Inventory Planning and Valuation

1. Inventory Planning and Valuation Advanced Accounting Chapter 6 Mrs. Brownfield

2. Merchandise Inventory • Usually the largest asset • Analyze frequently for planning future purchases • Maintained on the computer • Constant change – inventory is purchased and sold • Affects the income statement

3. Flow of Inventory Costs End of the fiscal period, Cost of Merchandise available is divided into two: 1. Current Asset 2. Cost of Merchandise Sold during the current fiscal period

4. Goods • Items in the merchandise inventory • Cost of Goods • Price paid to vendors • Cost involved with getting the good to the business • Two methods of goods inventory • Physical count • Continuous record of purchases and sales

5. Goods Cont’d. • In transit • Who holds the title to the goods? • FOB shipping point (Free on Board) • Buyer pays transportation • Title of goods to buyer when goods are shipped • FOB destination • Vendor pays transportation • Title of goods passes to the buyer when good received

6. Goods on Consignment • Goods given to a business (Consignee) to sell • Goods title remains with the vendor (Consignor) • Consignee is not responsible for inventory

7. Record Keeping • Stock record • Merchandise quantities received and sold • File with all stock records is the Stock Ledger • Helps with knowing when to reorder • Perpetual inventory (based on records) • Sales recorded when made • Purchases recorded when goods are received • Inventory Record • Records periodic inventory (actually counting at specific times) • Hard to do multiple times a year

8. Stock Record • Record description of item, stock number, reorder quantity, min number and location • Write in the beginning quantity • Record sales transactions • Enter purchase transactions

9. 6-1 Work Together

10. Inventory Record • Enter date, description • Record stock number and description • Write number of units counted • Record price then calculate total cost • Total all inventory items for total cost of merchandise inventory

11. 6-1 Work Together

12. Inventory Costing 6-2

13. FIFO • First In, First Out • Merchandise purchased first is merchandise sold first • Uses most recent purchase prices

14. LIFO • Last In, First Out • Merchandise purchased last is merchandise sold first • Uses the earliest purchase prices

15. Weighted Average • Cost is average of price paid for similar items purchased • Total cost divided by units purchased • Units on hand multiplied by average cost per unit

16. Lower of Cost or Market • Market=current replacement cost • Which price to we take? • Inventory cost reduced to current market price when unit price is higher than market • Inventory is maintained when unit price is lower than market • Compare FIFO, LIFO, or Weighted average with Current Market Price of inventory

17. Lower Cost of Market Compare – which one is lower Indicates the lower of the two methods

18. 6-3 Estimating Inventory Gross Profit Method vs. Retail

19. Estimating Inventory • When keeping periodic inventory • Need to cost inventory on monthly financial stms • Physically taking monthly periodic inventory is too expensive • Inventories are then estimated • Perpetual inventory • Use stock records • Do not need to make estimates

20. Gross Profit Method • Using previous years’ percentage of gross profit on operations • Assumes a continuing relationship exists between gross profit and net sales • Sufficiently accurate for monthly statements – not exact

21. Gross Profit Example • Work Together 6-3

22. Retail Method • Estimating based on cost and retail prices • Separate records must be kept for cost and retail prices • Net purchases • Net sales • Beginning merchandise inventory

23. Retail Method Example