8/13/2019

LOGO Learning Objectives

Learning Objectives
1. Define accounting principles related to inventory
2. Define inventory costing methods
Chapter 5 3. Account for perpetual inventory using the three
most common costing methods
4. Compare the effects of the three most common
inventory costing methods
5. Apply the lower-of-cost-or-market rule to
inventory
6. Estimate ending inventory by the gross profit
method
Nguyen Quoc Nhat – [Link]@[Link] Company Logo

5.1 Accounting Principles and

Chapter’s content
Inventories
5.1 Accounting Principles and Inventories 5.1.1 Consistency Principle
5.2 Inventory Costing Methods The consistency principle states that
5.3 Lower –of – cost –or- Market Rule businesses should use the same accounting
5.4 Estimate Ending Inventory methods from period to period. Consistency
helps investors compare a company’s financial
statements from one period to the next.

[Link] Company Logo [Link] Company Logo

5.1 Accounting Principles and Inventories 5.1 Accounting Principles and Inventories
5.1.2 Disclosure Principle 5.1.3Materiality Concept
The disclosure principle holds that a company should The materiality concept states that a company
report enough information for outsiders to make must perform strictly proper accounting only for
wise decisions about the company. significant items. Information is significant—or, in
In short, the company should report relevant, accounting terms, material — when it would cause
reliable, and comparable information about itself. someone to change a decision
This includes disclosing the method being used to
account for inventories.

[Link] Company Logo [Link] Company Logo

1
 8/13/2019

5.1 Accounting Principles and Inventories 5.2 Inventory Costing Methods

5.1.4 Accounting Conservatism 5.2.
Conservatism in accounting means exercising
As we saw in Chapter 4,
caution in reporting items in the financial statements.
Ending inventory = Number of Unit on hand X Unit cost
Conservatism says,
● Anticipate no gains, but provide for all probable losses.
Cost of goods sold = Number of Unit sold X Unit cost
● If in doubt, record an asset at the lowest reasonable
amount and a liability at the highest reasonable amount. Companies determine the number of units from
● When you are faced with a decision between two perpetual inventory records backed up by a physical
options, you must choose the option that undervalues, count. The cost of each unit of inventory is as follows:
rather than overvalues, your business.” Cost per unit = Purchase price – Purchase discounts – Purchase
returns + Freight in
The goal of conservatism is to report realistic figures.

[Link] Company Logo [Link] Company Logo

5.2 Inventory Costing Methods 5.2 Inventory Costing Methods

5.2.1Materiality Concept
Item: DVD0503 As we saw in Chapter 4,
In this exhibit, Smart Touch began July with 2 DVD0503s in
Date Quantity Quantity Cost per Unit Quantity on
Purchased Sold Hand
inventory. It had 3 DVD0503s at the end of July. The company
Jul -1 40 4
plans on selling each DVD for $80 to its customers. Measuring
5 6 50 10
inventory cost is easy when prices do not change. But unit cost
8 5 5
does change often. Looking at Exhibit 6-2, you can see that Smart
15 7 48 12
Touch’s cost per unit did change each time it made a purchase.
26 6 50 6
The July 1 beginning inventory cost $40 each, the purchases made
July 5 cost $45 each, and the purchases made July 26 cost $47
31 9 52 15
each. How many of the DVD0503s that were sold cost $40? How
31 22 11 15
many cost $45? To compute ending inventory and cost of goods
sold, Smart Touch must assign a unit cost to each item. The four
costing methods we’ll illustrate that GAAP allows are as follows:
[Link] Company Logo [Link] Company Logo

5.2 Inventory Costing Methods 5.2 Inventory Costing Methods

Requirements: 5.2.1 Specific unit cost
1. Specific unit cost The specific-unit-cost method is also called the
2. First-in, first-out (FIFO) cost specific-identification method. This method uses the
3. Last-in, first-out (LIFO) cost specific cost of each unit of inventory to determine
ending inventory and to determine cost of goods
4. Average cost sold. In the specific-unit-cost method, the company
knows exactly which item was sold and exactly what
the item cost. This costing method is best for
businesses that sell unique, easily identified
inventory items, such as automobiles, jewels, and
real estate (identified by address)…

[Link] Company Logo [Link] Company Logo

2
 8/13/2019

5.2 Inventory Costing Methods 5.2 Inventory Costing Methods

Item: DVD0503 Requirements:
Date Quantity Quantity Cost per Quantity 1. First-in, first-out (FIFO) cost
Purchased Sold Unit on Hand 2. Last-in, first-out (LIFO) cost
Jul -1 40 4 3. Average cost
5 6 50 10
8 5 5
15 7 48 12
26 6 50 6
31 9 52 15
31 22 11 15

[Link] Company Logo [Link] Company Logo

Date Account Title and Explanation Debit Credit

Jul -5
Purchase Inventory XXX
Cash/Account payable XXX
FIFO Journal Entries (All purchases and sales on Journal
FIFOPurchased Entries
inventory (All purchases
on cash(account) and sales on
account) 8a account)
Accounts recrivable (Cash) XXX
Sales Revenue XXX
Sale on accounts (cash)
8b Cost of goods sold XXX
Inventory XXX
Cost of goods sold
15 Purchase Inventory XXX
Cash/Account payable XXX
Purchased inventory on cash(account)
26 The same Jul-8 XXX
XXX

31 Purchase Inventory XXX

Cash/Account payable XXX
Purchased inventory on cash(account)
[Link] Company Logo [Link] Company Logo

5.2 Inventory Costing Methods 5.2 Inventory Costing Methods

5.2. First-in, first-out (FIFO) cost 5.2. First-in, first-out (FIFO) cost
 The cost of goods sold is based on the oldest  The cost of goods sold is based on the oldest
purchases—that is, the First In is the First Out purchases—that is, the First In is the First Out
of the warehouse (sold) of the warehouse (sold)
Date Quantity Purchased Cost of goods Sold Inventory on hand Date Quantity Purchased Cost of goods Sold Inventory on hand
Quantity Unit Total Quanti Unit Total Quanti Unit Total Quantity Unit Total Quanti Unit Total Quanti Unit Total
cost cost ty cost cost ty cost cost cost cost ty cost cost ty cost cost
Jul -1 40 4 Jul -1 40 4
5 6 50 50 10 5 6 50 4 40 10
8 5 ? 5 5 6 50

15 7 48 48 12 8 5 5 5

26 6 ?
15 7 48 48 12
31 9 52
26 6 ?
[Link] Company Logo 31 9
[Link] 52 Company Logo

3
 8/13/2019

5.2 Inventory Costing Methods LOGO

Requirements:
1. Specific unit cost
2. First-in, first-out (FIFO) cost
3. Last-in, first-out (LIFO) cost
4. Average cost

[Link]

[Link] Company Logo