Inventory

Inventory

Practice As You Learn

There are 4 major things that you will most likely be asked to do:

1)  Calculate cost of goods sold

2)  Determine inventory and cost of goods sold using FIFO, LIFO, Average

3)  Determine lower of cost or market (LCM)

4)  Record inventory transactions using both methods:  Periodic and Perpetual

1) Calculate cost of goods sold:

Memorize this formula:

   Beginning Inventory
+ Purchases
= Available for sale
–  Ending Inventory
= Cost of Goods Sold

To get an amount for purchases and inventory if it is not given to you – multiply the quantity x cost per unit

When doing the calculation, ignore everything other than purchases and finished goods inventory – beginning and ending

2)  Determine the value of inventory and CGS using FIFO, LIFO, Average:

1st write the beginning inventory and purchases in date order:

2nd Total the quantity column and total cost for the goods available column. You have total available. You will be given total units sold or total units in ending inventory. Determine the other one.

       Quantity x Cost per unit = Total Cost
Beginning
Purchases
Purchases
Purchases
   Goods Available
– Units Sold
= Units in inventory

3rd Use the quantity of units sold to determine the cost of goods sold based on the order sold.

FIFO:  The first units are sold first

Start from the beginning and go down through the purchases until you have enough to total the units sold

LIFO:  The last units are sold first 

Start from the last purchase and go up through the purchases until you have enough to total the units sold

Average:

The average is the average of “goods available”

Total cost of goods available
Quantity of goods available   = $Average cost

Then:  quantity of units sold x $average cost = CGS

For all 3 methods:

Goods available
– CGS                                        (income statement)
= Ending inventory value    (balance sheet)

3)  Determine lower of cost or market (LCM)

1st Set up the table as follows:

2nd Put the given amounts in the cost and market column

3rd Compare the cost to the market and put the lowest in the LCM column

4th Total the cost column and total the LCM column

5th The lowest total – cost or LCM must be reported as the inventory value

If LCM is lower than cost, reduce inventory for the difference

CGS                                           $XXX
       Inventory                                    $XXX

4)  Record inventory transactions:  Periodic and Perpetual

Periodic method:  Only use the inventory account for the final adjustment

1) Put the beginning inventory amount in the “T” account

2) Record purchases to the “purchase account” and accounts payable/cash

3) Record the sales and receivable only for a sale (nothing for inventory)

You have not used the inventory account and it is showing the amount for beginning inventory instead of the amount on hand at the end.

4) Adjust the inventory account to the ending amount – use CGS also

5) Credit the purchases account for the amount in the account to make it be 0; use CGS for the debit

Perpetual method:  Use the inventory account for every transaction

1) Put the beginning inventory amount in the “T” account

2) Record purchases in the inventory account and accounts payable/cash

3) Record sales/receivables and the cost of goods sold/inventory

Put the inventory amounts from the journal entries into the “T” account.
You have used the inventory account to report each movement and the inventory account shows a running balance of the cost of inventory on hand.   It may be incorrect due to human errors.  

4) Count what you have and make the inventory account be what you actually have.   The other account used is cost of goods sold.

Practice Problem 1 – Calculate Cost of Goods Sold

The following information was taken from the records of XYZ Company:

Calculate the cost of goods sold for XYZ Company:

Practice Problem 2 – FIFO, LIFO, Average

The Company had the following transactions during the first quarter:

Determine the value of ending inventory and cost of goods sold for the quarter using the periodic method (CGS is determined at the end of the period, ignore dates sold) 

A.  FIFO
B.  LIFO
C.  Average Cost

Practice Problem 3 – Lower of Cost or Market

Company XYZ has 3 items in inventory with a quantity and cost as follows:

After further analysis, the company determined that the market for Item 1 is $2.95, for item 2 is $2.20 and item 3 is $2

Determine if a write-down of inventory is required using lower of cost or market

Practice Problem 4 – Periodic & Perpetual

A company purchased inventory for a cost of $65,000 on June 1.  The company returned goods with a cost of $6,000 on June 12. On June 14, goods with a cost of $21,000 were sold to the customer for $42,000.  Inventory actually counted at the end of June totaled $48,000. Purchases and sales were for cash. Beginning inventory is $12,000. Make the appropriate journal entries for the transactions related to inventory using

1) the periodic method
2) the perpetual method.