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Introduction To Financial Accounting Sarath Fall 2013
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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?

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Introduction To Financial Accounting Sarath Fall 2013
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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
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
780
Canon
900
912
900
Vivitar
1500
1380
1380
Kodak
1680
1620
1620
$4680

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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 ...
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