Williams 08

8
Chapter 8
Inventories and Cost of

Goods Sold
Slide 1 Copyright © 1997 McGraw-Hill Ryerson Limited.

8
Basic Relationships –
Merchandising Companies
W-MART

8
Cost of this Cost of
period’s beginning inventory
inventory bought this period

8
Total cost of
goods available
for sale this
period

8
Total cost of
goods available
for sale this
period
Cost of this Cost of goods

period’s ending sold this
inventory period

8
Manufacturing Companies

8
Manufacturing Companies
① Raw materials
● Materials and purchased
parts awaiting assembly or
manufacture
② Work in process
● Partially completed
products still in factory
③ Finished goods
● Fully assembled or
manufactured goods
available for sale
Cost of raw
8
Basic Relationships – materials used +
direct labour +
Manufacturing Companies manufacturing
Cost of finished overhead + or –
goods beginning change in work in
inventory this period process inventory
Cost of goods
manufactured this
period

Cost of raw
8
direct labour +
Cost of goods
manufactured this
Total cost of
period
goods available
for sale this
period

Cost of raw
8
direct labour +
Cost of goods
manufactured this
Total cost of
period
goods available
for sale this
period
Cost of finished Cost of finished

goods inventory at goods sold
end of period this period

8 Inventory Cost Flow Methods
Specific Weighted–
identification average
FIFO LIFO
8 Specific Identification
❖ Used with small volume, high
dollar inventory
❖ Specific cost of each

inventory item is known

Assume that
Computers, Inc.’s
beginning inventory
and purchases
during the year for
mouse pads were as
follows:

C o m p u t e r s , In c .
M o u s e P a d In v e n to r y
D ate U n its $ /U n it T o ta l
B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g Based on
In v e n t o r y 800
ending
inventory count.
C ost of
G o o d s S o ld
Assume that the 800 units in the ending
inventory consists of the following:
600 units from the beginning inventory
200 units from the Sept. 15 purchase.
Using the specific identification method,

determine the cost of the ending
inventory.

Computers, Inc.
Mouse Pad Ending Inventory
Date Units $/Unit Total
Beg. Inv. 600 $ 5.25 $ 3,150.00
End. Inv. 800
The per unit cost for the beginning inventory was $5.25.
Six hundred of these units are on hand at year–end.

Computers, Inc.
Beg. Inv. 600 $ 5.25 $ 3,150.00
9/15 200 5.80 1,160.00
End. Inv. 800 $ 4,310.00
The per unit cost for the Sept. 15 purchase was $5.80.
Two hundred of these units are on hand at year–end.

B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 $ 4 ,3 1 0 . 0 0
C ost of
G o o d s S o ld
B e g in n in g
In v e n t o r y Cost1of
, 0 0Goods
0 $ 5Sold
. 2 5 is
$ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3
calculated
100
as:
5 .3 0 5 3 0 .0 0
6 /2 0 150 5 .6 0 8 4 0 .0 0
9 /1 5 Goods Available
200 5for
. 8 0 Sale 1 ,1 6 0 .0 0
1 1 /2 9 Less Ending
1 0 0 Inventory
5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 $ 4 ,3 1 0 . 0 0
C ost of
G o o d s S o ld
B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 $ 4 ,3 1 0 . 0 0
C ost of
G o o d s S o ld 750 $ 4 ,0 6 0 . 0 0
8 Now let’s move on
to the
weighted–average
inventory costing
method.

8 Weighted–Average Cost
❖ Compute cost of goods available for sale:
Cost of Beg. Inv. + Cost of Purchases
❖ Compute total units available for sale:

Units in Beg. Inv. + Units Purchased
❖ Compute weighted-average cost per

unit:
Cost of Goods Available for Sale
Total Units Available for Sale

❖ Compute weighted-average cost per unit:
Cost of Goods Available for Sale
Total Units Available for Sale
❖ Compute ending inventory:

Units in Ending Inv. × Average Cost per Unit
❖ Compute Cost of Goods Sold:

Units Sold × Average Cost per Unit

The schedule on the next screen shows the mouse
pad inventory for Computers, Inc.
The physical inventory count shows 800 mouse
pads in ending inventory.
Use the weighted–average cost method to
determine:
(1) Ending inventory cost
(2) Cost of goods sold

B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
C ost of
G o o d s S o ld
B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 GAS 1,550
- EI (800)
C ost of COGS 750
G o o d s S o ld 750
Weighted–Average Cost per Unit:
Ending Inventory:
Cost of Goods Sold:

$8,370
= $5.40
1,550
Ending Inventory:
Cost of Goods Sold:

$8,370
= $5.40
1,550
Ending Inventory:
800 Units × $5.40 = $4,320
Cost of Goods Sold:

$8,370
= $5.40
1,550
Ending Inventory:
800 Units × $5.40 = $4,320
Cost of Goods Sold:

750 Units × $5.40 = $4,050

B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 $ 4 ,3 2 0 . 0 0
C ost of
G o o d s S o ld 750 $ 4 ,0 5 0 . 0 0
8
Now let’s move

on to the FIFO
inventory
costing
method.

8 First-In, First-Out
Cost of oldest Cost of newest
inventory inventory
items items
Cost of goods Ending

sold inventory

Use the FIFO inventory method to determine:

B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
C ost of
G o o d s S o ld
B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 GAS 1,550
- EI (800)
C ost of COGS 750
Computers, Inc.
End. Inv. 800

Computers, Inc.
11/29 100 $ 5.90 $ 590.00
Remember: FIFO ending inventory

is calculated using the cost of the
newest purchases. Start with 11/29
and then add other purchases until
End. Inv. 800
you reach the number of units in
ending inventory.

Computers, Inc.
11/29 100 $ 5.90 $ 590.00
9/15 200 5.80 1,160.00
6/20 150 5.60 840.00
1/3 100 5.30 530.00
Beg. Inv. 250 5.25 1,312.50
End. Inv. 800 $ 4,432.50

B e g in n in g
In v e n t o r y Cost1of
, 0 0Goods
0 $ 5Sold
. 2 5 is
$ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3
calculated
100
as
5 .3 0
: 5 3 0 .0 0
6 /2 0 150 5 .6 0 8 4 0 .0 0
9 /1 5 Goods Available
200 5for
. 8 0 Sale 1 ,1 6 0 .0 0
1 1 /2 9 Less Ending
1 0 0 Inventory
5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 $ 4 ,4 3 2 . 5 0
C ost of
G o o d s S o ld 750 $ 3 ,9 3 7 . 5 0
Computers, Inc.
Mouse Pad Cost of Goods Sold
Cost of
Goods Sold 750
Remember: FIFO cost of goods sold is
calculated using the cost of the oldest
purchases. Start with beginning
inventory and then add other purchases
until you reach the number of units sold.
Computers, Inc.
Beg. Inv. 750 $ 5.25 $ 3,937.50
Cost of
Goods Sold 750 $ 3,937.50

8 Last-In, First-Out
ANY QUESTIONS
BEFORE WE
DISCUSS LIFO?

Cost of oldest Cost of newest
inventory inventory
items items
Ending Cost of goods

inventory sold

Use the LIFO inventory method to determine:

B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
C ost of
Computers, Inc.
Remember: LIFO ending inventory is calculated using

the cost of the oldest purchases. Start with beginning
inventory and then add other purchases until you
reach the number of units in ending inventory.
End. Inv. 800

Computers, Inc.
Beg. Inv. 800 $ 5.25 $ 4,200.00
End. Inv. 800 $ 4,200.00

B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 $ 4 ,2 0 0 . 0 0
C ost of
B e g in n in g
In v e n t o r y 1 ,0 0 0 $ 5 .2 5 $ 5 ,2 5 0 . 0 0
P urch ase s:
1 /3 1 0 0 5 .3 0 5 3 0 .0 0
6 /2 0 1 5 0 5 .6 0 8 4 0 .0 0
9 /1 5 2 0 0 5 .8 0 1 ,1 6 0 .0 0
1 1 /2 9 1 0 0 5 .9 0 5 9 0 .0 0
G o ods
A v a ila b le
f o r S a le 1 ,5 5 0 $ 8 ,3 7 0 . 0 0
E n d in g
In v e n t o r y 800 $ 4 ,2 0 0 . 0 0
C ost of
G o o d s S o ld 750 $ 4 ,1 7 0 . 0 0
Computers, Inc.
Remember: LIFO cost of goods sold is
calculated using the cost of the newest
purchases. Start with 11/29 and then add
other purchases until you reach the
number of units sold.
Cost of
Goods Sold 750

Computers, Inc.
11/29 100 $ 5.90 $ 590.00
Cost of
Goods Sold 750

Computers, Inc.
11/29 100 $ 5.90 $ 590.00
9/15 200 5.80 1,160.00
6/20 150 5.60 840.00
1/3 100 5.30 530.00
Beg. Inv. 200 5.25 1,050.00
Cost of
Goods Sold 750 $ 4,170.00

8
Comparison of Inventory
Methods
Computers, Inc.
Mouse Pad Inventory
Ending Cost of
Inventory Method Inventory Goods Sold
Specific Identification $ 4,310.00 $ 4,060.00
W eighted-Average 4,320.00 4,050.00
FIFO 4,432.50 3,937.50
LIFO 4,200.00 4,170.00

8 Periodic versus Perpetual
Periodic
Quantity of inventory Cost of goods sold is

on hand determined calculated as:
by physical count Beginning inventory
+ Purchases
– Ending inventory

8 Periodic versus Perpetual
Perpetual
Quantity of inventory Cost of goods sold is

on hand determined determined when
by updated records sales are made

8 Lower of Cost or Market
1 Realizable value
2 Replacement cost
Is cost lower than the designated “market” value?

8 Lower of Cost or Market
1 Realizable value
2 Replacement cost
Is cost lower than the designated “market” value?
If yes, no inventory If no, adjust inventory

adjustment is made. to “market.”

8
Financial Statement
Disclosure
Description of accounting
principles used to determine
inventory costs
Reference to use of any

industry specific accounting
principles or methods
Major categories of
inventories

8 Management Issues
Physical Avoid Stock
Safeguarding Outs
Minimize Minimize
Warehouse Costs Ordering Costs

8 Analyzing Inventories
Gross profit margin

Gross profit margin ratio =
Net sales

8 Analyzing Inventories
Cost of goods sold

Inventory turnover ratio =
Average inventory
Average number of days’ 365 days

inventory on hand =
Inventory turnover ratio

8 End of Chapter 8

Williams 08

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8

Inventories and Cost of

Slide 1 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 2 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 3 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 4 Copyright © 1997 McGraw-Hill Ryerson Limited.

Cost of this Cost of goods

Slide 5 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 6 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 8 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 9 Copyright © 1997 McGraw-Hill Ryerson Limited.

Cost of finished Cost of finished

Slide 10 Copyright © 1997 McGraw-Hill Ryerson Limited.

❖ Specific cost of each

Slide 12 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 13 Copyright © 1997 McGraw-Hill Ryerson Limited.

Using the specific identification method,

Slide 15 Copyright © 1997 McGraw-Hill Ryerson Limited.

End. Inv. 800

Slide 16 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 17 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 21 Copyright © 1997 McGraw-Hill Ryerson Limited.

❖ Compute total units available for sale:

❖ Compute weighted-average cost per

Slide 22 Copyright © 1997 McGraw-Hill Ryerson Limited.

❖ Compute ending inventory:

❖ Compute Cost of Goods Sold:

Slide 23 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 24 Copyright © 1997 McGraw-Hill Ryerson Limited.

Cost of Goods Sold:

Slide 27 Copyright © 1997 McGraw-Hill Ryerson Limited.

Cost of Goods Sold:

Slide 28 Copyright © 1997 McGraw-Hill Ryerson Limited.

Cost of Goods Sold:

Slide 29 Copyright © 1997 McGraw-Hill Ryerson Limited.

Cost of Goods Sold:

Slide 30 Copyright © 1997 McGraw-Hill Ryerson Limited.

Now let’s move

Slide 32 Copyright © 1997 McGraw-Hill Ryerson Limited.

Cost of goods Ending

Slide 33 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 34 Copyright © 1997 McGraw-Hill Ryerson Limited.

End. Inv. 800

Slide 37 Copyright © 1997 McGraw-Hill Ryerson Limited.

Remember: FIFO ending inventory

Slide 38 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 39 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 42 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 43 Copyright © 1997 McGraw-Hill Ryerson Limited.

Ending Cost of goods

Slide 44 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 45 Copyright © 1997 McGraw-Hill Ryerson Limited.

Remember: LIFO ending inventory is calculated using

End. Inv. 800

Slide 47 Copyright © 1997 McGraw-Hill Ryerson Limited.

End. Inv. 800 $ 4,200.00

Slide 48 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 51 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 52 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 53 Copyright © 1997 McGraw-Hill Ryerson Limited.

Slide 54 Copyright © 1997 McGraw-Hill Ryerson Limited.

Quantity of inventory Cost of goods sold is

Slide 55 Copyright © 1997 McGraw-Hill Ryerson Limited.