Inventory Valuation

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ObjectivesStudents will be able to explain the difference between the three cost assumption methods to value ending inventory.Students will be able to value inventory using the LIFO, FIFO, and Average Cost methods.What is inventory?Will eventually bring in revenueMerchandiseFinished GoodsWork in processRaw materials

What determines how we value inventory?What type of business we are in?Retail, manufacturingHow much variance there is in the unit cost for purchases

Ways to value inventorySpecific IdentificationIdentification by specific item, barcode, etc.Ex. VIN # on car lots Cost Flow assumptionsFirstin-First-outLast-in-First-outAverage Cost Method

First-in-First-OutAssumes that the first items in the door are the first items that will be soldAssumes that ending inventory must consist of only the most recent purchasesEnding inventory is valued using the most recent purchases going backward.

FIFO contdDateExplanationUnitsUnit CostTotal CostJan 1Beginning Inventory25$30$750Feb 1Purchases50 251250Apr 10Purchases40301200May 15Purchases2025500Sep 1Purchases2525625Dec 1Purchases40301250Total available for sale2005575Ending Inventory30Units Sold170FIFO contdEnding Inventory

Total units *most recent pricesDec 1 Purchase price30 * 30 = $900

*note use the price until you get the pricing on all of the unitsCost of Goods Sold

Available for saleLess ending inventory 5575 -900 COGS $ 4625Last-in-First-OutAssumes that the last items in the door are the first items that will be soldAssumes that ending inventory must consist of oldest purchasesEnding inventory is valued using the oldest recent purchases going forward.

LIFO contdDateExplanationUnitsUnit CostTotal CostJan 1Beginning Inventory25$30$750Feb 1Purchases50 251250Apr 10Purchases40301200May 15Purchases2025500Sep 1Purchases2525625Dec 1Purchases40301250Total available for sale2005575Ending Inventory30Units Sold170LIFO contdEnding Inventory

Total units *oldest pricesBeginning inventory $750 (25 units)Feb 1 purchase 5 units5 * 25 = 125

750+ 125 = 875Cost of Goods Sold

Available for saleLess ending inventory 5575 -875 COGS $ 4700Average Cost MethodAssumes that the unit cost of inventory will remain basically the same throughout the periodEnding inventory is valued using the total value of units available during period divided by total units available. This gives you the average unit cost.Average cost contdDateExplanationUnitsUnit CostTotal CostJan 1Beginning Inventory25$30$750Feb 1Purchases50 251250Apr 10Purchases40301200May 15Purchases2025500Sep 1Purchases2525625Dec 1Purchases40301250Total available for sale2005575Ending Inventory30Units Sold170Average Cost Method contdEnding InventoryValue of total available Inventory $5575 divided byAvailable units 200Cost per unit 27.88 Times units inEnding inventory 30

Ending inventory $836.40Cost of Goods Sold

Available for saleLess ending inventory $ 5575.00 -836.40 COGS $ 4738.60Why do care how we value it?We have to pay taxes on itIt affects cost of goods sold, which affects our profits

QUIZWhich method assumes that the first items in the door are the first items that will be sold?A. FIFOC. LIFOD. Specific IdentificationB. Average CostWhich method assumes that the unit cost of inventory will remain basically the same throughout the period?A. FIFOC. LIFOD. Specific IdentificationB. Average CostWhich method assumes that ending inventory is valued using the most recent purchases going backward?A. FIFOC. LIFOD. Specific IdentificationB. Average CostWhich is not a cost assumption valuation method?A. FIFO

C. Specific Identification

B. LIFO

D. Average Cost Method

Which type of company would use specific identification to value inventory?A. Retail

C. Manufacturing

B. Car Dealership

D. Small Business

Which is not something to consider when choosing a valuation method?A. The way we have always done it

C. How often the unit costs changes during the accounting periodB. The type of business that we are in

D. Which gives a better representation of actual cost of the goods that were sold The FIFO method assumes that the first items in the door are the first items that will be sold.TrueFalse The LIFO method assumes that ending inventory must consist of only the most recent purchases.

TrueFalseThere is only one appropriate way to value inventory?TrueFalseA company may change their valuation methods often so that they can show a profit?TrueFalseThe endcomputComputerCopyright 1998, The Microsoft CorporationStan LePard-Panther Moderncompute.midTrack 1Track 1 #2Track 1 #3Track 1 #4Track 1 #5Track 1 #6percussionTrack 1 #10Track 1 #11Track 1 #12Track 1 #13Track 1 #14