Inventory Record Keeping Methods
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1 HOSP 2110 (Management Acct) Learning Centre Inventory Record Keeping Methods There are two methods of record keeping for tracking a business s inventory: periodic and perpetual. The periodic method is done by taking a physical count and costing the inventory over a specific time period (e.g. weekly) to determine the cost of sales. The perpetual method is done by continuously updating the inventory with each purchase and sale of inventory. To determine cost of sales (or cost of goods sold): Beginning inventory (BI) + Purchases (P) Ending inventory (EI) = Cost of Goods Sold (CGS) There are four different types of inventory valuation methods that can be used for the perpetual method: (1) specific item cost; (2) first-in, first-out (FIFO); (3) lastin, first-out (LIFO); and (4) weighted average cost. This worksheet will cover the last three types. FIFO inventory control: whatever items of inventory are received first are assumed to be sold first, leaving the newest inventory items in stock. LIFO inventory control: whatever items of inventory are received most recently (newest) are assumed to be sold first, leaving the oldest inventory items in stock. Weighted average cost (WAC): calculates a weighted average cost for each item of inventory available for sale. When new inventory items are purchased (at a different price), the total value of inventory on hand is recalculated and divided by the total number of items to get the new cost per unit. At the end, the column of purchases and the column of sales transactions are added up to determine the total inventory purchases and total cost of sales. You can double check that CS is correct by using the BI + P EI = CS equation. The equation won t be perfectly true for the weighted average cost method since rounding errors occur in the calculation of weighted average costs. Example: Use FIFO, LIFO, and WAC to evaluate the following inventory record. June 1: Beginning balance was 3 $20. June 2: Purchase 8 $15. June 6: Sale of 6 items. June 15: Purchase 4 $18. June 20: Sale of 7 items. The beginning balance and purchases will be the same for all three methods. For FIFO and LIFO, purchases of inventory at different unit prices stay separate in the record of available inventory. Authored by Emily by Simpson Emily Simpson Student review only. May not be reproduced for classes.
2 For FIFO, the oldest things in the inventory balance will be sold first. On June 6, the number of items to be sold is greater than the amount of items at a particular price. The 3 $20 are the oldest, so they are sold first, but another 3 items are also needed to be sold. These come from the next level of $15 each. The items sold are then removed from the inventory balance available. Check that BI + P EI = CS $60 + $192 $36 = $216 FIFO: 2 $15.00 = $ $20.00 = $60.00 $15.00 = $ $20.00 = $60.00 $15.00 = $75.00 $15.00 = $ $18.00 = $72.00 $ = $75.00 $18.00 = $ $15.00 = $75.00 $18.00 = $36.00 $18.00 = $36.00 Ending Purchases = $ CS = $ Ending Inv. = $36.00 For LIFO, the newest things in the inventory balance will be sold first. Now, on June 6, where 6 items are to be sold, there are enough of the newest items to only sell items at $15 each. On June 20, in order to sell 7 items, we will sell the newest $18, the next newest $14, and then one of the $20. Again check that BI + P EI = CS $60 + $192 $40 = $212 LIFO: 2 $15.00 = $ $20.00 = $60.00 $15.00 = $ $15.00 = $90.00 $20.00 = $ $18.00 = $72.00 $20.00 = $60.00 $18.00 = $ $18.00 = $72.00 $20.00 = $40.00 $20.00 = $20.00 Ending Purchases = $ CS = $ Ending Inv. = $40.00 Student review only. May not be reproduced for classes. 2
3 For WAC, on June 2, when 8 new $15 are purchased, we take the sum of inventory value ($ ) and divide by the total number of goods (11), to get the new cost for each good ($16.36 each). This is the price we will value and sell goods at until another purchase of inventory at a different price (e.g., June 15). WAC: 2 $15.00 = $ $16.36 = $ $16.36 = $98.16 $16.36 = $ $18.00 = $72.00 $17.09 = $ $17.09 = $ $17.09 = $34.18 Ending Purchases = $ CS = $ Ending Inv. = $34.18 Practice Problem 1. Beginning inventory was $26,000, ending inventory was $18,000, and cost of goods sold was $94,000. What was the amount of inventory purchased? 2. On January 1, inventory was $37,000. Inventory purchases for the month of January were $54,000 and the inventory balance on January 31 was $19,000. What was the cost of goods sold? 3. Beginning inventory was $41,000, inventory purchased was $72,000, and cost of goods sold was $100,000. What was the ending inventory? 4. The following information is taken form a perpetual inventory record. Calculate the value of ending inventory and cost of sales for the period ending Aug 31, using: (a) FIFO (b) LIFO (c) weighted average cost. August 1: Beginning balance was $12 August 3: Sale of 2 items August 5: Purchase of 6 $12.50 August 8: Sale of 3 items August 11: Sale of 3 items August 14: Purchase of 8 $13 August 16: Sale of 4 items August 19: Sale of 3 items August 22: Purchase of 5 $13.50 August 25: Sale of 4 items August 29: Sale of 2 items Student review only. May not be reproduced for classes. 3
4 Solutions 1. $86, $72, $13, (a) FIFO 5 $12.50 = $75.00 $12.00 = $24.00 $12.50 = $ $12.00 = $24.00 $12.50 = $62.50 $12.50 = $ $12.50 = $37.50 $ = $ $13.00 = $ $12.50 = $25.00 $13.00 = $ $12.50 = $25.00 $13.00 = $78.00 $13.00 = $ $13.00 = $39.00 $13.00 = $ $13.50 = $67.50 $13.00 = $39.00 $13.50 = $ $13.00 = $39.00 $13.50 = $ @ $13.50 = $ $13.50 = $27.00 $13.50 = $27.00 Ending Purchases = $ Cost of sales = $ Ending Inv. = $27.00 (b) LIFO 5 $12.50 = $75.00 $12.00 = $24.00 $12.50 = $ $12.50 = $37.50 $12.00 = $24.00 $12.50 = $ $12.50 = $37.50 $ = $ $13.00 = $ $12.00 = $24.00 $13.00 = $ $13.00 = $52.00 $12.00 = $24.00 $13.00 = $ $13.00 = $39.00 $12.00 = $ $13.50 = $67.50 $12.00 = $24.00 $13.50 = $67.50 Student review only. May not be reproduced for classes. 4
5 25 $13.50 = $54.00 $12.00 = $24.00 $13.50 = $ $13.50 = $13.50 $12.00 = $24.00 Ending Purchases = $ Cost of sales = $ Ending Inv. = $24.00 (c) Weighted average cost 5 $12.50 = $75.00 $12.38 = $ $12.38 = $37.14 $12.38 = $ $12.38 = $37.14 $ = $ $13.00 = $ $12.88 = $ $12.88 = $51.52 $12.88 = $ $12.88 = $38.64 $12.88 = $ $13.50 = $67.50 $13.27 = $ $13.27 = $53.08 $13.27 = $ $13.27 = $26.54 $13.27 = $26.54 Ending Purchases = $ Cost of sales = $ Ending Inv. = $26.54 Student review only. May not be reproduced for classes. 5
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