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Chapter 6
Inventories
Lecture 29
Lecture Overview
• Inventory Systems• Perpetual Inventory System• Periodic Inventory System
• Cost Flow Assumptions• First in First Out• Last in First Out
Perpetual Inventory Costs
Inventory cost data to demonstrate Average Perpetual Systems
Cost ofMdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 204 Sale 7 30
10 Purchase 8 2122 Sale 4 3128 Sale 2 3230 Purchase 10 22
Item 127B
Average Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
The firm begins the year with 10 units of Item 127B on hand
at a total cost of Rs.200.
Perpetual Inventory Costs
Inventory cost data to demonstrate Average Perpetual Systems
Cost ofMdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 204 Sale 7 30
10 Purchase 8 2122 Sale 4 3128 Sale 2 3230 Purchase 10 22
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
The sale of 7 units leaves a
balance of 3 units.
The sale of 7 units leaves a balance of 3 units.
Jan. 1 10 20 200 4 7 20 140 3 20 60Jan. 1 10 20 200
On January 4, 7 units of Item 127B are sold at Rs. 30 each.
On January 4, 7 units of Item 127B are sold at Rs. 30 each.
Average Perpetual Inventory Account
Perpetual Inventory Costs
Inventory cost data to demonstrate Average Perpetual Systems
Cost ofMdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 204 Sale 7 30
10 Purchase 8 2122 Sale 4 3128 Sale 2 3230 Purchase 10 22
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 11 20.7 228
Average Perpetual Inventory Account
Perpetual Inventory Costs
Inventory cost data to demonstrate Average Perpetual Systems
Cost ofMdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 204 Sale 7 30
10 Purchase 8 2122 Sale 4 3128 Sale 2 3230 Purchase 10 22
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 11 20.7 228
Average Perpetual Inventory Account
22 4 20.7 82.8 7 20.7 145.2
Perpetual Inventory Costs
Inventory cost data to demonstrate Average Perpetual Systems
Cost ofMdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 204 Sale 7 30
10 Purchase 8 2122 Sale 4 3128 Sale 2 3230 Purchase 10 22
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 11 20.7 228
Average Perpetual Inventory Account
22 4 20.7 82.8 7 20.7 145.2 28 2 20.7 41.4 5 20.7 103.8
Perpetual Inventory Costs
Inventory cost data to demonstrate Average Perpetual Systems
Cost ofMdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 204 Sale 7 30
10 Purchase 8 2122 Sale 4 3128 Sale 2 3230 Purchase 10 22
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 11 20.7 228
Average Perpetual Inventory Account
22 4 20.7 82.8 7 20.7 145.2 28 2 20.7 41.4 5 20.7 103.8 30 10 22220 15 21.6 323.8
Totals 18 38813 262.2 15 21.6323.8
•The average cost periodic method
Jan. 1 Beginning Inventory
200 units @ Rs.9
Mar. 10 Purchase300 units @ Rs.10
400 units @ Rs.11 Sept. 21 Purchase
100 units @ Rs.12 Nov. 18 Purchase
1,000 units available for sale during year
Average Periodic
200 units @ Rs.9
300 units @ Rs.10
400 units @ Rs.11
100 units @ Rs.12
1,000 units available for sale during year
Rs.10,400
=Rs.1,800 Jan. 1
= 3,000 Mar. 10
= 4,400 Sept. 21
= 1,200 Nov. 18
Cost of merchandise available for sale
Average Periodic
Cost of Merchandise Available for Sale
Units Available for Sale During Year
= Average Unit Cost
Rs.10,4001,000 Units
= Rs.10.40 per Unit
Average Cost Periodic
Cost of merchandise available for saleRs.10,400Less ending inventory (Rs.10.40 x 300) 3,120Cost of merchandise sold Rs. 7,280
Cost of merchandise available for saleRs.10,400Less ending inventory (Rs.10.40 x 300) 3,120Cost of merchandise sold Rs. 7,280
To verify this amount, multiply 700 units sold times Rs.10.40 to get the same Rs.7,280.
Average Cost Periodic
3,800
2,700
4,650
3,920
Total 15,520 15,472 15,070
Valuation of Inventory at Lower-of-Cost-or-Market
A 400 10.25 9.50 4,100 3,800
B 120 22.50 24.10 2,700 2,892
C 600 8.00 7.75 4,800 4,650
D 280 14.00 14.75 3,920 4,130
Unit UnitInventory Cost Market Total Total Lower
Item Quantity Price Price Cost Market C or M
The market decline based on individual items
(Rs.15,520 – Rs.15,070) = Rs.450
Lecture Overview
• Inventory Systems• Perpetual Inventory System• Periodic Inventory System
• Cost Flow Assumptions• First in First Out• Last in First Out• Average Inventory Method
The EndThe End
Chapter 9
Estimating Inventory Cost
Retail Method of Estimating Inventory Cost
Retail method is based on relationship between cost of merchandise available for sale and the retail price.
Retail prices of all merchandise must be accumulated and totaled.
Inventory at retail is calculated at retail price of merchandise available for sale less net sales at retail.
Ratio is calculated as cost divided by retail price. Inventory at retail price times cost ratio equals
estimated cost of inventory.
Retail Inventory Method
Step 1: Determine the ratio of cost to the retail price.
Cost RetailMerchandise inventory, Jan. 1 19,400 36,000Purchases in January (net) 42,600 64,000Merchandise available for sale 62,000 100,000
Ratio of cost to retail price =62,000100,000
= 62%
Retail Inventory Method
Step 2: Determine the ending inventory at retail.
Sales for January (net) 70,000Merchandise inventory, January 31, at retail 30,000
Cost RetailMerchandise inventory, Jan. 1 19,400 36,000Purchases in January (net) 42,600 64,000Merchandise available for sale 62,000 100,000
Retail Inventory Method
Step 3: Calculate the estimated inventory at cost.
Merchandise inventory, January 31, at cost($30,000 x 62%) 18,600
Sales for January (net) 70,000Merchandise inventory, January 31, at retail 30,000
Cost RetailMerchandise inventory, Jan. 1 19,400 36,000Purchases in January (net) 42,600 64,000Merchandise available for sale 62,000 100,000
Gross Profit Method of Estimating Inventory Cost
1. A gross profit percentage rate is estimated based on previous experience adjusted for known changes.
2. Estimated gross profit is calculated by multiplying the estimated gross profit rate times the actual net sales.
3. Estimated cost of merchandise sold is calculated by subtracting the gross profit from actual sales.
4. The cost of merchandise sold estimate is deducted from actual merchandise available for sale to determine the estimated cost of merchandise inventory.
Merchandise inventory, January 1 57,000
Purchases in January (net) 180,000
Merchandise available for sale
Sales in January (net) 250,000Less: Estimated gross profit
Estimated cost of merchandise sold
Estimated merchandise inventory, January 31
($250,000 x 30%) 75,000
175,000 62,000
Gross Profit Method
The gross profit method is useful for estimating inventories for monthly or
quarterly financial statements in a periodic inventory system.
237,000
Inventory TurnoverInventory Turnover
SUPERVALU ZaleCost of merchandise sold 15,620,127,000 737,188,000Inventories:
Beginning of year 1,115,529,000 478,467,000End of year 1,067,837,000 571,669,000Total 2,183,366,000 1,050,136,000
Average 1,091,683,000 525,068,000 Inventory turnover 14.3 times 1.4 times
Use: Inventory turnover measures the relationship between the volume of goods sold and the amount of inventory carried during the period.
Average daily cost of merchandise sold: 15,620,127,000/365 42,794,868 737,188,000/365 2,019,693Ending inventory 1,067,837,000 571,669,000
Number of Days’ Sales in InventoryNumber of Days’ Sales in Inventory
SUPERVALU Zale
Average selling period 25 days 283 days
Use: To assess the efficiency in the management of inventory
Use: To assess the efficiency in the management of inventory
The EndThe End
Chapter 9
