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7

InventoriesInventories


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1. Describe the importance of control

over inventory.2. Describe three inventory cost flow

assumptions and how they impact the

income statement and balance sheet.

After studying this chapter, you should

be able to:


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3

3

3. Determine the cost of inventory under the

perpetual system, using the FIFO, LIFO, andaverage cost methods.


be able to:

4. Determine the cost of inventory under the

periodic system, using the FIFO, LIFO, and

average cost methods.5. Compare and contrast the use of the three

inventory costing methods.


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4

4

6. Describe and illustrate the reporting of

merchandise inventory in the financialstatement.


be able to:

7. Estimate the cost of inventory using the

retail method and the gross profit

method.


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5

5

Describe the importance of

control over inventory.

Objective 1Objective 1

7-1


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6

7-1

Two primary objectives of control

over inventory are:1) Safeguarding the inventory, and

2) Properly reporting it in the

financial statements.


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7

7-1

Controls over inventory

include developing and usingsecurity measures to prevent

inventory damage or customer

or employee theft.


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8

7-1

To ensure the accuracy of the

amount of inventory reported inthe financial statements, a

merchandising business should

take aphysical inventory.


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9

9

Describe three inventory costflow assumptions and how they

impact the income statement

and balance sheet.


7-2


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10

1010

7-2Inventory Costing Methods


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11

1111

7-2

(Continued)


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12

1212

7-2

(Continued)


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13

1313

7-2

(Concluded)


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14

250

200

150

100

50

0FIFO Average Specific

Indentification

Inventory Costing Methods In Indonesia 7-2


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1514

400

300

200

100

0

371

299

130

FIFO LIFO Average cost

Inventory Costing Methods In USA 7-2

Number of firms

(> $1B Sales)


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7-2-

Example Exercise 7-1

The three identical units of Item QBM are purchased during

February, as shown below.

Feb. 8 Purchase 1 Rp45,000

15 Purchase 1 48,00026 Purchase 1 51,000

15

Item QBM Units Cost

Assume that one unit is sold on February 27 for Rp70,000.

Determine the gross profit for February and ending inventory on

February 28 using (a) first-in, first-out (FIFO); (b) last-in, first-out

(LIFO); and (c) average cost methods.

Total 3 Rp144,000

Average cost per unit Rp48,000 (Rp144,000 3 units)


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Follow My Example 7-1

16

7-2

For Practice: PE 7-1A, PE 7-1B

Gross Profit Ending Inventory

(a) First-in, first-out (FIFO): Rp25,000 (Rp70,000 Rp45,000) Rp99,000 (Rp48,000 Rp51,000)

(b) Last-in, first-out (LIFO): Rp19,000 (Rp70,000 Rp51,000) Rp93,000 (Rp45,000 + Rp48,000)

(c) Average cost: Rp22,000 (Rp70,000 Rp48,000) Rp96,000 (Rp48,000 x 2)

$144/3 units


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18

18

Determine the cost ofinventory under the perpetual

inventory system, using

FIFO, LIFO, and averagecost methods.


7-3


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19

1918

On January 1, the firm had 100 units of

Item 127B that cost Rp20,000 per unit.

7-3FIFO Perpetual

Item

127BUnits Cost

Jan. 1 Inventory 100 Rp20,000


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2019

7-3FIFO Perpetual

On January 4, the firm sold 70 units

of 127B at Rp30,000 each.

Item

127BUnits Cost


4 Sale 70


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21

7-3FIFO Perpetual

On January 22, the firm sold twenty

units at $30.

4 Accounts Receivable 2 100 000

Sales 2 100 000

4 Cost of Merchandise Sold 1 400 000

Merchandise Inventory 1 400 000



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2221

Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost

4 70 20 1,400 30 20 600

7-3FIFO Perpetual

Jan. 1 100 20 2,000

The cost was in Rp000


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2322

On January 10, the firm purchased

80 units at Rp21,000 each.

7-3FIFO Perpetual

Item 127B

Units Cost


4 Sale 70

10 Purchase 80 21,000


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2423

10 Merchandise Inventory 1 680 000

Accounts Payable 1 680 000



7-3FIFO Perpetual


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2524

Item 127B




Jan. 1 100 20 2,000

4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600

80 21 1,680

7-3FIFO Perpetual



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26

2625


for Rp30,000 each.

7-3FIFO Perpetual

Item 127B

Units Cost


4 Sale 70

10 Purchase 80 21,000

22 Sale 40


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27

27

7-3FIFO Perpetual


units at $30.


Sales 1 200 000

22 Cost of Merchandise Sold 810 000

Merchandise Inventory 810 000


for Rp30,000 each.

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28

2827

Item 127B




Jan. 1 100 20 2,000

4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600

80 21 1,680

22 30 20 600

10 21 210 70 21 1,470

7-3FIFO Perpetual

Of the forty sold, thirty are considered to be from

those acquired at Rp20,000 each. The other ten are

considered to be from the January 10 purchase.



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On January 28, the firm sold 20

units at Rp30,000 each.

7-3FIFO Perpetual

Item 127B

Units Cost


4 Sale 70

10 Purchase 80 21,000

22 Sale 40

28 Sale 20

28


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3029

7-3FIFO Perpetual

28 Accounts Receivable 600 000

Sales 600 000






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3130

Item 127B




Jan. 1 100 20 2,000

4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600

80 21 1,680

22 30 20 600

10 21 210 70 21 1,470

28 20 21 420 50 21 1,050

7-3FIFO Perpetual

Unit Cost and Total Cost is in Rp000


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Item

127BUnits Cost


4 Sale 70

10 Purchase 80 21,000

22 Sale 40

28 Sale 20

30 Purchase 100 22,000

7-3FIFO Perpetual

On January 30, purchased ten additional

units of Item 127B at Rp22,000 each.


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3332

On January 30, purchased ten additional

units of Item 127B at Rp22,000 each.

7-3FIFO Perpetual




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3433

Item 127B




Jan. 1 100 20 2,000

4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600

80 21 1,680

22 30 20 600

10 21 210 70 21 1,470

28 20 21 420 50 21 1,050

30 100 22 2,200 50 21 1,050

100 22 2,200

7-3FIFO Perpetual

Unit Cost and Total Cost is in Rp000


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3534

Item 127B




Jan. 1 100 20 2,000

4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600

80 21 1,680

22 30 20 600

10 21 210 70 21 1,470

28 20 21 420 50 21 1,050

30 100 22 2,200 50 21 1,050

100 22 2,200

7-3FIFO Perpetual

Cost of merchandise sold for

January is Rp2,630,000.Unit Cost and Total

Cost is in Rp000


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Item 127B




Jan. 1 100 20 2,000

4 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600

80 21 1,680

22 30 20 600

10 21 210 70 21 1,470

28 20 21 420 50 21 1,050

30 100 22 2,200 50 21 1,050

100 22 2,200

7-3FIFO Perpetual

January 31, inventory is Rp3,250,000

(Rp1,050,000 + Rp2,200,000)35



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7-3-


Beginning inventory, purchases, and sales for Item ER27

are as follows:

Nov. 1 Inventory 40 units at Rp5,000

5 Sale 32 units

11 Purchase 60 units at Rp7,000

21 Sale 45 units

36

Assuming a perpetual inventory system and the first-in,

first-out (FIFO) method, determine (a) the cost of themerchandise sold for the November 21 sale and (b) the

inventory on November 30.


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7-3


a) Cost of merchandise sold:

8 units @ Rp5,000 Rp40,000

37 units @ Rp7,000 259,000

45 units Rp299,000

b) Inventory, November 30:

Rp161,000 = (23 units x Rp7,000)


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3938

On January 1, the firm had 100 units of

Item 127B that cost Rp20,000 per unit.

7-3LIFO Perpetual

Item 127B

Units Cost



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4039

7-3LIFO Perpetual



Item 127B

Units Cost


4 Sale 70


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41

7-3LIFO Perpetual


units at $30.


Sales 2 100 000

4 Cost of Merchandise Sold 1 400 000

Merchandise Inventory 1 400 000



40


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4241

Item 127B




4 70 20 1,400 30 20 600

7-3LIFO Perpetual

Jan. 1 100 20 2,000

The unit cost and total cost is in Rp000


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4342



7-3LIFO Perpetual

Item 127B

Units Cost


4 Sale 70

10 Purchase 80 21,000

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7-3LIFO Perpetual

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4544

Item 127B




Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600

80 21 1,680

7-3LIFO Perpetual


46


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4645


for Rp30,000 each.

7-3LIFO Perpetual

Item 127B

Units Cost


4 Sale 70

10 Purchase 80 21,000

22 Sale 40

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47

7-3LIFO Perpetual


units at $30.


Sales 1 200 000




for Rp30,000 each.

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48


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Item 127B




Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

10 80 21 1,680 30 20 600

80 21 1,680

22 40 21 840 30 20 600

40 21 840

7-3LIFO Perpetual

All of the 40 sold are considered to be fromthe January 10 purchase.


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7-3LIFO Perpetual

48

Item 127B

Units Cost


4 Sale 70

10 Purchase 80 21,000

22 Sale 40

28 Sale 20

50


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5049

7-3LIFO Perpetual

28 Accounts Receivable 600 000

Sales 600 000





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5150

Item 127B




Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

28 20 21 420 30 20 600

20 21 420

7-3LIFO Perpetual

22 40 21 840 30 20 600

40 21 840

10 80 21 1,680 30 20 600

80 21 1,680

All of the 20 sold are considered to be from

the January 22 purchase.


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5251

Item 127B

Units Cost


4 Sale 70

10 Purchase 80 21,000

22 Sale 40

28 Sale 20

30 Purchase 100 22,000

7-3LIFO Perpetual

On January 30, the firm purchased one hundred

additional units of Item 127B at Rp22,000 each.

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5352

On January 30, the firm purchased one hundred

additional units of Item 127B at Rp22,000 each.

7-3LIFO Perpetual



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5433

7-3LIFO Perpetual

53

Item 127B




Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

28 20 21 420 30 20 600

20 21 420

7-3LIFO Perpetual

22 40 21 840 30 20 600

40 21 840

10 80 21 1,680 30 20 600

80 21 1,680

30 100 22 2,200 30 20 600

20 21 420

100 22 2,200


55


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5533

7-3LIFO Perpetual

54

Item 127B




Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

28 20 21 420 30 20 600

20 21 420

7-3LIFO Perpetual

22 40 21 840 30 20 600

40 21 840

10 80 21 1,680 30 20 600

80 21 1,680

30 100 22 2,200 30 20 600

20 21 420

100 22 2,200Cost ofmerchandise sold Rp2,660,000Cost ofmerchandise sold Rp2,660,000


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5633

7-3LIFO Perpetual

55

Item 127B




Jan. 1 100 20 2,0004 70 20 1,400 30 20 600

28 20 21 420 30 20 600

20 21 420

7-3LIFO Perpetual

22 40 21 840 30 20 600

40 21 840

10 80 21 1,680 30 20 600

80 21 1,680

30 100 22 2,200 30 20 600

20 21 420

100 22 2,200

January 31, inventory..Rp3,220,000January 31, inventory..Rp3,220,000


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7-3-


Beginning inventory, purchases, and sales for Item ER27

are as follows:

Nov. 1 Inventory 40 units at Rp5,000

5 Sale 32 units

11 Purchase 60 units at Rp7,000

21 Sale 45 units

56

Assuming a perpetual inventory system and the last-in,

first-out (LIFO) method, determine (a) the cost of themerchandise sold for the November 21 sale and (b) the

inventory on November 30.

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57

7-3


a) Cost of merchandise sold:

Rp315,000 = (45 units x Rp7,000)

b) Inventory, November 30:

8 units @ Rp5,000 Rp 40,000

15 units @ Rp7,000 105,000

23 Rp145,000

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59

Determine the cost of inventory

under the periodic inventory

system, using FIFO, LIFO, and

average cost methods.


7-4

60


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60

Using FIFO, the earliest

batch purchased is

considered the first batchof merchandise sold. The

physical flow does not

have to match theaccounting method chosen.

7-4FIFO Periodic

61


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6160

=Rp2,000,000

= 1,680,000

= 2,200,000

Cost of merchandise

available for sale

7-4FIFO Periodic

100 units @ Rp20,000100 units @ Rp20,000

80 units @ Rp21,00080 units @ Rp21,000

100 units @ Rp22,000100 units @ Rp22,000

280 units available

for sale duringyear

Jan. 1

Jan. 10

Jan. 30

Rp5,880,000

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6261

7-4FIFO Periodic

The physical count on January 31 shows that 150

units are on hand (conclusion: 130 units were

sold). What is the cost of the ending inventory?

= Rp 0

= 1,050,000

= 2,200,000

100 units @ $20100 units @ $20

80 units @ $2180 units @ $21

100 units @ $22100 units @ $22

Jan. 1

Jan. 10

Jan. 30

Sold these

Sold 30 of these

50 units @ Rp21,00050 units @ Rp21,000

100 units @ Rp22,000100 units @ Rp22,000

Ending inventory Rp3,250,000

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7-4FIFO Periodic

Now we can calculate the cost of goods

sold as follows:

Beginning inventory, January 1 (Slide 60) Rp2,000,000

Purchases (Rp1,680,000 + Rp2,200,000) 3,880,000Cost of merchandise available for sale Rp5,880,000

Ending inventory, January 31(Slide 61) 3,250,000

Cost of merchandise sold Rp2,630,000

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64


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64

Using LIFO, the most recent batch

purchased is considered the first batch of

merchandise sold. The actual flow of goodsdoes not have to be LIFO. For example, a

store selling fresh fish would want to sell the

oldest fish first (which is FIFO) even though

LIFO is used for accounting purposes.

7-4LIFO Periodic

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7-4LIFO Periodic

64

=Rp2,000,000

= 1,680,000

= 2,200,000

Cost of merchandise

available for sale

100 units @ Rp20,000100 units @ Rp20,000

80 units @ Rp21,00080 units @ Rp21,000

100 units @ Rp22,000100 units @ Rp22,000

280 units available

for sale duringyear

Jan. 1

Jan. 10

Jan. 30

Rp5,880,000

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6665

7-4LIFO Periodic

Assume again that the physical count on January

31 is 150 units (and that 130 units were sold).

What is the cost of the ending inventory?

=Rp2,000,000

= 1, 680

= 2,200

100 units @ Rp20,000100 units @ Rp20,000

80 units @ $2180 units @ $21

100 units @ $22100 units @ $22

Jan. 1

Jan. 10

Jan. 30 Sold these

Sold 30 of these

50 units @ Rp21,00050 units @ Rp21,000

= 0

= 1,050,000

Ending inventory Rp3,050,000

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6766

7-4LIFO Periodic


sold as follows:





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The weighted average unit cost

method is based on the average

cost of identical units. The totalcost of merchandise available

for sale is divided by the related

number of units of that item.

7-4Average Cost

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7-4Average Cost

Rp5,880,000

=Rp2,000,000

= 1,680,000

= 2,200,000

100 units @ Rp20,000100 units @ Rp20,000

80 units @ Rp21,00080 units @ Rp21,000

100 units @ $22100 units @ $22

280

Jan. 1

Jan. 10

Jan. 30

Average unit cost: Rp5,880,000 280 = Rp21,000

Cost of merchandise sold: 130 units at Rp21,000 = Rp2,730,000

Ending merchandise inventory: 150 units at Rp21,000=

Rp3,150,000

68

100 units @ Rp22,000100 units @ Rp22,000

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7069

7-4


sold as follows:





Average Cost

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71

7-4-


The units of an item available for sale during the year were as

follows:

Jan. 1 Inventory 6 units @ Rp50,000 Rp 300,000

Mar. 20 Purchase 14 units @ Rp55,000 770,000Oct. 30 Purchase 20 units @ Rp62,000 1,240,000

Available for sale 40 units Rp 2,310,000

70

There are 16 units of the item in the physical inventory at

December 31. The periodic inventory system is used.Determine the inventory cost by (a) the first-in, first-out

(FIFO) method, (b) the last-in, first-out (LIFO) method, and

(c) the average cost method.

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71

7-4


a) First-in, first-out (FIFO) method: Rp992,000 (16 units

x Rp62,000)

b) Last-in, first-out (LIFO) method: Rp850,000 (6 units

x Rp50,000) + (10 units x Rp55,000)

c) Average method: Rp924,000 (16 units x

Rp57,750) where average cost = Rp57,750

(Rp2,310,000 40 units)

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73

Compare and contrast the

use of the three inventory

costing methods.


7-5

74


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7473

7-5Partial Income Statements

Net sales Rp3,900,000

Cost of merchandise sold:

Beginning inventory Rp2,000,000Purchases 3,880,000

Merchandise available for sale Rp5,880,000

Less ending inventory 3,250,000

Cost of merchandise sold 2,630,000

Gross profit Rp1,270,000

First-In, First-Out

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7574




Beginning inventory Rp2,000,000

Purchases 3,880,000Merchandise available for sale Rp5,880,000




Average Cost

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7675




Beginning inventory Rp2,000,000

Purchases 3,880,000Merchandise available for sale Rp5,880,000




Last-In, First-Out

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77

7-5Recap

Weighted

FIFO LIFO Average

Ending inventory Rp3,250,000 Rp3,150,000 Rp3,050,000

Cost of merchandise sold Rp2,630,000 Rp2,730,000 Rp2,830,000

Gross profit Rp1,270,000 Rp1,170,000 Rp1,070,000

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78

Describe and illustrate thereporting of merchandise

inventory in the financial

statements.


7-6

79


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7-6

If the cost of replacing an

item in inventory is lower

than the original purchasecost, the lower-of-cost-or-

market(LCM) methodis

used to value the inventory.

Lower-of-Cost-or-Market Method

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80

7-6

Market, as used in lower

of cost or market, is the

cost to replace the

merchandise on the

inventory date.

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7-6

Cost and replacement cost can be

determined for

1) each item in the inventory,2) major classes or categories of

inventory, or

3) the inventory as a whole.

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82

A B C D E F G

Unit Unit

Inventory Cost Market ower

Commodity Quantity Price Price Cost Market of C or M1 A 400 Rp10,250 Rp 9,500 Rp4,100,000 Rp3,800,000 Rp3,800,000 1

2 B 120 22,500 24,100 2,700,000 2,892,000 2,700,000 2

3 C 600 8,000 7,750 4,800,000 4,650,000 4,650,000 3

4 D 280 14,000 14,750 3,920,000 4,130,000 3,920,000 4

5 Total Rp15,520,000 Rp15,472,000 Rp15,070,000 5

Total

De te rm in in g I n v e n t o r y a t

o w e r -o f-C o s t -o r-M a rk e t

M e tho d

7-6

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7-6

Merchandise that is out of date,

spoiled, or damaged should be

written down to its net realizablevalue. This is the estimated

selling price less any direct cost

of disposal, such as sales

commissions.

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84

7-6Merchandise Inventory on the

Balance Sheet

Merchandise inventory is usually

presented in the Current Assets

section of the balance sheet,

following receivables.

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85

7-6

The method of

determining the cost ofinventory (FIFO, LIFO,

or weighted average)

should be shown.

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86

7-6-


On the basis of the following data, determine the value

of the inventory at the lower of cost or market. Apply

lower of cost or market to each inventory item as shown

in Exhibit 7.

85

Inventory Unit Unit

Commodity Quantity Cost Price Market Price

C17Y 10 Rp 39,000 Rp 40,000

B563 7 Rp 110,000 98,000

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87


86For Practice: PE 7-5A, PE 7-5B

Unit Unit Lower of

Commodity Qty Cost Price Market Price Cost Market C or M

C17Y 10 Rp 39,000 Rp 40,000 Rp 390,000 Rp 400,000 Rp 390,000

B563 7 110,000 98,000 770,000 686,000 686,000

Total Rp1,160,000 Rp1,086,000 Rp1,076,000

7-6-

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88

7-6-


Agung Jaya Motor Shop incorrectly counted its

December 31, 2008 inventory as Rp250,000,000

instead of the correct amount of Rp220,000,000.

Indicate the effect of the misstatement on Agung

Jaya Motor Shop December 31, 2008 balance sheet

and income statement for the year ended December

31, 2008.

87

89

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89



7-6-

Amount of Misstatement

Overstatement (Understatement)

Balance Sheet:

Merchandise inventory overstated Rp 30,000,000

Current assets overstated 30,000,000Total assets overstated 30,000,000

Owners equity overstated 30,000,000

Income Statement:

Cost of merchandise sold understated Rp(30,000,000)

Gross profit overstated 30,000,000Net income overstated 30,000,000

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90

Estimate the cost ofinventory, using the retail

method and the gross profit

method.


7-7

91


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91

The retail inventory methodof estimating inventory

cost is based on therelationship of the cost ofmerchandise available for

sale to the retail price of the

same merchandise.

7-7Retail Inventory Method

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92

A B C

Cost Retai l

1 Merchandise inventory, January 1 Rp19,400,000 Rp36,000,000 1

2 Purchases in January (net) 42,600,000 64,000,000 2

3 Merchandise available for sale Rp62,000,000 Rp100,000,000 3

5 Sales for January (net) 70,000,000 5

6 Merchandise inventory, January 31, at retail Rp30,000,000 6

7 Merchandise inventory, January 31, at estimated cost 7

8 (Rp30,000,000 x 62%) Rp18,600,000 8

44Ratio of cost to retai l price: (Rp 62,000,000:Rp

100,000,000) = 62%

Determining Inventory by

the Retail Method7-7

93

7 7


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93

7-7


A business using the retail method of inventory costing

determines that merchandise inventory at retail is

Rp900,000,000. If the ratio of cost to retail price is

70%, what is the amount of inventory to be reported on

the financial statements?

92


Rp630,000,000 (Rp900,000,000 x 70%)


94

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94

Thegross profit methoduses

the estimated gross profit for theperiod to estimate the inventory

at the end of the period.

7-7Gross Profit Method

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A B C

Cost Retai l

1 Merchandise inventory January 1 Rp 57,000,000 1

2 Purchases in January (net) 180,000,000 2

3 Merchandise available for sale Rp 237,000,000 3

4 Sales for January (net) Rp 250,000,000 4

5 Less estimated gross profit (Rp250,000 x 30%) 75,000,000 5

6 Estimated cost of merchandise sold 175,000,000 6

7 Estimated merchandise inventory, January 31 Rp 62,000,000 7

Estimating Inventory by

Gross Profit Method

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The gross profit method is useful for

estimating inventories for monthly orquarterly financial statements in a

periodic inventory system.

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Based on the following data, estimate the cost of ending

merchandise inventory:

Sales (net) Rp1,250,000,000

Estimated gross profit rate 40%

Beginning merchandise inventory Rp100,000,000

Purchases (net) 800,000,000Merchandise available for sale Rp900,000,000

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Merchandise available for sale Rp900,000,000

Less cost of merchandise sold[Rp1,250,000,000 x (100% 40%)] 750,000,000

Estimated ending merchandise inventory Rp150,000,000

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Inventory turnovermeasures the

relationship between the volume of goods

(merchandise) sold and the amount of

inventory carried during the period.

Inventory turnover =Cost of merchandise sold

Average inventory

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HERO RIMO

Cost Of Merchandise Sold Rp4,035,116,000,000 Rp87,696,796,439

Inventories

Beginning Of Year Rp427,941,000,000 Rp24,907,993,901End Of Year Rp494,919,000,000 Rp28,537,693,305

Average Rp461,430,000,000 Rp26,722,843,603

Inventory Turnover 8.74 times 3.28 times

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Generally, the larger the

inventory turnover, the moreefficient and effective the

management of inventory.

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The number of days sales in

inventory is a rough measure of the

length of time it takes to acquire,

sell, and replace the inventory.

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Average inventory

Average daily cost of

merchandise sold

Number of days

sales in inventory =

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HERO RIMO

Average Daily Cost Of Merchandise Sold

Rp16,681,472,000/365 Rp11,055,112,328.77

Rp1,157,226,000/365 Rp240,265,196Average Inventory Rp461,430,000,000 Rp26,722,843,603

Number Of Days' Sales in Inventory 41.74 days 111.22 days

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war22e_ch07 revisi

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