ACCT 209 Lecture Notes - Lecture 7: Weighted Arithmetic Mean, Matching Principle, European Cooperation In Science And Technology

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Chapter 6 INVENTORIES

Inventory and the matching principle:

Inventory is an asset when purchased

Becomes expense when it is sold

(cost of goods sold)

INVENTORY COST FLOW METHODS

Cost of inventory must be allocated between units sold during period (expense) and

units left on hand at end of period (asset)

Problem:

Counting the number of items on hand at the end of the period is relatively easy.

Sometimes, though, the same item purchased at different times will have a different cost.

So how do we assign a dollar cost to the units left in inventory and a dollar cost to the units

sold during the period?

Ex: identical light bulbs at the beginning of the year and at the end of the year cost a

diff. amt.

Solution: inventory cost flow methods

1. specific ID method –

each item is uniquely identifiable

2. weighted average method

Assumes that all unit available for sale have the same weighted average cost

3. FIFO –

“First i, first out” e: ilk o the raks i the groer store before they expire)

It assumes that items are sold in the same order as they were purchased.

4. LIFO –

“Last i, first out” e: takig soethig off the top of the pile

It assumes items are sold in reverse of the order purchased

NOTE: The cost flow method chosen does not hae to ath the opa’s physical flow of

goods.

Consistency is important!

The company must use the same method year after year.

B if ou keep sithig ethods ou a’t opare.

(if they change, they have to talk to the auditors and the SEC)

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Example: Inventory cost flow (valuation) methods

Units Purchase price Total purchase

per unit

Beginning inventory 10 $ 5 $ 50

Purchases:

Oct 2 8 6 48

Oct 5 5 9 45

Oct 21 7 10 70

$213

Ending inventory 12

Determine the dollar amount that will be assigned to the ending inventory and cost of

goods sold using:

a. weighted average method

b. FIFO

c. LIFO

Comparing inventory cost flows methods

FIFO

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Document Summary

Becomes expense when it is sold (cost of goods sold) Cost of inventory must be allocated between units sold during period (expense) and units left on hand at end of period (asset) Counting the number of items on hand at the end of the period is relatively easy. Sometimes, though, the same item purchased at different times will have a different cost. So how do we assign a dollar cost to the units left in inventory and a dollar cost to the units sold during the period? diff. amt. Solution: inventory cost flow methods: specific id method . Ex: identical light bulbs at the beginning of the year and at the end of the year cost a each item is uniquely identifiable: weighted average method, fifo . Assumes that all unit available for sale have the same weighted average cost. First i(cid:374), first out (cid:894)e(cid:454): (cid:373)ilk o(cid:374) the ra(cid:272)ks i(cid:374) the gro(cid:272)er(cid:455) store before they expire)

Related Questions

Oahu Kiki tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each month, as if it usees a periodic inventory system. Assume Oahu Kiki's records how the following for the month of January. Sales totaled 330 units. Dates Units Unit Cost Total Cost Beginning Inventory January 1 Units 300 Unit Cost $90 Total Cost $27,000 Purchase January 15 Units 400 Unit Cost 100 Total Cost 40,000 Purchase January 24 Units 300 Unit Cost 120 Total Cost 36,000 Required: 1. Calculate the number and cost of goods available for sale Number of Goods Available for Sale Cost of Goods Available for Sale 2. Calculate the number of units in ending inventory. Ending Inventory units 3. Calculate the cost of ending inventory and cost of goods sold using the (a) FIFO, (b) LIFO, and (c)weighted average cost methods. Cost of Ending Inventory FIFO, LIFO, Weighted Average Cost Cost of Goods Sold FIFO, LIFO, Weighted Average Cost

periwinklelizard760

E7-6 Analyzing and Interpreting the Financial Statement Effects of Periodic FIFO, LIFO, and Weighted Average Cost [LO 7-3]

Orion Iron Corp. tracks the number of units purchased and sold throughout each year but applies its inventory costing method at the end of the year, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

Transactions	Units		Unit Cost
a. Inventory, Beginning		350	$	14
For the year:
b. Purchase, April 11		950		12
c. Purchase, June 1		700		15
d. Sale, May 1 (sold for $42 per unit)		350
e. Sale, July 3 (sold for $42 per unit)		610
f. Operating expenses (excluding income tax expense), $18,000

Required:

1.	Calculate the number and cost of goods available for sale.

2.	Calculate the number of units in ending inventory.

3.	Compute the cost of ending inventory and cost of goods sold under (a) FIFO, (b) LIFO, and (c) weighted average cost. (Do not round intermediate calculations. Round your final answers to the nearest dollar amount.)

4.	Prepare an Income Statement that shows the FIFO method, LIFO method and weighted average method.

Which inventory costing method minimizes income taxes?

A.	FIFO
b.	LIFO
C.	Weighted Average Cost

chocolateelephant868

PA7-1 Analyzing the Effects of Four Alternative Inventory Methods in a Periodic Inventory System [LO 7-3]

Gladstone Company tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each period, as if it uses a periodic inventory system. Assume its accounting records provided the following information at the end of the annual accounting period, December 31.

Transactions		Units			Unit Cost
Beginning inventory, January 1			1,600		$	45
Transactions during the year:
a.	Purchase, January 30		2,300			49
b.	Sale, March 14 ($100 each)		(1,250	)
c.	Purchase, May 1		1,000			75
d.	Sale, August 31 ($100 each)		(1,500	)

Assuming that for Specific identification method (item 1d) the March 14 sale was selected two-fifths from the beginning inventory and three-fifths from the purchase of January 30. Assume that the sale of August 31 was selected from the remainder of the beginning inventory, with the balance from the purchase of May 1.

Required:
1.	Compute the amount of goods available for sale, ending inventory, and cost of goods sold at December 31 under each of the following inventory costing methods: (Round intermediate calculations to 2 decimal places and final answers to the nearest whole dollar amount.)

2-a.

Of the four methods, which will result in the highest gross profit?

	Last-in, first-out
	Weighted average cost
	First-in, first-out
	Specific identification

2-b.

Of the four methods, which will result in the lowest income taxes?

	Last-in, first-out
	Weighted average cost
	First-in, first-out
	Specific identification

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ACCT 209 Lecture Notes - Lecture 7: Weighted Arithmetic Mean, Matching Principle, European Cooperation In Science And Technology

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