFO Matches high (newer)

costs with current (higher) sales.

Inventory is valued based on low (older) cost basis.

Results in lower taxable income.

Is not officially endorsed by the IASC.

FIFO Matches low (older) costs

with current (higher) sales.

Inventory is valued at approximate replacement cost.

Results in higher taxable income.

FIFO Matches low (older) costs

with current (higher) sales.

Inventory is valued at approximate replacement cost.

Results in higher taxable income.

8-71

Comparison of Cost Flow Methods

Average Cost FIFO LIFO

Cost of goods sold 31,941$ 31,050$ 32,950$ Ending inventory 15,709 16,600 14,700 Total 47,650$ 47,650$ 47,650$


8-72

Comparison of Cost Flow Methods

# of Companies

% of Companies

# of Companies

% of Companies

FIFO 384 46% 394 43%LIFO 251 30% 150 16%Average 167 20% 235 25%Other 31 4% 148 16%Total 833 100% 927 100%

Inventory Method Used by Major Companies

2003 1973

8-73

Learning Objective

Discuss the factors affecting a company’s choice of inventory method.

8-74

Decision Makers’ Perspective

What factors motivate companies to select one inventory method over another?

How accurate is the timing of reported

incomeand income taxes?

How closely do reported

costs reflect actualflow of inventory?

How well are costs matched against

related revenues?

8-75

Learning Objective

Understand supplemental LIFO disclosures and the effect of LIFO liquidations on net

income.

8-76

LIFO Liquidation

LIFO inventory costs on the balance sheet are “out of date” because they reflect

old purchase transactions.

LIFO inventory costs on the balance sheet are “out of date” because they reflect

old purchase transactions.

When prices rise . . .

If inventory declines, these “out of date” costs

may be charged to current earnings.

If inventory declines, these “out of date” costs

may be charged to current earnings.

This LIFOliquidation results in

“paper profits.”

This LIFOliquidation results in

“paper profits.”

8-77

LIFO Reserves

Many companies use LIFO for external reporting and income tax purposes but maintain internal records using FIFO or

average cost.

The conversion from FIFO or average cost The conversion from FIFO or average cost to LIFO takes place at the end of the to LIFO takes place at the end of the

period. The conversion may look like this:period. The conversion may look like this:

The conversion from FIFO or average cost The conversion from FIFO or average cost to LIFO takes place at the end of the to LIFO takes place at the end of the

period. The conversion may look like this:period. The conversion may look like this:

2003 2002

Total inventories at FIFO 12,541$ 11,544$ Less: LIFO allowance 1,581 1,807 Inventories, at LIFO cost 10,960$ 9,737$

8-78

Learning Objective

Calculate the key ratios used by analysts to monitor a company’s investment in inventories.

8-79

Gross Profit Ratio

Gross profitratio

Gross profit Net sales

=

This measure indicates how muchof each sales dollar is left after

deducting the cost of goods sold to cover expenses and provide a profit.

8-80

Inventory Turnover Ratio

Cost of goods sold Average inventory

Inventoryturnover ratio

=

This ratio measures how many times a company’s inventory has been sold

and replaced during the year.

This ratio measures how many times a company’s inventory has been sold

and replaced during the year.

If a company’s inventory If a company’s inventory turnover Is less than its turnover Is less than its

industry average, it either industry average, it either has excessive inventory or has excessive inventory or

the wrong sorts of inventory.the wrong sorts of inventory.

8-81

Earnings Quality

Many believe that manipulating income reduces earnings quality because it can mask permanent earnings. Inventory write-downs and changes in inventory method are two additional inventory-

related techniques a company could use to manipulate earnings.

Many believe that manipulating income reduces earnings quality because it can mask permanent earnings. Inventory write-downs and changes in inventory method are two additional inventory-

related techniques a company could use to manipulate earnings.

8-82

Learning Objective

Determine ending inventory using thedollar-value LIFO inventory method.

8-83

LIFO Inventory Pools

Inventory Pools consist of inventory units grouped according to similarities.

Inventory Pools consist of inventory units grouped according to similarities.

For example, all similar units

purchased at the same time can be “pooled”

and assigned an average unit cost.

For example, all similar units

purchased at the same time can be “pooled”

and assigned an average unit cost.

Using Inventory Pools with LIFO simplifies

record keeping.

Using Inventory Pools with LIFO simplifies

record keeping.

8-84

Example

The replacement inventory differs from the old inventory on

hand. We just create a new layer.

Example

The replacement inventory differs from the old inventory on

hand. We just create a new layer.

Dollar-Value LIFO (DVL)

DVL inventory pools are viewed as layers of value, rather than layers of similar units.DVL inventory pools are viewed as layers

of value, rather than layers of similar units.

DVL simplifies LIFO record-keeping.

DVL simplifies LIFO record-keeping.

DVL minimizes the probability of layer

liquidation.

DVL minimizes the probability of layer

liquidation.

At the end of the period, we determine if a new inventory layer

was added by comparing ending

inventory to beginning inventory.

At the end of the period, we determine if a new inventory layer

was added by comparing ending

inventory to beginning inventory.

8-85


We need to determine if the increase in ending inventory over beginning inventory was due to a price increase or an increase

in inventory.

We need to determine if the increase in ending inventory over beginning inventory was due to a price increase or an increase

in inventory.

1a. Compute a Cost Index for the

year.

1a. Compute a Cost Index for the

year.

8-86


1b. Deflate the ending

inventory value using

the cost index.

1b. Deflate the ending

inventory value using

the cost index.

1c. Compare ending

inventory (at base year cost) to

beginning inventory.

1c. Compare ending

inventory (at base year cost) to

beginning inventory.

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Next, identify the layers in ending inventory and the years they were created.

Next, identify the layers in ending inventory and the years they were created.

Sum all the layers to arrive at Ending Inventory at DVL

cost.

Sum all the layers to arrive at Ending Inventory at DVL

cost.

Convert each layer’s base year cost to layer

year cost by multiplying times the

cost index.

Convert each layer’s base year cost to layer

year cost by multiplying times the

cost index.

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End of Chapter 8

Documents

Inventories: Measurement