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Chapter

Inventories
Eris Tri Kurniawati.,SE.,MM.Ak
Objectives
Objectives
1. Summarize and provide examples of internal
After
After studying
control procedures studying this
that applythisto inventories.
2. Describe the chapter,
effect ofyou
chapter, should
inventory
you shoulderrors on the
be
financial statement.be able
able to:
to:
3. Describe the three inventory cost flow
assumptions and how they impact the income
statement and balance sheet.
4. Compute the cost of inventory under the
perpetual inventory system, using the
following cost methods: first-in, first-out; last-
in, first-out; average cost.
Objectives
Objectives
5. Compute the cost of inventory under the
periodic inventory system, using the
following costing methods: first-in, first-out;
last-in, first-out; average cost.
6. Compare and contrast the use of the three
inventory costing methods.
.
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

AG

EE
R EE

R
Invoice

AG
JOURNAL
Post.
Date
Description
Ref.
Nov. 9 Inventory 1 222 00
Accounts Payable--XYZ Co. 1 222 00
Purchased merchandise on
account.
Effect
Effect of
of Inventory
Inventory Errors
Errors on
on
Financial
Financial Statements
Statements
LIABILITIES

Merchandise ASSETS OWNER’S


Inventory EQUITY

Net Income

Cost of COSTS & REVENUES


Merchandise Sold EXPENSES

IfIfmerchandise inventoryisis.............. overstated


merchandiseinventory
Cost
Costof
ofmerchandise
merchandisesoldsoldisis............ understated
Gross
Grossprofit
profitand
andnet
netincome
incomeare are...... overstated
Ending
Endingowner’s equityisis.................. overstated
owner’sequity
Effect
Effect of
of Inventory
Inventory Errors
Errors on
on
Financial
Financial Statements
Statements

IfIfmerchandise inventoryisis.............. understated


merchandiseinventory
Cost
Costof
ofmerchandise soldisis............ overstated
merchandisesold
Gross
Grossprofit
profitand
andnet
netincome
incomeare are...... understated
Ending
Endingowner’s equityisis.................. understated
owner’sequity
Inventory
Inventory Cost
Cost Flow
Flow Assumptions
Assumptions
Purchased
Purchased
goods
goods

Sold
Sold
goods
goods
Inventory
Inventory Cost
Cost Flow
Flow Assumptions
Assumptions

Sold
Purchased
Sold
Purchased
goods
goods
goods
goods
Inventory
Inventory Cost
Cost Flow
Flow Assumptions
Assumptions

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

20% 19%

10%
4%
0%
Fifo Lifo Average Other
Perpetual
Perpetual Inventory
Inventory Costs
Costs
Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 $20
$20
4Cost
4 Saleof
Sale 77 $30
$30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
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
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 $20
$20
4Cost
4 Saleof
Sale 77 $30
$30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 4,
4, 77 units
units of
of Item
Item
127B
127B are
are sold
sold at
at $30
$30 each.
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
The sale
sale of
of 77 units
units leaves
leaves aa
balance
balance of of 33 units.
units.

On
On January
January 4,
4, 77 units
units of
of Item
Item
127B
127B are
are sold
sold at
at $30
$30 each.
each.
FIFO Perpetual Inventory Account

Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 $20
$20
4Cost
4 Saleof
Sale 77 $30
$30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 10,
10, the
the firm
firm purchased
purchased
eight
eight units
units at
at $21
$21 each.
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 10, the balance of
firm
On January 10, the firm
11 units is accounted for separately.
purchased
purchased eight
eight units
units at
at $21
$21 each.
each.
FIFO Perpetual Inventory Account

Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 $20
$20
4Cost
4 Saleof
Sale 77 $30
$30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 22,
22, the
the firm
firm sold
sold
four
four units
units for
for $31
$31 each.
each.
FIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance


On January 22,
On January 22, the the
Unit Total Unit Total Unit Total
firm
Date firm
sold
Qty. sold
four
Cost four
units
units
Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1
for
for $31
$31 each.
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
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 $20
$20
4Cost
4 Saleof
Sale 77 $30
$30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 28,
28, the
the firm
firm
sold
sold two
two units
units at
at $32.
$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
On January
January 28,
28, the
the firm
firm
sold
sold two
two units
units at
at $32.
$32.
FIFO Perpetual Inventory Account

Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 $20
$20
4Cost
4 Saleof
Sale 77 $30
$30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 30,
30, purchased
purchased ten
ten additional
additional
units
units of
of Item
Item 127B
127B at
at $22
$22 each.
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
On January
January 30,
30, purchased
purchased
7 20 140 3 20 60
10 8ten
ten additional
21 168 units
additional units of
of Item
Item 3 20 60
8 21 168
22
127B
127B atat $22
$223each.
each. 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
The firm
firm begins
begins the the year
year with
with
10
10 units
units of of Item
Item 127B
127B onon
hand
hand atat aa total
total cost
cost of
of $200.
$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
On January
January 4,4, the
the firm
firm sold
sold
77 units
units at
at $30
$30 each.
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
On January
January 10,
10, the
the
firm
firm purchased
purchased eight
eight Note
Note that
that aa new
new
units layer
layer isis formed.
formed.
units at
at $21
$21 each.
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
OnOfJanuary
Of
On the
January 22,
the 44 units the
22,sold,
units the all
sold, all come
come
firm
fromfirm
from thesells
most
sells
the four
most recent
recent purchase
four purchase
units
unitsatat
at aa $31
at costeach.
cost
$31 of
of $21
$21 each.
each. 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
On January
January 28,
28, sold
sold
two
two units
units at
at $32
$32 each.
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
On January
January 30,30, purchase
purchase 10 22 220
10
10 units
units at
at $22
$22 each.
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
Fifo Periodic
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
Fifo Periodic
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
Fifo Periodic
Periodic
A
Aphysical
physical count
count on
on
December
December 3131 reveals
reveals that
that
700
700 of
of the
the 1,000
1,000 units
units
have
have been
been sold.
sold.

Using
Using fifo,
fifo, the
the first
first units
units
purchased
purchased are are theoretically
theoretically thethe
first
first units
units sold.
sold. WeWe begin
begin the
the
count
count with
with January
January 1. 1.
Fifo
Fifo Periodic
Periodic
Soldunits
200 these@200
$9 = $1,800
$ 0 Jan. 1

Soldunits
300 these@300
$10 = 3,0000 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
Fifo Periodic
Periodic

Cost
Cost of
of merchandise
merchandise available
available for
for sale
sale $10,400
$10,400
Less
Less ending
ending inventory
inventory 3,400
3,400
Cost
Cost of
of merchandise
merchandise sold
sold $$ 7,000
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
Lifo Periodic
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
Using available
lifo, the
the most
most recent
recent batch
batch
for sale during
purchased
purchased isis considered
considered the
the first
first
year
batch
batch of
of merchandise
merchandise sold.
sold.
Lifo
Lifo Periodic
Periodic
Jan. 1 Beginning
200 units @ $9 Assume
Assume again
again that
that
Inventory
700
700 units
units were
were sold
sold
300 units @ $10 Mar.during
10 Purchase
the
during the year.
year.
400 units @ $11 Sept. 21 Purchase

100 units @ $12 Nov. 18 Purchase


1,000 units available
for sale during
year
Lifo
Lifo Periodic
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
Lifo Periodic
Periodic

Cost
Cost of
of merchandise
merchandise available
available for
for sale
sale $10,400
$10,400
Less
Less ending
ending inventory
inventory 2,800
2,800
Cost
Cost of
of merchandise
merchandise sold
sold $$ 7,600
7,600
Summary
Summary of
of Lifo
Lifo Periodic
Periodic
Cost of
Merchandise Merchandise Sold
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
Average Cost
Cost Periodic
Periodic

200 units @ $9 Jan. 1 Beginning


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

100 units @ $12 Nov. 18 Purchase


1,000 units available
for sale during
year
Average
Average Cost
Cost Periodic
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
Average Cost
Cost Periodic
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
Average Cost
Cost Periodic
Periodic

Cost
Cost of
of merchandise
merchandise available
available for
for sale
sale $10,400
$10,400
Less
Less ending
ending inventory
inventory ($10.40
($10.40 xx 300)
300) 3,120
3,120
Cost
Cost of
of merchandise
merchandise sold
sold $$ 7,280
7,280
To verify this
amount, multiply
700 units sold
times $10.40 to get
the same $7,280.
Chapter Inventory

The
The End
End

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