Chapter

INVENTORIES AND THE

8 COST OF GOODS SOLD
Slide
8-2
INVENTORY DEFINED

Inventory
Inventory

Goods
Goods owned
owned Current
Current
and
andheld
heldfor
forsale
sale asset
asset
to
to customers
customers

Inventory is expected to be converted into

cash within the company’s operating
cycle. In the balance sheet, inventory is
listed immediately after accounts receivable.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-3

THE FLOW OF INVENTORY COSTS

BALANCE SHEET

As purchase costs
Current assets:
(or manufacturing Inventory
costs) are incurred $ $
as goods
INCOME STATEMENT are sold
Revenue $
Cost of goods sold
Gross profit
Expenses
Net income
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-4

THE FLOW OF INVENTORY COSTS

In a perpetual inventory system, The inventory account is continuously updated
to reflect items on hand. In this system inventory entries parallel the flow of
costs.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Entry on Purchase Date
Inventory $$$$
Accounts Payable $$$$

Entry on Sale Date

Cost of Goods Sold $$$$
Inventory $$$$
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-5

WHICH UNIT DID WE SELL?

When identical units of inventory have

different unit costs, a question naturally
arises as to which of these costs should be
used in recording a sale of inventory.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Entry on Sale Date
Cost of Goods Sold $$$$
Inventory $$$$

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-6

INVENTORY SUBSIDIARY LEDGER

AA separate
separate subsidiary
subsidiary account
account is is maintained
maintained
for
for each
each item
item in
in inventory.
inventory.
Item LL002 Primary supplier Electronic City
Description Laser Light Secondary supplier Electric Company
Location Storeroom 2 Inventory level: Min: 25 Max: 200
Purchased Sold Balance
Cost of
Unit Unit Goods Unit
Date Units Cost Total Units Cost Sold Units Cost Total
Sept. 5 100 $ 30 $ 3,000 100 $ 30 $ 3,000
Sept. 9 75 50 3,750 100 30 3,000
75 50 3,750
Sept. 10 10 ? ? ? ? ?
? ? ?

How can we determine the unit cost for the Sept. 10 sale?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-7

INVENTORY COST FLOWS

We use one of these inventory valuation
methods to determine cost of inventory sold.

Specific Average
identification cost

FIFO LIFO
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-8

INFORMATION FOR THE FOLLOWING INVENTORY EXAMPLES

The Bike Company (TBC)

Cost of Goods Available for Sale
Aug. 1 Beg. Inventory 10 units @ $ 91 = $ 910
Aug. 3 Purchased 15 units @ $ 106 = $ 1,590
Aug. 17 Purchased 20 units @ $ 115 = $ 2,300
Aug. 28 Purchased 10 units @ $ 119 = $ 1,190

Retail Sales of Goods

Aug. 14 Sales 20 units @ $ 130 = $ 2,600
Aug. 31 Sales 23 units @ $ 150 = $ 3,450

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-9

SPECIFIC IDENTIFICATION

When a unit
is sold, the
specific cost of
the unit sold is
added to cost
of goods sold.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-10

SPECIFIC IDENTIFICATION – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 9 @ $ 91 = $ 819
11 @ $ 106 = $ 1,166 $ 515

The
The Cost
Cost ofof Goods
Goods Sold
Sold for
for the
theAugust
August 14 14 sale
sale is
is
$1,985,
$1,985, leaving
leaving $515
$515 and
and 55 units
units in
in inventory.
inventory.

Let’s look at the entries for

Continue the Aug. 14 sale.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-11

SPECIFIC IDENTIFICATION – EXAMPLE

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Aug. 14 Cash Retail
Retail 2,600
Sales 2,600

14 Cost of Goods Sold Cost

Cost 1,985
Inventory 1,985

AAsimilar
similar entry
entry is
is
made Continue
made after
after each
each sale.
sale.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-12

SPECIFIC IDENTIFICATION – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Cost
Cost of
of Goods
Goods
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14
Sold
Sold forfor 9 @ $ 91 = $ 819
August
August 31 31 == 11 @ $ 106 = $ 1,166 $ 515
Aug. 17 $ 2,815
Aug. 28
$2,610
20 @ $ 115 = $ 2,300
10 @ $2,610
$ 119 = $ 1,190 $ 4,005
Aug. 31 Additional purchases were made1 @ $August
91 = $ 91
Additional purchases were madeon on August1717and
and28.
28.
3 @ $ 106 = $ 318
Costs
Costsassociated
associatedwith
withsales
saleson
onAugust
August 31 were as follows: 11@ @$91,
15 @31$were
115 as
= follows:
$ 1,725 $91,
33@@$106,
$106,15
15@@$115,
$115,& 4 @ $119.
4 @& 4$@ $119.
119 = $ 476 $ 1,395

McGraw-Hill/Irwin
Continue © The McGraw-Hill Companies, Inc., 2002
Slide
8-13

SPECIFIC IDENTIFICATION – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Income Statement
Aug. 14 9 @ $ 91 = $ 819
COGS = $4,595 11 @ $ 106 = $ 1,166 $ 515
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,815
Aug. 28 10 @ $ 119 = $ 1,190 $ 4,005
Aug. 31 1 @ $ 91 = $ 91
3 @ $ 106 = $ 318
15 @ $ 115 = $ 1,725
4 @ $ 119 = $ 476 $ 1,395
Balance Sheet
1 @ $ 106 = $ 106
Inventory = $1,395
5 @ $ 115 = 575
6 @ $ 119 = 714
End. Inv. © The$McGraw-Hill
1,395 Companies, Inc., 2002
McGraw-Hill/Irwin
 Not really. Specific
Since specific identification is hard to use
identification is so when we sell a lot of
easy, can’t we use it inventory that has lots of
all the time? different costs.
Slide
8-15

AVERAGE-COST METHOD

When a unit is sold,

the average cost of each unit
in inventory is assigned to
cost
of goods sold.

Cost of Goods Units on hand

Available for ÷ on the date of
Sale sale

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-16

AVERAGE-COST METHOD – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500

The
Theaverage
averagecost
cost per
per unit
unit
must
must be
becomputed
computedprior
prior
to
toeach
eachsale.
sale. $100 $2,500  25
$100 == $2,500 25
On
OnAugust
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Continue
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-17

AVERAGE-COST METHOD – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 20 @ $ 100 = $ 2,000 $ 500

The
The average
average costcost per
per
unit
unit is
is $100.
$100. $100 $2,500  25
$100 == $2,500 25

Let’s look at the entries

Continue for the Aug. 14 sale.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-18

AVERAGE-COST METHOD – EXAMPLE

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Aug. 14 Cash Retail
Retail 2,600
Sales 2,600

14 Cost of Goods Sold Cost

Cost 2,000
Inventory 2,000

AAsimilar
similar entry
entry is
is
made Continue
made after
after each
each sale.
sale.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-19

AVERAGE-COST METHOD – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 20 @ $ 100 = $ 2,000 $ 500
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,800
Aug. 28 10 @ $ 119 = $ 1,190 $ 3,990

Additional
Additional purchases
purchaseswere
weremade
madeononAugust
August 17
17and
and
August
August 28.
28.
On
OnAugust
August 31,
31, an
anadditional
additional 23
23units
unitswere
were sold.
sold.

Continue
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-20

AVERAGE-COST METHOD – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 20 @ $ 100 = $ 2,000 $ 500
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,800
Aug. 28 10 @ $ 119 = $ 1,190 $ 3,990

Total Purchases 55
Less: Sales to Date -20
$114 $3,990  35
$114 == $3,990 35
Units on Hand 35

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-21

AVERAGE-COST METHOD – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 20 @ $ 100 = $ 2,000 $ 500
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,800
Aug. 28 10 @ $ 119 = $ 1,190 $ 3,990
Aug. 31 23 @ $ 114 = $ 2,622 $ 1,368

The
The average
average costcost per
per $114 $3,990  35
$114 == $3,990 35
unit
unit is
is $114.
$114.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-22

AVERAGE-COST METHOD – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Income
Aug. 3 15Statement
@ $ 106 = $ 1,590 $ 2,500
Aug.COGS
14 = $4,622 20 @ $ 100 = $ 2,000 $ 500
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,800
Aug. 28 10 @ $ 119 = $ 1,190 $ 3,990
Aug. 31 23 @ $ 114 = $ 2,622 $ 1,368

Balance Sheet
Inventory = $1,368
$114
$114 ×× 12
12 == $1,368
$1,368
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-23

FIRST-IN, FIRST-OUT METHOD (FIFO)

Oldest
Oldest Costs
Costs of
of
Costs
Costs Goods
Goods Sold
Sold

Recent
Recent Ending
Ending
Costs
Costs Inventory
Inventory

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-24

FIFO – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 10 @ $ 91 = $ 910
10 @ $ 106 = $ 1,060 $ 530

The
TheCost
Cost of
of Goods
Goods Sold
Sold for
for the
theAugust
August 14 14sale
saleisis $1,970,
$1,970,
leaving
leaving $530
$530and
and55 units
units in
ininventory.
inventory.
On
OnAugust
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Continue
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-25

SPECIFIC IDENTIFICATION – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500

On
OnAugust
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Nine
Nine bikes
bikes originally
originally cost
cost $91
$91 and
and 1111 bikes
bikes
originally
originally cost
cost $106.
$106.

Continue
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-26

FIFO – EXAMPLE

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Aug. 14 Cash Retail
Retail 2,600
Sales 2,600

14 Cost of Goods Sold Cost

Cost 1,970
Inventory 1,970

AAsimilar
similar entry
entry is
is
made Continue
made after
after each
each sale.
sale.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-27

FIFO – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 10 @ $ 91 = $ 910
10 @ $ 106 = $ 1,060 $ 530
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,830
Aug. 28 10 @ $ 119 = $ 1,190 $ 4,020
Aug. 31 5 @ $ 106 = $ 530
18 @ $ 115 = $ 2,070 $ 1,420

Additional
Additionalpurchases
purchaseswere
weremade
madeon onAug.
Aug.17
17and
andAug.
Aug.28.
28.
Cost
CostOn of
of Goods
Goods
August 31,
Sold
Sold
an
for
for August
August
additional 23 units
31
31
were
=sold.
= $2,600
$2,600
On August 31, an additional 23 units were sold.

McGraw-Hill/Irwin
Continue © The McGraw-Hill Companies, Inc., 2002
Slide
8-28

FIFO – EXAMPLE
Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Income Statement
Aug. 14 10 @ $ 91 = $ 910
COGS = $4,570 10 @ $ 106 = $ 1,060 $ 530
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,830
Aug. 28 10 @ $ 119 = $ 1,190 $ 4,020
Aug. 31 5 @ $ 106 = $ 530
18 @ $ 115 = $ 2,070 $ 1,420

2 @ $ 115 = $ 230
Balance Sheet
10 @ $ 119 = 1,190
Inventory = $1,420
End. Inv. $ 1,420

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-29

LAST-IN, FIRST-OUT METHOD (LIFO)

Recent
Recent Costs
Costs of
of
Costs
Costs Goods
Goods Sold
Sold

Oldest
Oldest Ending
Ending
Costs
Costs Inventory
Inventory

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-30

LIFO – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 15 @ $ 106 = $ 1,590
5 @ $ 91 = $ 455 $ 455

The
The Cost
Cost ofof Goods
Goods Sold
Sold for
for the
the August
August 14 14 sale
sale is
is
$2,045,
$2,045, leaving
leaving $455
$455 and
and 55 units
units in
in inventory.
inventory.
On
OnAugust
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Continue
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-31

LIFO – EXAMPLE

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Aug. 14 Cash Retail
Retail 2,600
Sales 2,600

14 Cost of Goods Sold Cost

Cost 2,045
Inventory 2,045

AAsimilar
similar entry
entry is
is
made Continue
made after
after each
each sale.
sale.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-32

LIFO – EXAMPLE

Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Aug. 14 15 @ $ 106 = $ 1,590
5 @ $ 91 = $ 455 $ 455
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,755
Aug. 28 10 @ $ 119 = $ 1,190 $ 3,945
Aug. 31 10 @ $ 119 = $ 1,190
13 @ $ 115 = $ 1,495 $ 1,260

Additional
Additionalpurchases
purchaseswere
weremade
madeononAug.
Aug.17
17and
andAug.
Aug.28.
28.
Cost
Cost of of
On
Goods
Goods
Aug. 31,
Sold
anSold for
for
additional
August
August
23 units
31
31
were
== $2,685
$2,685
sold.
On Aug. 31, an additional 23 units were sold.

Continue © The McGraw-Hill Companies, Inc., 2002

McGraw-Hill/Irwin
Slide
8-33

LIFO – EXAMPLE
Inventory
Date Purchases Cost of Goods Sold Balance
Aug. 1 10 @ $ 91 = $ 910 $ 910
Aug. 3 15 @ $ 106 = $ 1,590 $ 2,500
Income Statement
Aug. 14 15 @ $ 106 = $ 1,590
COGS = $4,730 5 @ $ 91 = $ 455 $ 455
Aug. 17 20 @ $ 115 = $ 2,300 $ 2,755
Aug. 28 10 @ $ 119 = $ 1,190 $ 3,945
Aug. 31 10 @ $ 119 = $ 1,190
13 @ $ 115 = $ 1,495 $ 1,260

Balance Sheet 5 @ $ 91 = $ 455

Inventory = $1,260 7 @ $ 115 = 805
End. Inv. $ 1,260

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

 Inventory Valuation Methods: A Summary
Costs Allocated to:
Valuation Cost of Goods
Method Sold Inventory Comments
Specific Actual cost of Actual cost of units Parallels physical flow
identification the units sold remaining Logical method when units
are unique
May be misleading for
identical units
Average cost Number of units Number of units on Assigns all units the same
sold times the hand times the average unit cost
average unit cost average unit cost Current costs are averaged
in with older costs
First-in, First-out Cost of earliest Cost of most Cost of goods sold is based
(FIFO) purchases on recently on older costs
hand prior to the purchased units Inventory valued at current
sale costs
May overstate income during
periods of rising prices; may
increase income taxes due
Last-in, First-out Cost of most Cost of earliest Cost of goods sold shown at
(LIFO) recently purchases recent prices
purchased units (assumed still in Inventory shown at old (and
inventory) perhaps out of date) costs
Most conservative method
during periods of rising
prices; often results in lower
income taxes
Slide
8-35

THE PRINCIPLE OF CONSISTENCY

Once a company has

adopted a particular
accounting method, it
should follow that
method consistently,
rather than switch
methods from one
year to the next.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-36

TAKING A PHYSICAL INVENTORY

The
The primary
primary reason
reason for
for taking
taking aa physical
physical inventory
inventory
is
is to
to adjust
adjust the
the perpetual
perpetual inventory
inventory records
records for
for
unrecorded
unrecorded shrinkage
shrinkage losses,
losses, such
such as
as theft,
theft,
spoilage,
spoilage, oror breakage.
breakage.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Dec. 31 Cost of Goods Sold $$$$
Inventory $$$$

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-37

LCM AND OTHER WRITE-DOWNS

OF INVENTORY
Reduces
Reduces the the value
value
Obsolescence
Obsolescence of
of the
the inventory.
inventory.

Lower
Lower of
of Cost
Cost Adjust
Adjust inventory
inventory
or
or Market
Market value
value toto the
the lower
lower
(LCM)
(LCM) of
of historical
historical cost
cost or
or
current
current
replacement
replacement cost cost
(market).
(market).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-38

GOODS IN TRANSIT
AAsale
sale should
should be
berecorded
recorded when
whentitletitle
to
tothe
themerchandise
merchandisepasses
passes to
to the
the
buyer.
buyer.

F.O.B.
F.O.B. F.O.B.
F.O.B.
shipping
shipping destination
destination
point 
point  title
title point 
point  title
title
passes
passes to to passes
passes toto
buyer
buyer at
at the
the Year buyer
buyer at
at the
the
point
point of
of End point
point of
of
shipment.
shipment. destination.
destination.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-39

PERIODIC INVENTORY SYSTEMS

In a periodic inventory system, entries are as
follows.

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Entry on Purchase Date
Purchases $$$$
Accounts Payable $$$$

Note
Note that
that an
an entry
entry is
is not
not
made
made toto inventory.
inventory.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-40

PERIODIC INVENTORY SYSTEMS

In a periodic inventory system, inventory entries
are as follows.

GENERAL JOURNAL
P
Date Account Titles and Explanation R Debit Credit
Entry on Sale Date
No entry to inventory.

Accounts Receivable $$$$

Sales $$$$

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-41

PERIODIC INVENTORY SYSTEMS

The inventory on
hand and the
cost of goods
sold for the year
are not
determined until
year-end.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-42

PERIODIC INVENTORY SYSTEMS

We use one of these inventory valuation
methods in a periodic inventory system.

Specific Average
identification cost

FIFO LIFO
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-43

INFORMATION FOR THE FOLLOWING

INVENTORY EXAMPLES
Computers, Inc.
Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory 1,000 $ 5.25 $ 5,250.00
Purchases:
Jan. 3 300 5.30 1,590.00
June 20 150 5.60 840.00
Sept. 15 200 5.80 1,160.00
Nov. 29 150 5.90 885.00
Goods
Available
for Sale 1,800 $ 9,725.00
Ending
Inventory 1,200 ?
Cost of
Goods Sold 600 ?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-44

SPECIFIC IDENTIFICATION – EXAMPLE

By reviewing actual
purchase invoices,
Computers, Inc. determines
that the 1,200 mouse pads
on hand at year-end have
an actual total cost of
$6,400.
Determine the cost of
goods sold for the year.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-45

SPECIFIC IDENTIFICATION – EXAMPLE

Computers, Inc.
Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory 1,000 $ 5.25 $ 5,250.00
Purchases:
Jan. 3 300 5.30 1,590.00
June 20 150 5.60 840.00
Sept. 15 200 5.80 1,160.00
Cost
Cost of Goods Sold
Nov. 29of Goods Sold150 5.90 885.00
$9,725
Goods --
$9,725 $6,400
$6,400 == $3,325
$3,325
Available
for Sale 1,800 $ 9,725.00
Ending
Inventory 1,200 $ 6,400.00
Cost of
Goods Sold 600 $ 3,325.00
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-46

AVERAGE-COST METHOD

The
The average
average cost
cost is
is
calculated
calculated at
at year-
year-
end
end as
as follows:
follows:

Total Cost of Total Number

Goods of Units
Available for ÷ Available for
Sale Sale

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-47

AVERAGE-COST METHOD – EXAMPLE

Computers, Inc.
Mouse Pad Inventory
Avg.
Avg.Cost $9,7251,800
Cost $9,725 1,800== Date Units $/Unit Total
$5.40278
$5.40278 Beginning
Ending
EndingInventory
Inventory Inventory 1,000 $ 5.25 $ 5,250.00
Avg.
Avg.Cost $5.402781,200
Cost $5.40278 1,200== Purchases:
$6,483
$6,483 Jan. 3 300 5.30 1,590.00
June 20 150 5.60 840.00
Cost
Costof
ofGoods
GoodsSold
Sold Sept. 15 200 5.80 1,160.00
Avg.
Avg.Cost $5.40278600
Cost $5.40278 600== Nov. 29 150 5.90 885.00
$3,242
$3,242 Goods
Available
for Sale 1,800 $ 9,725.00
Ending
Inventory 1,200
1,200 $ 6,483.00
?
Cost of
Goods Sold 600 $ 3,242.00
?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
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FIRST-IN, FIRST-OUT METHOD (FIFO)

Oldest
Oldest Costs
Costs of
of
Costs
Costs Goods
Goods Sold
Sold

Recent
Recent Ending
Ending
Costs
Costs Inventory
Inventory

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-49

FIFO – EXAMPLE
Remember: Start Computers, Inc.
Mouse Pad Inventory
with the 11/29 Date Units $/Unit Total
purchase and then Beginning
add other purchases Inventory 1,000 $ 5.25 $ 5,250.00
until you reach the Purchases:
number of units in Jan. 3 300 5.30 1,590.00
ending inventory. June 20 150 5.60 840.00
Sept. 15 200 5.80 1,160.00
Nov. 29 150 5.90 885.00
Goods
Available
for Sale 1,800 $ 9,725.00
Ending
Inventory 1,200 ?
Cost of
Goods Sold 600 ?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-50

FIFO – EXAMPLE
Cost of
Date Beg. Inv. Purchases End. Inv. Goods Sold
1,000@$5.25 600@$5.25
400@$5.25
Jan. 3 300@$5.30 300@$5.30
June 20 150@$5.60 150@$5.60
Sept. 15 200@$5.80 200@$5.80
Nov. 29 150@$5.90 150@$5.90
Units 1,200
150 600

Now, we have allocated

Costs $6,575 $3,150
the cost to allNow,
1,200 let’s
Now, let’s complete
units complete the
the
Cost in endingAvailable
of Goods inventory. table.
table.
for Sale $9,725

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-51

FIFO – EXAMPLE
Completing the table Computers, Inc.
Mouse Pad Inventory
summarizes the Date Units $/Unit Total
computations just Beginning
made. Inventory 1,000 $ 5.25 $ 5,250.00
Purchases:
Jan. 3 300 5.30 1,590.00
June 20 150 5.60 840.00
Sept. 15 200 5.80 1,160.00
Nov. 29 150 5.90 885.00
Goods
Available
for Sale 1,800 $ 9,725.00
Ending
Inventory 1,200 $ 6,575.00
Cost of
Goods Sold 600 $ 3,150.00

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-52

LAST-IN, FIRST-OUT METHOD (LIFO)

Recent
Recent Costs
Costs of
of
Costs
Costs Goods
Goods Sold
Sold

Oldest
Oldest Ending
Ending
Costs
Costs Inventory
Inventory

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-53

LIFO – EXAMPLE
Remember: Start with Computers, Inc.
Mouse Pad Inventory
beginning inventory
Date Units $/Unit Total
and then add other Beginning
purchases until you Inventory 1,000 $ 5.25 $ 5,250.00
reach the number of Purchases:
units in ending Jan. 3 300 5.30 1,590.00
inventory. June 20 150 5.60 840.00
Sept. 15 200 5.80 1,160.00
Nov. 29 150 5.90 885.00
Goods
Available
for Sale 1,800 $ 9,725.00
Ending
Inventory 1,200 ?
Cost of
Goods Sold 600 ?

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-54

LIFO – EXAMPLE
Cost of
Date Beg. Inv. Purchases End. Inv. Goods Sold
1,000@$5.25 1,000@$5.25
Jan. 3 300@$5.30 200@$5.30
100@$5.30
June 20 150@$5.60 150@$5.60
Sept. 15 200@$5.80 200@$5.80
Nov. 29 150@$5.90 150@$5.90
Units 1,000
1,200 100
600

Now, we have allocated

Costs $6,310
Next, $3,415
Next, let’s
let’s
the cost to all 1,200 units complete
completethethe
Cost in
of ending inventory.
Goods Available for Sale $9,725
table.
table.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
Slide
8-55

LIFO – EXAMPLE
Completing the table Computers, Inc.
Mouse Pad Inventory
summarizes the Date Units $/Unit Total
computations just Beginning
made. Inventory 1,000 $ 5.25 $ 5,250.00
Purchases:
Jan. 3 300 5.30 1,590.00
June 20 150 5.60 840.00
Sept. 15 200 5.80 1,160.00
Nov. 29 150 5.90 885.00
Goods
Available
for Sale 1,800 $ 9,725.00
Ending
Inventory 1,200 $ 6,310.00
Cost of
Goods Sold 600 $ 3,415.00

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

Slide
8-56

END OF CHAPTER 8
Careful! If you
drop the inventory
we will have another
write down.

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002