Intermediate Financial Accounting I: Inventories: Measurement

Intermediate
Financial Accounting I
Inventories: Measurement
Objectives of this Chapter
1. Discuss the importance of inventory
valuation.
2. Study perpetual and periodic inventory
systems and the ending period
adjustments for inventory.
3. Study and compare the inventory cost
flow assumptions.
4. Explain the effect of LIFO liquidations.
Inventories: Measurement 2
Objectives of this Chapter (contd.)
1. Identify the items that should be
included in the inventory count.
2. Discuss the lower of cost or market
(LCM) rule.
3. Study the accounting treatment of
changing to LIFO cost flow assumption
and the use of LIFO reserve account.
4. LIFO Inventory Pools
5. Dollar-value LIFO technique.
1. Inventories:
the Importance of Inventory Valuation

How would the valuation and cost flow
assumptions of inventory affect the income
measurement?
 Valuation Methods: Historical Cost,
Current Exist Value, Current Entry Value,
Present Value, LCM.
 Cost Flow Assumptions: LIFO, FIFO,
Average, Specific Identification.
 CGS = Beginning Inventory + Net
Purchase - Ending Inventory
Inventories:
the Importance of Inventory Valuation (contd.)
 Different valuation methods and
different cost flow assumptions will
result in different cost of ending
inventories and therefore different cost
of goods sold.
The Impact of Valuation of Ending
Inventory on The CGS & Income
Year 1
Income CGS = Beg. Inv. + Net Pur. - End. Inv.
under over under a
over under over b
Year 2
over under under
under over over
a. either understating the units or the value
b. either overstating the units or the value
Impact on Omitting Goods from
Purchases
CGS = Beg. Inventory + N.P. - End. Inventory
B/S I/S
Ending Inv. understated Purchase understated
R/E no effect CGS no effect
A/P under N/I no effect
Working Capital no effect Inventory (End.)
understated
Current Ratio overstatinga
a. When CA > CL
Defining Inventory
1. Assets held for resale purpose in a
normal course of business
2. Assets used to produce products for
resale purpose
 Merchandising Firms: Merchandise
 Manufacturing Firms: Raw materials
Work-in-process
Finished Goods
How to Determine Inventory Value
Presented on the Balance Sheet?

Applying either the periodic inventory
system or the perpetual inventory
system and select a cost flow
assumption to determine the value of
inventories.

Both inventory systems require a
physical count of inventory at the end of
a period to determine the units which
can be included in the inventory account.
2. Inventory Systems and
Ending Period Adjustments
 Types of Inventory Systems
 A. Perpetual Inventory System
 B. Periodic Inventory System
A. Perpetual Inventory System

Purchase:
Inventory xxx
A/P xxx

Sale:
CGS xxx
Inventory xxx
A/R xxx
Sales xxx
Perpetual Inventory System (contd.)

Inventory account is used for the
purchase and sale transactions.

CGS account is used to record the CGS
of a sale. Therefore, the CGS is also
known at all time.

CGS is determined by selecting a cost
flow assumption.
Perpetual Inventory System
Example
Balance
Date Purchase Sell FIFO W-A
LIFO
3/1 (Beg. Bal.) 100 $5 100 $5 100 $5
100 $5 100 $5
3/5 150 $6 250 $5.6
150 $6 150 $6
a
3/7 200 50 $6 50 $5 50 $5.6
50 $6 50 $5
3/14 100 $7 150 $6.53
100 $7 100 $7
20 $6 50 $5
3/28 30b 120 $6.53
100 $7 70 $7
a. Sales price is $10 per unit.
b. Sales price is $11 per unit.
Example (contd.) - Journal Entries
(Perpetual vs. Periodic)
Perpetual (FIFO) Periodic
3/5 Inventory 900 3/5 Purchases 900
Cash 900 Cash 900
3/7 Cash 2,000 3/7 Cash 2,000
Sales Rev. 2,000 Sales Rev. 2,000
CGS 1,100
Inventory 1,100
3/14 Inventory 700 3/14 Purchases 700
Cash 700 Cash 700
3/28 Cash 330 Cash 330
Sales Rev. 330 Sales Rev. 330
CGS 180
Inventory 180
Example (contd.)
Inventory a Inventory Inventory
(FIFO) (LIFO) (WA)
B.B.500 1100 500 1150 500 1120
900 180 900 210 900 195.9
700 700 700
E.B.820 740 784.1
a. The balance of inventory is known at all time

under the perpetual inventory system.
Example (contd.)
The balance of cost of goods sold account1 :
CGS CGS CGS
(FIFO) (LIFO) (W-A)
3/7...1100 1150 1120
3/28...180 210 195.9
1280 1360 1315.9
1.The balance of inventory is known at all time

under the perpetual inventory system.
a. Adjustments for lost units.

b. Adjustments for LCM valuation.
a. Adjustments for Lost Units
(Perpetual Inventory System)
Assuming ending units = 110 units.
On 3/31, the lost units = 10.
Cost of 10 lost units => $6 x 10 = $60 (FIFO)
$7 x 10 = $70 (LIFO)
$6.53 x 10 = 65.3 (W-A)
Adjusting Entry:
3/31 Loss on Inventory Units a 60
Inventory 60
a. or use the account of Inventory over and short
b. Adjustments for LCM Valuation
(Perpetual Inventory System)
Inventory (FIFO)
B.B 500 1,100
900 180
700
820 60 -- 3/31 (Adj. for lost units)
760
Ending Inv. Cost (on 3/31, FIFO) = $760 LCM
Assuming market price = $600 LCM = $600 =$600
Adjustments for LCM Valuation
(contd.)

Adjusting entry => Given that Allowance for
Declining in Market Value of inventory has a
beginning balance of zero:
Allowance 3/31
0 -- 3/1 Loss Due to Market Value
160 Decline of Inventory 160
160 -- 3/31 Allowance to Reduce
Inventory to Market 160
B/S (3/31)
Inventory 760
Allowance (160)
Inv. At LCM 600
An Alternative of LCM Adjustment
 Many companies (i.e., Cisco Systems, inc.
2001, source: Spiceland, etc.)record the
adjustment of LCM follows:
 Cost of Goods Sold 160
 Inventory 160
 Note: Recording the loss as an increase in CGS will
have the same impact on earnings as reporting it as a
loss from value decline in the holding inventory.
However, this treatment will distort the gross profit.
(contd.)

If the allowance account had a beginning
balance of $20, the adjusting entry would
be:
Allowance
20 -- 3/1 Loss 140
140 Allowance 140
160 -- 3/31
(contd.)

If the Allowance account had a
beginning balance of 200, the adjusting
entry would be:
Allowance Allowance 40
40 200 Gain from Recovery
160 of M.V. of Inventory 40
B. Periodic Inventory System

At the end of an accounting period, the
following steps must be followed to
determine the cost of ending inventory
and cost of goods sold:
1. Do an inventory count.
2. Applying a cost flow assumption to
determine the cost of ending inventory.
3. Determine the cost of goods sold using:
CGS = Beg. Inv. + Net Pur. - Ending Inv.a
a. No adjusting entries are required.
Periodic Inventory Systema
Example

Using the example on Page 10 and
assuming the physical count of
inventory indicates 105 units on hand
on 3/31, the cost of ending inventory
(105 units) would be (given a FIFO
cost flow assumption):
$7  100 + $6  5 = $730
a. For journal entries, see page 14.
Periodic Inventory System
Example (contd.)
Inventory Data: The CGS under FIFO is:
Units Cost $500 + 1,600 - 730 =
3/1 (B.B) 100 $1,370.
$5 If a LIFO assumption is
3/5 Pur. 150 used, the cost of end.
$6 Inv. is:
3/14 Pur. 100 $5 x 100 + $6 x 5 = $530.
$7
The CGS is:
$500 + 1600 - 530 =
$1,570.
(Periodic Inventory System)
1. No adjustment is needed for lost units
(because the cost of lost units is
embedded in the CGS).
(Periodic Inventory System)
2.Adjustment for the LCM valuation assuming
FIFO:
Cost of E.I. = $730 LCM Allowance
Market = $600 = $600 0 --
3/1(assumed)
130
Adjusting entry: 130 --3/31
Loss Due to Market Decline of Inv. 130
Allowance to Reduce Inv. to Market 130
3. Comparison of FIFO vs. LIFO
During an Inflation Period
Income Tax B/S I/S
LIFO
(matching
current cost
with revenue Low Low Unfair Fair
if not
depleted to
early layers)
FIFO High High Fair Unfair
Survey: (Source: Accounting Trends &
Techniques) a, b,c
Yearl Total LIFO FIFO W-A Others
Firms
1984 1061 408 366 225 52
100% 38% 30% 22% 5%
1988 1038 379 396 213 50
100% 36.5% 38% 20.5% 5%
1991 1032 361 421 200 50
100% 35% 41% 19% 5%
2000 887 283 386 180 38
100% 32% 44% 20% 4%
2006 802 228 385 159 30

100% 28% 48% 20% 4%
Survey: (Source: Accounting Trends &
Techniques) (contd.)
a. Sample firms are 600 firms. Most
companies adopt more than one
inventory method.
b. Due to low inflation, the number of
firms adopting LIFO has declined
since mid-1980s.
c. IAS No. 2 does not permit LIFO, and
therefore, multinational companies
use LIFO for all or most of their
domestic inventories while use FIFO
or average cost for their foreign
subsidiaiies.
Switching to LIFO
During an Inflation Period

Reason of switching to LIFO:
Tax savings.
Income Manipulation When LIFO Is
Used (assuming price is rising)
1. To increase income (by decreasing
CGS):
 Strategy:
2.To decrease income (by increasing
CGS):
 Strategy:
Advantages of FIFO
a. Less likely to be subject to
management manipulation;
b. Produce higher income during an
inflation period;
c. Inventory cost reported on the B/S is
close to the replacement cost.
Disadvantage of FIFO
a. Bad matches of sales revenue and
CGS; match current sales revenue with
old costs;
b. Producing higher income during an
inflation period results in paying more
income tax.
Advantages of LIFO
a. Good match of sales revenue with
CGS.
b. Produce lower income during an
inflation period; result in tax savings.
Disadvantages of LIFO
a. Inventory cost presented on the B/S is
not fair.
b. Subject to management manipulation.
Note: International Accounting Standard
No. 2 does not allow LIFO.
IRS
1. Does not allow firms to use LCM if
firms are using LIFO.
2. LIFO conformity rule.

The non-LIFO income numbers are
allowed on the supplementary reports
since 1981.
IRS (contd.)
3. LIFO is not acceptable by the IRS till
1939.
4. LIFO Liquidations

A LIFO Liquidation profit can occur
when units purchased are less than
units sold in the period.
An Example of LIFO Liquidation Profit
20x5 Beg. Inv. 400 $5
Pur. 300 $6
Pur. 500 $7
Pur. 600 $8
During 20x5, 1,700 units were sold.
What is the LIFO liquidation profit?
Total purchases of 20x5 are 1,400 units.
The LIFO liquidationprofit is:
(1,700-1,400) x ($8-$5) = $900
Choice of Inventory Cost-Flow Assumptions and
Conversion of FIFO to LIFO for Comparison
Purposes*
a. Choice of inventory cost-flow
assumptions.
b. Inventory Management (JIT system,
Inventory turnover rate, etc.): the
example of Dell Inc.
c. Adjustment of inventory cost-flow
assumption on the same basis before
making comparison of financial
statements.
Adjustment of Inventory Cost-Flow
Assumption – An Example
Information: ABC is currently adopting
FIFO assumption. IF LIFO were
adopted, cost of ending inventory
would be $1,000 and $3,000 lower for
x1 and x2, respectively.
Question: How much would the CGS and
income be different when LIFO is
adopted rather than FIFO?
Adjustment of Inventory Cost-Flow
Assumption- An Example (contd.)
CGS = Beg. Inv. + Net Pur. – End. Inv.
Impact => -1000 -3000

of LIFO
(LIFO Reserve)
Thus, CGS should be increased by
$2,000 and income before tax would be
decreased by $2,000.
LIFO Reserve: An Account Used to Adjust
Ending Inventory Value from FIFO to LIFO

The difference in the value of inventory
between the inventory method used for
internal reporting purposes (i.e., FIFO)
and LIFO is referred to as LIFO
Reserve or the Allowance to Reduce
Inventory to LIFO .

The change in the balance of LIFO
Reserve from one period to another is
referred as the LIFO Effect (i.e.,impact
on income). Inventories: Measurement 45
LIFO Reserve - Example

Assume Acme Boot Company uses the
FIFO method for internal reporting
purposes and LIFO for external reporting
purposes. On 12/31/x5, the LIFO Reserve
balance was $20,000. However, the value
of ending inventory on 12/31/x6 under
LIFO is $50,000 less than that of FIFO.

Inventory on 12/31/x5 at FIFO = $320,000

Inventory on 12/31/x6 at FIFO =$360,000
LIFO Reserve – Example (contd.)
(Inventory Disclosure, note D)12/31/x6 12/31/x5

Inventory at FIFO $360,000 $320,000

LIFO Reserve (50,000) (20,000)

Inventory at LIFO $310,000 $300,000


Thus, $30,000 should be added to the
LIFO Reserve account. The LIFO effect
(impact on income) for 20x6 is $30,000.
LIFO Reserve - Example (contd.)
J.E. to adjust inventory from FIFO to LIFO:
Cost of Goods Sold 30,000
LIFO Reserve a 30,000
(or Allowance to Reduce
Inventory to LIFO)
a. reported as a contra account to inventory

or a deduction from inventory
Inventory Presentation and Footnote
Disclosure
Inventories, net of adjustment to
LIFO Reserve
(Note D) $310,000
Note D (contd.): Inventories. Inventories

are valued at the lower of cost or
market determined principally by the
LIFO method. If the FIFO cost method
had been used, inventories would have
been $50,000 higher. Inventories: Measurement 49
5. Items to Be Included in Inventory

Any goods with the legal title transferred
to the buyer should be included in the
inventory of the buyer (including goods
in transit with a F.O.B. shipping point
term).
Special Cases
a. Consigned Goods: Legal title
remained with the consignor
(manufacturers).
b. Sales with High Sales Returns

(conditional sale):
c. Sales on Approval:
Special Cases (contd.)
d. Product Financing Arrangements:
(Parking Transactions; SFAS No. 49)
e. Sales on Installment (revenue

recognition on accrual basis):
What Should Be Included in The
Product Costs
 Purchase price  --> Yes
x --> No
 Freight-In cost  --> may be
x Handling charge
x Storage cost related to purchase
x Buying cost of the purchasing department
x Insurance, taxes
 Interest cost: only in some cases.
What Should Be Included in the
Product Costs (contd.)

Purchase Discount account should be
treated as a contra account to
purchases.
6. Inventory Valuation - the LCM Rule
Departure from Historical Cost Assumption
LCM: Lower of Cost or Market.
Reasons: Conservatism.
Market ==> Replacement Cost constrained by:
Ceiling => Net Realizable Value
= Selling price - estimated cost to
complete and sell
Floor => NRV - normal profits
Inventory Valuation - Example
 Selling price = 12
 Package cost = $1
 Transportation cost = $3
 Normal profits = $3
 NRV = Selling price - Package -
Transportation = $12 - $1- $3 = $8
 NRV - Normal profit = $5
Inventory Valuation - Example (contd.)
Acquisition Replacement NRV -
NRV Market LCM
Cost Cost Profit
$10 $6 $8 $5 $6 $6
a
$10 $9 $8 $5 $8 $8
b
$10 $4 $8 $5 $5 $5
$10 $12 $8 $5 $8 $8
a. Example of the ceiling can prevent future
unexpected loss.
b.Example of preventing the recognition of
abnormal loss in the current period.
Inventory Valuation - LCM

For financial reporting, LCM can be
performed at the individual item level, at the
category level or at the total inventory level.

Common practice: at the individual item
level.

LCM performed at the individual item level is
most conservative and is most commonly
used because it is complied with the IRS
rule.
LCM Application - at Individual Level
versus at Group Level
Item Cost Market LCM (at individual level)
A $50 $60 $50
B* $140 $100 $100
C $300 $360 $300
Total $490
_____ $520
_____ $450
_____
_____ _____ _____
LCM at group level ==> $490
The difference of $40 is resulting from item
B: $140 - 100 = $40
LCM and iGAAP

IAS No. 2 requires inventory to be valued
at LCM.

The market value of IAS is the NRV, not
the replacement cost as in US GAAP.

IAS allows the reversal of inventory write-
down when the conditions for write-down
do not exist.

US GAAP does not allow the reversal of
inventory write-down.
7. Initial Adoption of LIFO

The accounting treatments for
accounting method changes are:

a. Current Period Approach: cumulative
effect from the change reported in the
I/S. (Note: eliminated by SFAS 154)

b. Retrospective Approach
Initial Adoption of LIFO

When change from other method to
LIFO, neither a cumulative effect nor a
retrospective adjustment can be made.

The base year inventory for all following
years is the beginning inventory of the
year In which LIFO is adopted.
Initial Adoption of LIFO

This value of the beginning inventory
needs to be adjusted to the cost.

The effect of the change on the current
year’s income and on the value of the
ending inventory must be disclosed.
Journal Entry to Restate
the Beginning Inventory to Cost

Assume that Rooms, Inc. decided to
switch from FIFO to LIFO in 20x9. The
beginning inventory of 20x9 has a cost
basis of $100,000 but is reported at
$90,000 on the balance sheet because
market is lower than cost. The
following entry is made to restate the
inventory to a cost basis (ignoring tax
effects):
Journal Entry to Restate the Beginning
Inventory to Cost (contd.)

Alternative 1:
Allowance to Reduce
Inventory to Market 10,000
Adjustment to Record
Inventory at cost 10,000
(If an allowance method is used in LCM
application.)
Journal Entry to Restate the Beginning
Inventory to Cost (contd.)

Alternative 2:
Inventory 10,000
Adjustment to
Record Inv. at Cost 10,000
(only If a direct write-off method is used in
LCM application)
Footnote Disclosure of Changing
from FIFO to LIFO
Note: Inventory Pricing. In the fourth quarter, the
company expanded its use of the LIFO method
of inventory to additional portion of its
inventories in order to more closely match
current costs with current revenues. The effect
of this change was to reduce net income for the
current year by $2,804,000 or $0.49 per share.
As of December 31, inventories valued on a
LIFO basis amounted to $74,166,000. If valued
on a FIFO basis, such inventories would be
increased to $90,551,000.
8. LIFO Inventory Pools (Specific Goods
Pools LIFO) (source: Spiceland, etc.)*
 Problems associated with the Unit LIFO
(i.e., the LIFO concept applies to units of inventory
as described in previous sections; also called
specific goods LIFO):
 Costly to implement: It requires the
records of each unit of inventory.
 LIFO liquidations: When units of a
specific inventory purchased are less
than units sold during the period, the
beginning layers are eroded.
LIFO Inventory Pools (contd.)*

LIFO inventory pools technique can:

1) simplify recordkeeping by grouping
inventory into pools, and

2)reduce the probability of LIFO layer
liquidation/erosion.
LIFO Inventory Pools (contd.)

Within pools, all purchases of goods in the
pool are considered to be made at the
same time during the period and at the
average cost.

When the quantity of ending inventory in
the pool increases (i.e., the quantity of
ending inv. is greater than that of the beg.
Inv.), the ending inventory of the pool will
consist of the beg. Inv. and the layer of the
period.
LIFO Inventory Pools: An Example
(contd.)

The 2008 beg. inventory (BI)of Cole Glass Inc.
LIFO inventory pool consisted of the following:
Quantity (squared Cost (per Total Cost
foot (SF)) SF)
Grade A 10,000 $3.00 $30,000

Window Glass
Grade B 14,000 $2.50 $35,000
Grade C 11,000 $2.20 $24,200
Totals 35,000 $89,200

Average SF Cost $2.55 = ($89,200/
of the Pool -BI 35,000)

During 20x8, Cole sold 48,000 squared feet of
window glass and purchased 51,000 squared
feet as follows:
Quantity (squared Cost (per SF) Total Cost
foot (SF))
Grade A Window 20,000 $3.10 $62,000

Glass
Grade B 15,000 $2.60 $39,000
Grade C 16,000 $2.45 $39,200

Totals 51,000 $140,200
Average 2008 SF $2.75 = ($140,200/
Cost of the Pool 51,000)
(contd.)

The average cost of 2008 beg. inventory
and 2008 window glass inventory pool is
$2.55 and $2.75, respectively.

The ending inventory quantity for the
pool is:
35,000+51,000-48,000=38,000 units
(contd.)

Since the ending inventory of 2008
exceeds its beg. Inventory, the ending
inventory will include the beginning
inventory (i.e., 35,000 units ) and a LIFO
layer of 3,000 units from 2008 .

Thus, the cost of 2008 ending inventory
equals:
$2.55 x 35,000+ $2.75x 3,000 = $97,500
Problems Associated with LIFO
Inventory Pools

When a product in an inventory pool is
discontinued, the old costs of the discontinued
item will become the cost of goods sold and
therefore, result in LIFO liquidation.

Even if the product is replaced, it may not be
similar to the old item and cannot be included
in the same pool.

Therefore, LIFO inventory pool requires
redefine pools periodically when there are
changes in the product mix of the pool.
9. Dollar-Value LIFO (DV LIFO)
Technique*

DV LIFO technique simplifies the
recordkeeping procedures (due to no
need to keep unit flows).

DV LIFO technique helps to protect
LIFO layers from erosion (i.e., reduce the
probability of LIFO liquidations; more than
the LIFO inventory pool technique).

This technique is frequently used in
practice
DV LIFO Technique (contd.)*

DV LIFO defines a layer as the dollar
value, not units, of ending inventory for a
specific year.

One layer is formed for each year.

Dollar Value of Inventories: Current cost
(the most recent purchase price) of the
ending Inventory.
DV LIFO Technique (contd.)*

To determine whether a new LIFO layer
is added under DV LIFO, the DV of
ending inventory (EI) is compared with
that of the beg. Inventory (BI).

If the DV of EI exceeds that of the BI,
the EI layers will consist of the DV of
the BI layer plus a new DV layer
created for the current year (i.e., the DV
of EI – the DV of BI).
The Cost Index

When the price level of the EI differs from
that of BI, a cost index should be used to
adjust the DV of EI at the price level of the BI
before forming the layers for the EI.

Cost index of a layer year =
Cost in layer year/Cost in base year
 Base year is the year in which DV LIFO is
adopted and a layer year is any subsequent
year in which an inv. Layer is created..
Dollar Value LIFO – An Example
Layer Current Cost Cost EI at Value of
Year of Ending (Price) Base year Inv. At
Inventory Index Price Levl. D-V LIFO
20x0 a $20,000 100 $20,000 $20,000
20x1 $30,000 120 $25,000 $26,000
20x2 $31,200 130 $24,000 $24,800
20x3 $39,200 140 $28,000 $30,400
a. the base year
Example (contd.)
Forming of layers:
20x0 20x1 20x2
20x3
20,000 ... L1 20,000...L1 20,000...L1
20,000...L1
5,000...L2 4,000...L2 4,000...L2
0...L3 0...L3
4,000 ..L4
Converting to the corresponding year’s index level:
20x0 20x1 20x2
20x3
20,000x1 20, 000x1+ 20,000x1+ 20,000x1+
=20,000 5 ,000x1.2 4,000x1.2+
4,000x1.2+
Comments on Dollar-Value LIFO

Items with similar economic, not
physical, characteristics (i.e., subject to
similar cost change pressure) will be
pooled together.

The more items are included in an
inventory pool, the less likely the
erosion of the LIFO layers can occur.
Comments on Dollar-Value LIFO
(contd.)*

Income number can be manipulated by
changing the number of inventory
pools.

On average, retailers form 6 pools for
their inventories and non-retailers form
3 pools for their inventories.
An Example of Manipulating Income by
Changing the Number of Inventory Pools

Stauffer Chemical Company had
increased LIFO pools from 8 to 280 ,
boosting its net income by $16,515,000
(13%) (source: KWW, 13th edition).
Types of Indexes

Internal Index: Internal price index
computed by the company for its own
product.

External Index: Computed by an outside
party such as the government, commodity
exchange, or trade association.

General Index: Composed of several
commodities, goods or services.

Specific Index: For one commodity, good
or service.
External Price Index*
 The Consumer Price Index for urban
consumers (CPI-U) is an example of an
external general price index.
 CPI-U is published monthly by the Bureau of
Labor Statistics of the federal government.
 Specific external price indexes (i.e., for gold,
silver, corn…) are also available from trade
associations.
The Internal Indexes
A Double-Extension Method (i.e., the value
of inv. units extended at both current and base-year
prices):
Internal Index for the Current Year =
End. Inv*. at Current Year’s Cost
End. Inv. at Base-Year Cost
End. Inv. is the ending inventory of the
current year.
The cost index for the base year equals one.
Example

To compute specific internal price indexes:
Year Current Units of Cost
Cost End. Inv. Index(%)
20x0 (base year) $19 300 100a
20x1 $22.8 400 120b
20x2 $24.7 450 130c
20x3 $26.6 370 140d
a. 19*300/19.0*300=100% c.24.7*450/19*450=130%
b. 22.8*400/19*400=120% d.26.6*370/19*370=140%
Example (contd.)

General internal price index:
(for more than one inventory in the pool):
Inv. A Inv. B
Current Units of Current Units of
Cost End. Inv. Cost End. Inv.
20x0(base year) $19 100 $20 150
20x1 $22.8 110 $22 120
General internal price index of 20x0:
(19x100+20x150) / (19x100+20x150)=100%
General internal price index of 20x1:
(22.8x110+22x120) / (19x110+20x120)=114.6%

Intermediate Financial Accounting I: Inventories: Measurement

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Intermediate Financial Accounting I: Inventories: Measurement

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Intermediate

a. The balance of inventory is known at all time

1.The balance of inventory is known at all time

a. Adjustments for lost units.

2006 802 228 385 159 30

2. LIFO conformity rule.

Impact => -1000 -3000

a. reported as a contra account to inventory

Note D (contd.): Inventories. Inventories

b. Sales with High Sales Returns

e. Sales on Installment (revenue

Grade A 10,000 $3.00 $30,000

Totals 35,000 $89,200

Grade A Window 20,000 $3.10 $62,000

Grade C 16,000 $2.45 $39,200

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