Inventory Planning and Valuation

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Chapter 6

• Inventory Planning and Valuation

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How does inventory (the stuff we sell to people)
flow through our business?
This is what we have left over
This is what we start with..
Ending Merchandise Inventory
Beginning Inventory
Cost of Merchandise Available for Sale
Cost of Merchandise Sold
Net Purchases
This is what we buy throughout the year
This is the cost, it cost us to sell Our goods
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Some more review of terms from last year.

• FOB Free On Board
• FOB shipping point means that the buyer pays
  the transportation charges
• Ownership of the goods changes hands to the buyer
  once the goods have been delivered to the
  transportation business.
• FOB destination the vendor pays the
  transportation charges.
• Title of the good stays in the vendors hand until
  goods are delivered.

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Good on Consignment

• Consignment Goods are given to a business to
  sell but for which the title remains with the
  vendor.
• Consignee the person or business that receives
  goods (the person who wants the business to sell
  the goods for them)
• Consignor The person or business that gives
  goods on consignment

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How do we keep track of all of this inventory..

• Stock Record keeps track of each item we have
  in inventory and keeps a running account as to
  how many we have.
• Stock ledger is a lot like accounts receivable
  or payable ledgers. It is a ledger that has all
  of the items that we have so that we can keep a
  accurate count of how many we have.

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Inventory is increase through a form called a
Purchase Order (P.O.) it is a legal form That
says we will buy some of the good from you and
pay you at a later time.
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This is just a record of all of the stuff that we
have in our warehouse. It is a physical
inventory of the merchandise
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Inventory Costing Methods

• Fifo
• First In- First out
• Lifo
• Last in First out
• Weighted Average
• Getting a total cost/ dividing it by the total
  units to get a average price and then multiplying
  it by the number of units left over.

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Lets give you an example.
8 _at_ 25
12 _at_ 26
10 _at_ 27
18 _at_ 28
17 _at_ 23
If I look at my inventory at the end of the year
and we find out that there are 27 units on hand.
If we use the FIFO method it would look something
like this.
So our cost of inventory is 9 items _at_ 27.00
243.00 18 items _at_ 28.00 504.00 27 items
747.00
We would sell these first
These would be second
These would be third
Finally we would sell 1 of these
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Lets give you an example.
8 _at_ 25
12 _at_ 26
10 _at_ 27
18 _at_ 28
17 _at_ 23
If I look at my inventory at the end of the year
and we find out that there are 27 units on hand.
If we use the LIFO method it would look something
like this.
So our cost of inventory is 17 items _at_ 23.00
243.00 8 items _at_ 25.00 504.00 2 items _at_ 26.00
52.00 27 items 643.00
We would sell these first
These would be second
Finally we would sell 10 of these
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Weighted Average cost of inventory
8 _at_ 25
12 _at_ 26
10 _at_ 27
18 _at_ 28
17 _at_ 23
If I look at my inventory at the end of the year
and we find out that there are 27 units on hand.
If we use the LIFO method it would look something
like this.
17 items _at_ 23.00 391.00 8 items _at_ 25.00
200.00 12 items _at_ 26.00 312.00 10
items _at_ 27.00 270.00 18 items _at_ 28.00
540.00 65 items 1677.00
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17 items _at_ 23.00 391.00 8 items _at_ 25.00
200.00 12 items _at_ 26.00 312.00 10
items _at_ 27.00 270.00 18 items _at_ 28.00
540.00 65 items 1677.00
Total cost / Total Units Average cost per
unit 1677.00 65 25.80 Average cost per unit
x units left in inventory Cost of
inventory 25.80 27 696.60
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Lower of Cost or Market Inventory Costing Method

• In this context market refers to the current
  replacement cost of the merchandise item.
• For example, OfficeMart may currently have to pay
  a vendor 1.10 to purchase a ring binder. The
  market price, therefore is 1.10. When
  merchandise is purchased, the unit price is used
  to record inventory costs.
• If the unit price is higher than the market price
  at the end of a fiscal period , the inventory
  cost is reduced to the current market price.

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Gross Profit of Estimating Inventory
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508,340 / 873,400 58.2
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Merchandise Inventory Turnover Ratio

• Jan 1 Merch Inventory Dec 31 Merch Inv
• (168365 173325) / 2
• 170845 (average Merch. Inventory)
• Cost of Merch. Sold / Average Merch.
  Inventory
• Merch Inventory Turnover Ratio 5.4 times
• 365 / 5.4 68 days

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• Problems 6-1 on computer
• 6-2,3,4,5