LEARN MORE...

Home
Documents
March 2021
7
Lecture 8 9

Lecture 8 9

Content type

User Generated

Uploaded By

wjevgrsbew7

Pages

Showing Page:

1/4

Introduction To Financial Accounting Sarath Fall 2013

Page | 13

Lecture 8: Inventories Chapter 6

As we saw in chapter 5, there are two methods for calculating Cost of Goods Sold: (1) perpetual

where firms make journal entries for goods sold and then add up all journal entries -- if the

ending inventory is lower, an adjusting entry is required; (2) Periodic where (in theory), no

entries are made till the end of the period when a single entry to COGS is made. In practice,

almost all firms track inventory on a specific identification perpetual basis. However for

reporting purposes, they almost always use the periodic method.

Example

A firm starts with $100 of inventory, purchases $200 during the period and has three journal

entries for cost of goods sold that add up to $180. The ending inventory is $100.

1) How much inventory is missing?

2) Journal Entry for missing inventory

FIFO vs. LIFO

FIFO stands for First-in-First out; LIFO for Last-in-First-out. Both types of "inventory

processes" are common in practice.

Example

McDonalds uses both FIFO and LIFO. For example, The French Fries cooked first are sold first -

- new french fries are made only after the old fries have been used up. This is FIFO. At the end

of the evening, McDonald employees fill up the Ketchup bottles so that they will be full for

customers the next day -- what kind of a process is this? How old is the Ketchup at the bottom?

Firms that use LIFO Periodic actually sell units on a FIFO basis but use LIFO for inventory costs

-- you have to understand that (unlike the Ketchup Bottle) only the costs are old not the units.

Example:

Heinz started the month with 1,000 ketchup bottles that cost $1 to manufacture. During the

month they sold all the Ketchup. At the end of the month they made a new batch of 1,000

Ketchup bottles that cost $1.50 to manufacture. Heinz uses LIFO periodic for calculating

COGS.

How many bottles are in end inventory?

What is the value of end inventory?

What is COGS?

How would the answer be different if LIFO perpetual were used?

Showing Page:

2/4

Introduction To Financial Accounting Sarath Fall 2013

Page | 14

Method

Perpetual vs. Periodic

Used for financial

Reporting by:

Specific Identification

No difference

FIFO

No difference

Firms whose prices are

decreasing such as

Weighted Average

Different

Firms whose prices

fluctuate such as

LIFO

Different

Firms whose prices

increase such as

Inventories must be reported at lower-of-cost-or market. We have discussed in detail how to

measure cost (e.g. include Freight cost and insurance). The definition of market-value is much

harder. In intermediate accounting, you will learn about different methods for measuring market

value. For now, we will assume market value is given as in the next problem.

E 6-9

Americus Camera Shop uses the lower-of-cost-or-market basis for its inventory. The

following data are available at December 31.

Item

Units

Unit Cost

Market

Cameras:

Minolta

$170

$156

Canon

150

152

Light meters:

Vivitar

125

115

Kodak

120

135

Instructions : Determine the amount of the ending inventory by applying the lower-of-cost-or-

market basis.

Cost

Market

LCM

Minolta

850

780

Canon

900

912

900

Vivitar

1500

1380

Kodak

1680

1620

$4680

Showing Page:

3/4

End of Preview - Want to read all 4 pages?

Access Now

Unformatted Attachment Preview

Introduction To Financial Accounting Sarath Fall 2013 Lecture 8: Inventories Chapter 6 As we saw in chapter 5, there are two methods for calculating Cost of Goods Sold: (1) perpetual where firms make journal entries for goods sold and then add up all journal entries -- if the ending inventory is lower, an adjusting entry is required; (2) Periodic where (in theory), no entries are made till the end of the period when a single entry to COGS is made. In practice, almost all firms track inventory on a specific identification perpetual basis. However for reporting purposes, they almost always use the periodic method. Example A firm starts with $100 of inventory, purchases $200 during the period and has three journal entries for cost of goods sold that add up to $180. The ending inventory is $100. 1) How much inventory is missing? 2) Journal Entry for missing inventory FIFO vs. LIFO FIFO stands for First-in-First out; LIFO for Last-in-First-out. Both types of "inventory processes" are common in practice. Example McDonalds uses both FIFO and LIFO. For example, The French Fries cooked first are sold first - new french fries are made only after the old fries have been used up. This is F ...
Purchase document to see full attachment