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Universidad Cuauhtémoc

Campus Aguascalientes

Inventories
Análisis 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 Purchase
report AGREE order

Invoice

JOURNAL
Post.
Date
Description Ref.
Nov. 9 Inventory 1 222 00
Accounts Payable—XYZ Co. 1 222 00
Purchased merchandise on
account.
Effect of Inventory Errors on
Financial Statements
LIABILITIES
Merchandise ASSETS STOCK-
Inventory HOLDERS’
EQUITY
Net Income

Cost of COSTS & REVENUES


Merchandise Sold EXPENSES

If merchandise inventory is . . . . . . . overstated


Cost of merchandise sold is . . . . . . understated
Gross profit and net income are . . . overstated
Total stockholders’ equity is . . . . . overstated
Effect of Inventory Errors on
Financial Statements

If merchandise inventory is . . . . . . . understated


Cost of merchandise sold is . . . . . . overstated
Gross profit and net income are . . . understated
Ending owner’s equity is . . . . . . . . . understated
Inventory Cost Flow Assumptions
Purchased
goods

Sold
goods
Inventory Cost Flow Assumptions
Purchased
goods

Sold
goods
Inventory Cost Flow Assumptions

Sold
Purchased
goods
goods
Inventory Cost Flow Assumptions

Purchased Sold
goods goods
Inventory Costing Methods
43%
40%
34%
30%

19%
20%

10%
4%
0%
Fifo Lifo Average Other
Perpetual Inventory Costs
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4CostSale
of 7 $30
10 Purchase
Mdse. Sold 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
FIFO Perpetual Inventory Account
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

The firm begins the year with 10


units of Item 127B on hand at a
total cost of $200.
FIFO Perpetual Inventory Account

Inventory cost data to demonstrate


FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4CostSale
of 7 $30
10 Purchase
Mdse. Sold 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

On January 4, 7 units of Item


127B are sold at $30 each.
FIFO Perpetual Inventory Account
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

The sale of 7 units leaves a


balance of 3 units.

On January 4, 7 units of Item


127B are sold at $30 each.
FIFO Perpetual Inventory Account

Inventory cost data to demonstrate


FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4CostSale
of 7 $30
10 Purchase
Mdse. Sold 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

On January 10, the firm purchased


eight units at $21 each.
FIFO Perpetual Inventory Account
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

Because the purchase price of $21 is


different than the cost of the previous 3
units On
on hand, the inventory
January balance of
10, the firm
11 units is accounted for separately.
purchased eight units at $21 each.
FIFO Perpetual Inventory Account

Inventory cost data to demonstrate


FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4CostSale
of 7 $30
10 Purchase
Mdse. Sold 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

On January 22, the firm sold


four units for $31 each.
FIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance


On January 22, the
Unit Total Unit Total Unit Total
firm sold
Date Qty. Cost
four unitsQty.
Cost Cost Cost Qty. Cost Cost
Jan. 1
for $31 each. 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
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.
FIFO Perpetual Inventory Account

Inventory cost data to demonstrate


FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4CostSale
of 7 $30
10 Purchase
Mdse. Sold 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

On January 28, the firm


sold two units at $32.
FIFO Perpetual Inventory Account
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
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

Inventory cost data to demonstrate


FIFO and LIFO Perpetual Systems
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4CostSale
of 7 $30
10 Purchase
Mdse. Sold 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

On January 30, purchased ten additional


units of Item 127B at $22 each.
FIFO Perpetual Inventory Account
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 On January 30, purchased
7 20 140 3 20 60
10 8ten additional
21 168 units of Item 3 20 60
127B at $22 each. 8 21 168
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
LIFO Perpetual Inventory Account
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

The firm begins the year with


10 units of Item 127B on
hand at a total cost of $200.
LIFO Perpetual Inventory Account
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

On January 4, the firm sold


7 units at $30 each.
LIFO Perpetual Inventory Account
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

On January 10, the


firm purchased eight Note that a new
units at $21 each. layer is formed.
LIFO Perpetual Inventory Account
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
22 4 21 84 3 20 60
4 21 84
On
Of January
the 4 units22,sold,
the all come
firm
from thesells
mostfour
recent purchase
unitsatata $31
cost each.
of $21 each.
LIFO Perpetual Inventory Account
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
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42

On January 28, sold


two units at $32 each.
LIFO Perpetual Inventory Account
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
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
On January 30, purchase 10 22 220
10 units at $22 each.
LIFO Perpetual Inventory Account
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
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
Fifo Periodic
200 units @ $9 Jan. 1 Beginning
Inventory
300 units @ $10 Mar. 10 Purchase

400 units @ $11 Sept. 21 Purchase

100 units @ $12 Nov. 18 Purchase


1,000 units available
for sale during
year
Fifo Periodic
200 units @ $9 = $1,800 Jan. 1

300 units @ $10 = 3,000 Mar. 10

400 units @ $11 = 4,400 Sept. 21

100 units @ $12 = 1,200 Nov. 18


1,000 units available $10,400
for sale during
year 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
Soldunits
200 these@200
$9 $1,800
= $ 0 Jan. 1

Soldunits
300 these@300
$10 = 3,000
0 Mar. 10

Sold
400 units
200 200 of
@these
$11 = 4,400
2,200 Sept. 21

100 units @ $12 = 1,200 Nov. 18


1,000 units available $10,400
$ 3,400
for sale during
year Ending inventory
Fifo Periodic

Cost of merchandise available for sale $10,400


Less ending inventory 3,400
Cost of merchandise sold $ 7,000
Summary of Fifo Periodic
Cost of
Merchandise Merchandise
Available Sold
Purchases for Sale
$1,800 200 units at $9
Jan. 1
200 units at $9 $1,800
$3,000 300 units at $10
Mar. 10
300 units at $10 $3,000 200 units at $11
$2,200
Sep. 21
$7,000 700 units
400 units at $11 $4,400
Merchandise
Nov. 18
100 units at $12 $1,200 Inventory
$2,200 200 units at $11
1,000 units $10,400
$1,200 100 units at $12

$3,400 300 units


Lifo
Periodic
Lifo Periodic
200 units @ $9 Jan. 1 Beginning
Inventory
300 units @ $10 Mar. 10 Purchase

400 units @ $11 Sept. 21 Purchase

100 units @ $12 Nov. 18 Purchase


1,000 units lifo,
Using available
the most recent batch
for sale during
purchased is considered the first
year
batch of merchandise sold.
Lifo Periodic
Jan. 1 Beginning
200 units @ $9 Assume again that
Inventory
700 units were sold
300 units @ $10 Mar.during
10 Purchase
the year.
400 units @ $11 Sept. 21 Purchase

100 units @ $12 Nov. 18 Purchase


1,000 units available
for sale during
year
Lifo Periodic
200 units @ $9 = $1,800 Jan. 1

Sold
100 200 of
300 units @these
$10 = 3,000
1,000 Mar. 10

400
Soldunits
these@400
$11 = 4,4000 Sept. 21

100
Soldunits
these@100
$12 = 1,2000 Nov. 18
1,000 units available $10,400
$2,800
for sale during
year Ending Inventory
Lifo Periodic

Cost of merchandise available for sale $10,400


Less ending inventory 2,800
Cost of merchandise sold $ 7,600
Summary of Lifo Periodic
Merchandise
Merchandise Inventory
Available
Purchases for Sale $1,800 200 units at $9
$1,800
Jan. 1 $1,000 100 units at $10
200 units at $9 $1,800
$2,800 300 units
Mar. 10
300 units at $10 $3,000 Cost of
Merchandise
Sep. 21 Sold
400 units at $11 $4,400
$2,000 200 units at $10
Nov. 18
100 units at $12 $1,200
$4,400 400 units at $11
1,000 units $10,400
$1,200 100 units at $12

$7,600 700 units


Average
Periodic
Average Cost Periodic

200 units @ $9 Jan. 1 Beginning


The average cost Inventory
periodic method is based
300 units @ $10 Mar. 10 Purchase
on the average cost of
400 units @identical
$11 units.21 Purchase
Sept.

100 units @ $12 Nov. 18 Purchase


1,000 units available
for sale during
year
Average Cost Periodic
200 units @ $9 = $ 1,800

300 units @ $10 = $ 3,000

400 units @ $11 = $ 4,400

100 units @ $11 = $ 1,200

1,000 units available $10,400 Cost of


for sale during merchandise
year available for
sale
Average Cost Periodic
Cost of Merchandise
Available for Sale
= Average Unit Cost
Units Available for Sale
During Year

$10,400
= $10.40 per Unit
1,000 Units
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.
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.
Number of Days’ Sales in Inventory
SUPERVALU Zale
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

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