Inventories: Measurement

Sid Glandon, DBA, CPAAssociate Professor of Accounting

Classification

Merchandising Inventory– All costs of getting merchandise ready for sale

Manufacturing Inventory– Raw materials– Work in process

• Raw materials• Labor• Overhead

– Finished goods

Inventory Control

Perpetual Inventory System– Merchandise inventory– Cost of goods sold

Periodic Inventory System– Purchases– Purchase returns and allowances– Purchase discounts– Freight in

Perpetual Inventory SystemAccount Debit Credit

Inventory XXX Accounts payable XXXTo record the purchase of inventory

Account Debit CreditAccounts receivable XXX Sales XXXCost of goods sold XXX Inventory XXXTo record sales and related cost of goods sold

Periodic Inventory SystemAccount Debit Credit

Purchases XXX Accounts payable XXXTo record the purchase of inventory

Account Debit CreditAccounts receivable XXX Sales XXXTo record sales

Year-End Adjusting Journal Entry: Periodic Inventory System

Account Debit CreditIncome summary XXX Inventory XXXTo remove beginning inventory from the inventory account

Account Debit CreditInventory XXX Income Summary XXXTo record ending inventory in the inventory account

Physical Goods in Inventory

Goods in transit– f.o.b. shipping point– f.o.b. destination

Consigned goods Sales returns

– Sales with buyback agreement– Sales with high rates of return

Cost of Inventory

Purchases Purchase returns Purchase discounts

• Gross method– Record discount when payment is made

• Net method– Assume discount will be taken– Record interest expense on discounts not taken

Freight-in

Perpetual Inventory System: Partial Income Statement

Sales XXXCost of goods sold XXXGross profit XXX

Periodic Inventory System: Partial Income StatementSales XXXCost of goods sold: Beginning inventory XXX Purchases XXX Purchase discounts (XXX) Purchase returns and allowances (XXX) Total purchases XXX Freight-in XXX Net purchases XXX Goods available for sale XXX Ending inventory (XXX) Cost of goods sold XXX Gross profit XXX

Cost Flow Assumptions

Specific identification Average cost

– Periodic, weighted average for period– Perpetual, moving weighted average

FIFO (first-in, first-out) LIFO (last-in, first-out)

– Periodic, based on cost flow during period– Perpetual, based on each transaction

Dollar-Value LIFO

Measured in terms of dollar value, not physical quantity of goods

All amounts are converted to base-year prices

A layer is formed when– Ending inventory exceeds beginning

inventory (at base-year prices)