Inventory Valuation Standards 0 BCS-PAI-4 d. Identify and explain the advantages and disadvantages...
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Inventory Valuation
Inventory Valuation Standards 0 BCS-PAI-4 d. Identify and explain the advantages and disadvantages of different types of accounting systems. 0 BCS-PAI-4
Standards 0 BCS-PAI-4 d. Identify and explain the advantages
and disadvantages of different types of accounting systems. 0
BCS-PAI-4 g. Analyze business transactions and their effect on the
accounting equation.
Slide 4
Objectives 0 Students will be able to explain the difference
between the three cost assumption methods to value ending
inventory. 0 Students will be able to value inventory using the
LIFO, FIFO, and Average Cost methods.
Slide 5
What is inventory? 0 Will eventually bring in revenue 0
Merchandise 0 Finished Goods 0 Work in process 0 Raw materials
Slide 6
What determines how we value inventory? 0 What type of business
we are in? 0 Retail, manufacturing 0 How much variance there is in
the unit cost for purchases
Slide 7
Ways to value inventory 0 Specific Identification 0
Identification by specific item, barcode, etc. 0 Ex. VIN # on car
lots 0 Cost Flow assumptions 0 Firstin-First-out 0
Last-in-First-out 0 Average Cost Method
Slide 8
First-in-First-Out 0 Assumes that the first items in the door
are the first items that will be sold 0 Assumes that ending
inventory must consist of only the most recent purchases 0 Ending
inventory is valued using the most recent purchases going
backward.
Slide 9
FIFO contd DateExplanationUnitsUnit CostTotal Cost Jan
1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr
10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec
1Purchases40301250 Total available for sale2005575 Ending
Inventory30 Units Sold170
Slide 10
FIFO contd 0 Ending Inventory 0 Total units *most recent prices
Dec 1 Purchase price 30 * 30 = $900 *note use the price until you
get the pricing on all of the units 0 Cost of Goods Sold Available
for sale Less ending inventory 5575 -900 COGS $ 4625
Slide 11
Last-in-First-Out 0 Assumes that the last items in the door are
the first items that will be sold 0 Assumes that ending inventory
must consist of oldest purchases 0 Ending inventory is valued using
the oldest recent purchases going forward.
Slide 12
LIFO contd DateExplanationUnitsUnit CostTotal Cost Jan
1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr
10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec
1Purchases40301250 Total available for sale2005575 Ending
Inventory30 Units Sold170
Slide 13
LIFO contd 0 Ending Inventory 0 Total units *oldest prices
Beginning inventory $750 (25 units) Feb 1 purchase 5 units 5 * 25 =
125 750+ 125 = 875 0 Cost of Goods Sold Available for sale Less
ending inventory 5575 -875 COGS $ 4700
Slide 14
Average Cost Method 0 Assumes that the unit cost of inventory
will remain basically the same throughout the period 0 Ending
inventory is valued using the total value of units available during
period divided by total units available. This gives you the average
unit cost.
Slide 15
Average cost contd DateExplanationUnitsUnit CostTotal Cost Jan
1Beginning Inventory25$30$750 Feb 1Purchases50 251250 Apr
10Purchases40301200 May 15Purchases2025500 Sep 1Purchases25 625 Dec
1Purchases40301250 Total available for sale2005575 Ending
Inventory30 Units Sold170
Slide 16
Average Cost Method contd 0 Ending Inventory Value of total
available Inventory $5575 divided by Available units 200 Cost per
unit 27.88 Times units in Ending inventory 30 Ending inventory
$836.40 0 Cost of Goods Sold Available for sale Less ending
inventory $ 5575.00 -836.40 COGS $ 4738.60
Slide 17
Why do care how we value it? 0 We have to pay taxes on it 0 It
affects cost of goods sold, which affects our profits
Slide 18
QUIZ
Slide 19
Which method assumes that the first items in the door are the
first items that will be sold? 0 A. FIFO A. FIFO 0 C. LIFO C. LIFO
0 D. Specific Identification D. Specific Identification 0 B.
Average Cost B. Average Cost
Slide 20
Which method assumes that the unit cost of inventory will
remain basically the same throughout the period? 0 A. FIFO A. FIFO
0 C. LIFO C. LIFO 0 D. Specific Identification D. Specific
Identification 0 B. Average Cost B. Average Cost
Slide 21
Which method assumes that ending inventory is valued using the
most recent purchases going backward? 0 A. FIFO A. FIFO 0 C. LIFO
C. LIFO 0 D. Specific Identification D. Specific Identification 0
B. Average Cost B. Average Cost
Slide 22
Which is not a cost assumption valuation method? 0 A. FIFO A.
FIFO 0 C. Specific Identification C. Specific Identification 0 B.
LIFO B. LIFO 0 D. Average Cost Method D. Average Cost Method
Slide 23
Which type of company would use specific identification to
value inventory? 0 A. Retail A. Retail 0 C. Manufacturing C.
Manufacturing 0 B. Car Dealership B. Car Dealership 0 D. Small
Business D. Small Business
Slide 24
Which is not something to consider when choosing a valuation
method? 0 A. The way we have always done it A. The way we have
always done it 0 C. How often the unit costs changes during the
accounting period C. How often the unit costs changes during the
accounting period 0 B. The type of business that we are in B. The
type of business that we are in 0 D. Which gives a better
representation of actual cost of the goods that were sold D. Which
gives a better representation of actual cost of the goods that were
sold
Slide 25
The FIFO method assumes that the first items in the door are
the first items that will be sold. 0 True True 0 False False
Slide 26
The LIFO method assumes that ending inventory must consist of
only the most recent purchases. 0 True True 0 False False
Slide 27
There is only one appropriate way to value inventory? 0 True
True 0 False False
Slide 28
A company may change their valuation methods often so that they
can show a profit? 0 True True 0 False False
