Assignment

Participation Topic (Mandatory)

Inventory Additional Lecture Notes

Class,

Let me see if I can work up an example of how to calculate and use the different inventory methods. Let us use the following information:

The Floppy Company had the following inventory, purchase & sales events this month:

Now first let us do a bit of discussion. How many items did we have to sell during the month? How many items are in Ending Inventory?

Let us get started by determining what inventory system that Floppy uses. There are 2 system:

• Perpetual: every time there is a transaction (buy or sell) the inventory is updated.
• Periodic: we wait until the end of the month and lump sum all the like transactions then determine our cost and asset values

We will start with the Periodic System:

Let us talk again. We had 6 items for sale this month and the total dollar value of these 6 items is $38.00. Now only two events can happen to the items we have available for sale (Goods Available for Sale) (GAS):

1.  We sell the items (called Cost of Goods Sold) (COGS)

2.  or We still have them on our shelf (called Ending Inventory) (EI)

Well Floppy sold 4 items on Day 30. So if they had 6 items and sold 4 items that means they have 2 items in Ending Inventory. Now we may the specific inventory valuation method that we use in our company. There are three methods that you are responsible for: FIFO, LIFO & Weighted Average (also called Average).

FIFO: First In First Out: The value of the first item bought will be the value that we will use to determine COGS. But wait, it is easier to calculate the Ending Inventory, heck we have 2 items in Ending Inventory and since everything in the First was sold First that means the Last ones bought are still on the shelf.

We have 2 items that we purchased on Day 30 left in Ending Inventory. They cost $7.00 each so our total Ending Inventory is valued at 2 items * $7.00 each = $14.00.

Ok what is the value of the COGS?

If we had $38.00 in GAS and we have $14.00 in EI then COGS must be GAS - EI = COGS or:

Let us now make a partial Income Statement from the Information we have available to us:

LIFO: Last In First Out: The value of the first item bought will be the value that we will use to determine COGS. But wait, it is easier to calculate the Ending Inventory, heck we have 2 items in Ending Inventory and since everything in the Last was sold First that means the First ones bought are still on the shelf.

We have 1 item from the Beginning Inventory & 1 item from the what we purchased on Day 5 left in Ending Inventory. Here are the associated costs:

Note we must stratify our inventory records. Our total Ending Inventory is valued at $11.00.

Ok what is the value of the COGS?

If we had $38.00 in GAS and we have $11.00 in EI then COGS must be GAS - EI = COGS or:

Let us now make a partial Income Statement from the Information we have available to us:

Average: The value of the entire purchases are averaged and assigned to Ending Inventory and COGS based on the number in each element.

Let us calculate the average cost per unit of in the GAS:

Average Cost = $38.00 / 6 items = $6.33 per unit. (I do not worry about rounding to the nearest penny in this case. In other words it is a good idea not to get hung up on how to round numbers, that is call arithmetic not accounting.)

It is easier to calculate the Ending Inventory, heck we have 2 items in Ending Inventory and each one is valued at $6.33. Therefore, Ending Inventory of 2 items is = 2 items * $6.33 each = $12. 66 total.

Ok what is the value of the COGS?

If we had $38.00 in GAS and we have $11.00 in EI then COGS must be GAS - EI = COGS or:

Let us now make a partial Income Statement from the Information we have available to us:

Now, there are other factors involved in inventory valuation. Such aspects as purchase returns, purchase discounts, sales returns and freight in. These factors either increase or decrease the parts of the calculation of GAS or EI and possible the value of sales. Fit them into the equation as needed and then apply math to calculate the different results.

Floopy's uses a perpetual inventory system. Data for product Widget include the following purchases.

On June 1 Floopy's sold 30 units, and on August 27, 40 more units. Using a perpetual inventory system calculate

a. FIFO

b. LIFO

c. moving average cost.

Keep in mind, average cost and moving average are used interchangably with making reference to the perpetual system.

Now here is the solution for your review:

(1)  FIFO Method:

(2)  LIFO Method:

(3)  Moving Average Cost:

Now, look over both systems and the various methods within each system. If you have questions or need additional help, be specific and point directly to where you need me to provide additional details.