Chapter 8/9

I nventories
Accounting, 21
st
Edition
Warren Reeve Fess (CH 9)

Facilitator: Se Tin, S.E., M.Si, Ak



IFRS Edition
Kieso, Weygandt, and Warfield (CH 8)
Valuation of I nventories:
COST BASI S APPROACH
1. Identify major classifications of inventory.
2. Distinguish between perpetual and periodic inventory
systems.
3. Identify the effects of inventory errors on the financial
statements.
4. Understand the items to include as inventory cost.
5. Describe and compare the methods used to price
inventories.
Learning Objectives
Goods in transit
Consigned goods
Special sales
agreements
Inventory errors


Inventory Issues
Physical Goods
Included in
Inventory
Cost Included in
Inventory
Cost Flow
Assumptions
Classification
Cost flow
Control
Basic inventory
valuation

Product costs
Period costs
Purchase
discounts
Specific
identification
Average cost
FIFO
Summary analysis
Valuation of Inventories:
Cost-Basis Approach
Inventories are:
items held for sale, or
goods to be used in the production of goods to be sold.
Merchandiser Manufacturer
Businesses with Inventory
or
Classification
One inventory
account.
Purchase goods
in form ready for
sale.
Classification
Three accounts
Raw materials
Work in process
Finished goods
Classification
Inventory Cost Flow
Inventory Cost Flow
Companies use one of two types of systems for maintaining
inventory records perpetual system or periodic system.
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.
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
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.
LIABILITIES
OWNERS
EQUITY
REVENUES
ASSETS
COSTS &
EXPENSES
Effect of Inventory Errors on
Financial Statements
Merchandise
Inventory
Cost of
Merchandise Sold
Net Income
Effect of Inventory Errors
The effect of an error on net income in one year (2010) will be counterbalanced in
the next (2011), however the income statement will be misstated for both years.
Ending
Inventory
Misstated
Illustration: Yei Chen Corp. understates its ending inventory by
HK$10,000 in 2010; all other items are correctly stated.
Effect of Inventory Errors
The understatement does not affect cost of goods sold and net income because the
errors offset one another.
Purchases
and Inventory
Misstated
Purchased
goods
Sold
goods
Inventory Cost Flow Assumptions
Purchased
goods
Sold
goods
Inventory Cost Flow Assumptions
Purchased
goods
Sold
goods
Inventory Cost Flow Assumptions
Method adopted should be one that most clearly reflects
periodic income.
Cost Flow Assumption Adopted
does not need to equal
Physical Movement of Goods
Which Cost Flow Assumption to Adopt?
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
Inventory
200 units @ $9
Mar. 10 Purchase
300 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 these 200 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
Merchandise
Available
for Sale
$1,800
$3,000
$2,200
Cost of
Merchandise
Sold
200 units at $9
$10,400
$2,200
$1,200
$7,000
Merchandise
Inventory
$3,400
300 units at $10
200 units at $11
200 units at $11
100 units at $12
1,000 units
700 units
300 units
Lifo
Periodic
Jan. 1 Beginning
Inventory
200 units @ $9
Mar. 10 Purchase
300 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
Inventory
200 units @ $9
Mar. 10 Purchase
300 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 these 100 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 of
Merchandise
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
Merchandise
Available
for Sale
merchandise inv
Jan. 1 Beginning
Inventory
200 units @ $9
Mar. 10 Purchase
300 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 @ $12 = $ 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 Valuation Methods - Summary
Notice that gross profit and net income are lowest under LIFO, highest under
FIFO, and somewhere in the middle under average cost.
Inventory Valuation Methods - Summary
LIFO results in the highest cash balance at year-end (because taxes are
lower). This example assumes that prices are rising. The opposite result
occurs if prices are declining.
Under IFRS, LIFO is not permitted for financial reporting
purposes.
Nonetheless, LIFO is permitted for financial reporting
purposes in the United States, it is permitted for tax purposes
in some countries, and its use can result in significant tax
savings.
Many companies use
LIFO for tax and external financial reporting purposes
FIFO, average cost, or standard cost system for internal
reporting purposes.
Reasons:
LIFO Reserve
1. Pricing decisions
2. Record keeping easier
3. Profit-sharing or bonus arrangements
4. LIFO troublesome for interim periods
The End


Exercise 8-18

+ poin
tugas

Problem 8-2
Problem 8-7