Lecture Intermediate accounting (IFRS/e) - Chapter 8: Inventories: Measurement

Chapter 8

INVENTORIES:
MEASUREMENT

© 2013 The McGraw-Hill Companies, Inc.


Recording and Measuring Inventory

Types of Inventory

Merchandise
Inventory
Goods acquired for
resale
8-2

Manufacturing
Inventory
•Raw Materials
•work-in-progress
•Finished Goods


Manufacturing Inventories
Raw
Materials





Work in
Progress

$XX



Finished
Goods

$XX



Direct
Labor





Manufacturing
Overhead



8-3



Cost of Goods Sold

$XX

 Raw materials purchased
 Direct labor incurred
 Manufacturing overhead incurred
 Raw materials used
 Direct labor applied
 Manufacturing overhead applied
 Work in progress transferred to finished goods
 Finished goods sold


Inventory Systems
Two accounting systems are used to record
transactions involving inventory:

8-4

Perpetual
Perpetual Inventory
Inventory
System
System

Periodic
Periodic Inventory

Inventory
System
System

The
The inventory
inventory
account
account is
is
continuously
continuously
updated
updated as
as
purchases
purchases and
and
sales
sales are
are made.
made.

The
The inventory
inventory
account
account is
is adjusted
adjusted

at
at the
the end
end of
of aa
reporting
reporting cycle.
cycle.


Perpetual Inventory System
Lothridge Wholesale Beverage Company (LWBC) begins
2013 with $120,000 in inventory. During the period it
purchases on account $600,000 of merchandise for resale
to customers.
2013
Inventory
Accounts payable

600,000
600,000

Purchase of merchandise inventory on account

Returns of inventory are credited to the inventory
account.
Discounts on inventory purchases can be recorded
using the gross or net method.
8-5

Perpetual Inventory System
During 2013, LWBC sold, on account, inventory with a retail
price of $820,000 and a cost basis of $540,000, to customers.
2013
Inventory
Accounts payable

600,000
600,000

Purchase of merchandise inventory on account.

2013
Accounts receivable
Sales revenue

820,000
820,000

Record sales on account.

Cost of goods sold
Inventory
Record cost of goods sold.

8-6

540,000
540,000

Periodic Inventory System
The periodic inventory system is not designed to track
either the quantity or cost of merchandise inventory. Cost
of goods sold is calculated, using the schedule below, after
the physical inventory count at the end of the period.

Beginning Inventory
+ Net Purchases
Cost of Goods Available for Sale

- Ending Inventory
= Cost of Goods Sold
8-7


Periodic Inventory System
Lothridge Wholesale Beverage Company (LWBC) begins
2013 with $120,000 in inventory. During the period it
purchases on account $600,000 of merchandise for resale
to customers.
2013
Purchases
Accounts payable
Purchase of merchandise inventory on account

8-8

600,000

600,000


Periodic Inventory System
During 2013, LWBC sold, on account, inventory with a retail
price of $820,000 to customers, and a cost basis of $540,000.
2013
Accounts receivable
Sales revenue

820,000
820,000

Record sales on account.

No entry is made to record Cost of Goods Sold. A physical count
of Ending Inventory shows a balance of $180,000. Let’s
calculate Cost of Goods Sold at the end of 2013.

8-9


Periodic Inventory System
Calculation of Cost of Goods Sold
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory
Cost of goods sold

$

120,000
600,000
720,000
(180,000)
$ 540,000

We need the following adjusting entry to record cost of good sold.
December 31, 2013
Cost of goods sold
Inventory (ending)
Inventory (beginning)
Purchases

540,000
180,000
120,000
600,000

To adjust inventory, close purchases, and record cost of goods sold.
8 - 10


Comparison of Inventory Systems

8 - 11


What is Included in Inventory?

General Rule
All goods owned by the company on the inventory
date, regardless of their location.

Goods
Goodsin
inTransit
Transit
Depends
Dependson
onFOB
FOB
shipping
shippingterms.
terms.
8 - 12

Goods
Goods on
on
Consignment
Consignment


Expenditures Included in Inventory
Invoice
InvoicePrice
Price

Purchase

Purchase
Returns
Returnsand
and
Allowances
Allowances

+
Freight-in
Freight-inon
on
Purchases
Purchases

8 - 13

Purchase
Purchase
Discounts
Discounts


Purchase Returns
On November 8, 2013, LWBC returns merchandise that had a cost
to LWBC of $2,000, and a cost basis to the seller of 1,600.
Periodic Inventory Method
November 8, 2013
Accounts payable
2,000
Purchase returns and allowances

2,000

Perpetual Inventory Method
Accounts payable
Inventory

2,000

Returns
Returns of inventory are credited to the Purchase Returns
and Allowances account when using the periodic
inventory method.
The returns are credited to Inventory using the perpetual
inventory method.
8 - 14

2,000


Purchase Discounts
Gross Method
October 5, 2013
Purchases
Accounts payable

20,000
20,000

October 14, 2013
Accounts payable

14,000
Purchase discounts
Cash
November 4, 2013
Accounts payable
Cash
Discount terms are
2/10, n/30.
$14,000
x 0.02
$ 280
8 - 15

Net Method

280
13,720

6,000
6,000

Partial payment not
made within the
discount period

Purchases
Accounts payable

19,600

Accounts payable
Cash

13,720

Accounts payable
Interest expense
Cash

5,880
120

19,600

13,720

6,000
$20,000
x 0.02
$ 400
-120
$ 280


Inventory Cost Flow Assumptions

•• Specific
Specific identification
identification
•• Average

Average cost
cost
•• First-in,
First-in, first-out
first-out (FIFO)
(FIFO)
•• Last-in,
Last-in, first-out
first-out (LIFO)
(LIFO)

8 - 16


Perpetual Average Cost
Picture This, LLC, uses a standard frame size for
all pictures to hold down product costs. The
following schedule shows the frame inventory for
Picture This, LLC, for September.
The physical inventory count at September 30
shows 1,400 frames in ending inventory.
Use the perpetual average cost method to
determine:
(1) Ending inventory cost
(2) Cost of goods sold
8 - 17


Perpetual Average Cost
Picture This, LLC

Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29

Units
1,200
900
550
600
800

Goods Available for Sale
Ending Inventory
Goods Sold

4,050
(1,400)
2,650

8 - 18

$/Unit
$ 22.00
24.00
25.00
27.00

28.00

Total
$ 26,400.00
21,600.00
13,750.00
16,200.00
22,400.00
$ 100,350.00
-


Perpetual Average Cost
Date
Purchased
Beg. Inv. 1,200 x $ 22.00 =
9/3
900 x
24.00 =
9/15
550 x
25.00 =
9/15

Average Cost
26,400 $
22.00
21,600
22.86
13,750

23.30

Sold

1000 x

23.30 =

$61,750 ÷ (1,200 + 900 + 550) = $23.30 rounded

8 - 19

23,300.00

Balance
$ 26,400.00
48,000.00
61,750.00
38,450.00


Perpetual Average Cost
Date
Purchased
Beg. Inv. 1,200 x $ 22.00 =
9-3
900 x
24.00 =
9-15
550 x

25.00 =
9-15 2,650
9-21
600
27.00
9-22

Average Cost
26,400 $
22.00
21,600
22.86
13,750
23.30

Sold

1000 x
16,200

23.30 =

24.29
700

24.29

Balance
$ 26,400.00
48,000.00

61,750.00
23,300.00
38,450.00
54,650.00
17,003.00
37,647.00

[(1,650
[(1,650 ×× $23.30)
$23.30) ++ (600
(600 ×× $27)]
$27)] ÷÷ 2,250
2,250 == $24.29
$24.29 rounded
rounded

8 - 20


Perpetual Average Cost
Date
Purchased
Beg. Inv. 1,200 x $ 22.00 =
9-3
900 x
24.00 =
9-15
550 x
25.00 =
9-15 2,650

9-21
600 x
27.00 =
9-22
9-29
800 x
28.00 =
9-30

Average Cost
26,400 $
22.00
21,600
22.86
13,750
23.30
16,200
22,400

1,550 × $ 24.29 = $
800 ×
28.00 =
2,350
$
Weighted Average Cost $

Sold

1000 x

23.30 =

700 x

24.29 =

950 x

25.55 =

24.29
25.55

Balance
$ 26,400.00
48,000.00
61,750.00
23,300.00
38,450.00
54,650.00
17,003.00
37,647.00
60,047.00
24,272.50
35,774.50

37,650
22,400
60,050
25.55

Ending inventory = 1,400 units × $25.55 = $35,770
Rounding error

8 - 21


Perpetual Average Cost
Picture This, LLC
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for Sale
Ending Inventory
Cost of Goods Sold

8 - 22

Units
1,200
900
550
600
800
4,050
1,400

2,650

$/Unit
$ 22.00
24.00
25.00
27.00
28.00

Total
$ 26,400.00
21,600.00
13,750.00
16,200.00
22,400.00
$ 100,350.00
35,774.50
$ 64,575.50


Weighted-Average Periodic System
Let’s use the same information to assign costs to
ending inventory and cost of goods sold using the
periodic system.
Ending Inventory
(1,400 units)
Available
Available
for
forSale

Sale
(4,050
(4,050units)
units)
Goods Sold
(2,650)

$100,350 ÷ 4,050 = $24.7778 weightedaverage per unit cost
8 - 23


Weighted-Average Periodic System
Picture This, LLC
Frame Inventory
Date
Beg. Inventory
9/3
9/15
9/21
9/29
Goods Available for Sale
Ending Inventory
Cost of Goods Sold

8 - 24

Units
1,200
900
550

600
800
4,050
(1,400)
2,650

$/Unit
$ 22.00
24.00
25.00
27.00
28.00
$ 24.7778
$ 24.7778

Total
$ 26,400.00
21,600.00
13,750.00
16,200.00
22,400.00
$ 100,350.00
(34,688.92)
$ 65,661.08


First-In, First-Out (FIFO)
The FIFO
method
assumes that

items are sold
in the
chronological
order of their
acquisition.
8 - 25

•• The
The cost
cost of
of the
the oldest
oldest
inventory
inventory items
items are
are
charged
charged to
to COGS
COGS
when
when goods
goods are
are sold.
sold.
•• The
The cost
cost of
of the

the
newest
newest inventory
inventory
items
items remain
remain in
in
ending
ending inventory.
inventory.