Prepared by Johnny Howard
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T E R M S Accounting for Inventory Physical inventory an actual counting of the merchandise on hand Perpetual inventory a running count of all inventory items, based on tracking each item as it comes into and goes out of inventory. 1 17 3
Figure 17.1 Inventory Sheet 17 4
Figure 17.2 Inventory Sheet 17 5
T E R M S Computing Inventory Using the Average Cost Method Ending inventory (EI) is the cost of the inventory on hand at the end of the period. The average cost method is based on the assumption that the cost for each item on hand is the average cost for items from the opening inventory and items purchased during the period. 2 17 6
E X A M P L E The Average Cost Method 2 17 7
T E R M S Computing Inventory Using the FIFO and LIFO Methods The first-in, first-out (FIFO) costing method assumes that the cost for units sold is determined in the order in which the units were purchased. Thus, the cost of the inventory remaining is assumed to be based on the price of the units received most recently. The last-in, first-out (LIFO) costing method is based on the assumption that the cost of the inventory remaining is determined by the cost of the units purchased the earliest. 2 17 8
E X A M P L E S The FIFO and LIFO Methods 2 17 9
to Determine the Lower of Cost or Market (LCM) Inventory Value 1. Compute the unit or total cost for each type of inventory item using the average, FIFO, or LIFO costing method. 2. Determine the market value for each inventory item. 3. Compare the cost value from Step 1 with the market value from Step 2 and choose the lower of the two. 4. Compute the extension amount for each item based on the lower amount. 5. Sum the amounts in Step 4 to determine the total inventory value under LCM. 3 17 10
E X A M P L E Computing Inventory at the Lower of Cost or Market Value Average Cost Method 3 2012 South-Western, a part of Cengage Learning 17 11
E X A M P L E Computing Inventory at the Lower of Cost or Market Value FIFO Method 3 17 12
E X A M P L E Estimating Inventory Value Using Cost of Goods Sold 4 17 13
Calculating Average Inventory BI = Beginning Inventory EI = Ending Inventory 17 14
to Compute Inventory Turnover at Retail 1. Determine net sales. 2. Compute average inventory using retail price. 3. Compute inventory turnover at retail: Net sales Average inventory at retail. to Compute Inventory Turnover at Cost 1. Compute the cost of goods sold using the formula BI + P EI = CGS. 2. Compute the average inventory at cost. 3. Compute inventory turnover at cost: Cost of goods sold Average inventory at cost 5 17 15
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Chapter Terms for Review average cost method average inventory beginning inventory (BI) cost of goods sold (CGS) ending inventory (EI) extension first-in, first-out (FIFO) costing method gross profit method inventory sheet inventory turnover inventory turnover at cost inventory turnover at retail last-in, first-out (LIFO) costing method lower of cost or market value (LCM) market value net sales perpetual inventory physical inventory purchases (P) 17 18
Assignment 17.1: Inventory Cost A Compute the extensions and totals. 17 19
Assignment 17.1: Inventory Cost A Compute the extensions and totals. 17 20
Assignment 17.1: Inventory Cost B Compute the value of ending inventory. 17 21
Assignment 17.1: Inventory Cost B Compute the value of ending inventory. 17 22
Assignment 17.1: Inventory Cost B Compute the value of ending inventory (cont d). 17 23
Assignment 17.2: Inventory Estimating and Turnover A Solve the following problems. 17 24
Assignment 17.2: Inventory Estimating and Turnover A Solve the following problems. 17 25
Assignment 17.2: Inventory Estimating and Turnover A Solve the following problems. 17 26
Assignment 17.2: Inventory Estimating and Turnover B Solve the following problems. 17 27
Assignment 17.2: Inventory Estimating and Turnover B Solve the following problems. 17 28
Assignment 17.2: Inventory Estimating and Turnover B Solve the following problems. 17 29
Assignment 17.2: Inventory Estimating and Turnover B Solve the following problems. 17 30
Assignment 17.2: Inventory Estimating and Turnover B Solve the following problems. 17 31
Assignment 17.2: Inventory Estimating and Turnover B Solve the following problems. 17 32
Assignment 17.2: Inventory Estimating and Turnover B Solve the following problems. 17 33