Accounting for

Inventories

Learning Outcomes
1. Explain the cost of purchase, cost of
conversion and other costs pertaining to
inventories,
2. Determine the ending inventories and
cost of goods sold using different
measurement techniques under the
perpetual and periodic inventory system,
and
3. Measure the inventories at the lower at
cost and net realisable value

Recording and Measuring

Inventory
Types of Inventory

Merchandise
Inventory

Manufacturin
g Inventory

Goods acquired
for resale

Raw Materials
work-inprogress
Finished Goods

Inventory Systems
Two accounting systems are used to record
transactions involving inventory:
Perpetual
Perpetual
Inventory
Inventory
System
System
The
The inventory
inventory
account
account is
is
continuously
continuously
updated
updated as
as
purchases
purchases and
and
sales
sales are
are made.
made.

Periodic
Periodic
Inventory
Inventory
System
System
The
The inventory
inventory
account
account is
is
adjusted
adjusted at
at the
the
end
end of
of aa
reporting
reporting cycle.
cycle.

Perpetual vs Periodic
Illustration:
Beginning inventory 100 units at RM6 = RM600
Purchases
900 units at RM6 = RM5,400
Sales
600 units at RM12 = RM7,200
Ending inventory
400 units at RM6 = RM2,400

Perpetual vs Periodic

What is Included in
Inventory?
General Rule
All goods owned by the company on the
inventory date, regardless of their location.

Goods
Goodsin
inTransit
Transit
Depends
Dependson
onFOB
FOB
shipping
shippingterms.
terms.

Goods
Goods on
on
Consignment
Consignment

Inventory Cost Flow

Assumptions

Specific
Specific identification
identification
Average
Average cost
cost
First-in,
First-in, first-out
first-out (FIFO)
(FIFO)
Last-in,
Last-in, first-out
first-out (LIFO)
(LIFO)

Perpetual Average Cost

Picture This, LLC, uses a standard frame size
for all pictures to hold down product costs.
The following schedule shows the frame
inventory for Picture This, LLC, for
September.
The physical inventory count at September
30 shows 1,400 frames in ending inventory.
Use the perpetual average cost method to
determine:
(1) Ending inventory cost

Perpetual Average Cost

Perpetual Average Cost

$61,750 (1,200 + 900 + 550) = $23.30 rounded

Perpetual Average Cost

[(1,650
[(1,650
$23.30)
$23.30) +
+ (600
(600
$27)]
$27)]
2,250
2,250 =
= $24.29
$24.29 rounded
rounded

Perpetual Average Cost

Ending inventory = 1,400 units $25.55 = $35,770

Rounding error

Perpetual Average Cost

Weighted-Average Periodic
System

Lets use the same information to assign

costs to ending inventory and cost of goods
sold using the periodic system.
Ending Inventory
(1,400 units)
Available
Available
for
for Sale
Sale
(4,050
(4,050 units)
units)
Goods Sold
(2,650)

$100,350 4,050 = $24.7778

weighted-average per unit cost

Weighted-Average Periodic
System

First-In, First-Out (FIFO)

The FIFO
method
assumes that
items are sold
in the
chronological
order of their
acquisition.

The
The cost
cost of
of the
the oldest
oldest
inventory
inventory items
items are
are
charged
charged to
to COGS
COGS when
when
goods
goods are
are sold.
sold.
The
The cost
cost of
of the
the newest
newest
inventory
inventory items
items remain
remain
in
in ending
ending inventory.
inventory.

First-In, First-Out (FIFO)

Even
Even though
though the
the
periodic
periodic and
and the
the
perpetual
perpetual approaches
approaches
differ
differ in
in the
the timing
timing of
of
adjustments
adjustments to
to
inventory
inventory .. .. ..
.. .. .. COGS
COGS and
and Ending
Ending
Inventory
Inventory Cost
Cost are
are the
the
same
same under
under both
both
approaches.
approaches.

First-In, First-Out
(FIFO)
Periodic Inventory System

These
Theseare
arethe
the1,400
1,400
most
mostrecently
recently
acquired
acquired units.
units.

First-In, First-Out (FIFO)

Periodic Inventory System

First-In, First-Out (FIFO)

Perpetual Inventory System

These
Theseare
are the
thefirst
first
2,650
2,650 units
units
acquired.
acquired.

First-In, First-Out (FIFO)

Perpetual Inventory System

Last-In, First-Out (LIFO)

The LIFO
method
assumes that
the newest
items are sold
first, leaving the
older units in
inventory.

The
The cost
cost of
of the
the
newest
newest inventory
inventory
items
items are
are charged
charged to
to
COGS
COGS when
when goods
goods
are
are sold.
sold.
The
The cost
cost of
of the
the oldest
oldest
inventory
inventory items
items
remain
remain in
in inventory.
inventory.

Last-In, First-Out (LIFO)

Unlike
Unlike FIFO,
FIFO, using
using the
the
LIFO
LIFO method
method may
may
result
result in
in COGS
COGS and
and
Ending
Ending Inventory
Inventory
Cost
Cost that
that differ
differ
under
under the
the periodic
periodic
and
and perpetual
perpetual
approaches.
approaches.

Last-In, First-Out
Perpetual Inventory System

These
Theseare
are the
the
oldest
oldest units
unitsin
in
inventory
inventoryand
and are
are
most
most likely
likelyto
to
remain
remainin
in inventory
inventory
when
when using
usingLIFO.
LIFO.

Last-In, First-Out
Perpetual Inventory System

The Cost of Goods Sold for the September

15 sale is $24,550.
After this sale, there are 1,650 units in
inventory at various costs per unit.

Last-In, First-Out
Perpetual Inventory System

The Cost of Goods Sold for the September

22 sale is $18,600.
After this sale, there are 1,550 units in
inventory at various per unit cost.

Last-In, First-Out
Perpetual Inventory System

The Cost of Goods Sold for the

September 30 sale is $26,000.
After this sale, there are 1,400 units
in inventory (1,200 $22.00) per
unit
and (200 $24.00) for a total cost of
ending inventory of $31,200.

Last-In, First-Out
Periodic Inventory System

Last-In, First-Out
Periodic Inventory System

Last-In, First-Out
Perpetual Inventory System

Reporting -- Lower of Cost or

Market
Inventories are valued at the lowerof-cost-or market.

LCM
LCM is
is aa departure
departure from
from historical
historical cost.
cost. The
The
method
method causes
causes losses
losses to
to be
be recognized
recognized in
in the
the period
period
the
the value
value of
of inventory
inventory declines
declines below
below its
its cost
cost rather
rather than
than
in
in the
the period
period that
that the
the goods
goods ultimately
ultimately are
are sold.
sold.

Determining Market Value

Step 1
Determine Designated Market

(1)
(1)
Selling
Selling
Price
Price in
in
ordinary
ordinary
course
course
of
of
busines
busines
ss

Step 2
Compare Designated Market with Cost

(3)
(3) Net
Net
Realizab
Realizab
le
le Value
Value

(2)
(2) less:
less:
Estimated
Estimated cost
cost
of
of completion
completion
and
and disposal
disposal

Designated
Designated
Market
Market

Or

Lower
Lower of
of Cost
Cost
Or
Or Market
Market

Cost
Cost

Lower of Cost or Market

An item in inventory has a historical cost
of $20 per unit. At year-end we gather the
following per unit information:
selling price = $30
cost to complete and dispose = $4

How would we value this item in the

statement of financial position?

Lower of Cost or Market

Designated
$21.50
Market?

Historical cost of $20.00 is

less than the NRV of 26,
so this inventory item will
be valued at cost of
$20.00.

Thank you

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