Turnover and Valuation of Inventory

1
Chapter 7

• Turnover and Valuation of Inventory

2
Big Picture

• Two main concepts
• How quickly is my business moving merchandise?
• What is my inventory worth?

3
Objective 1

• Determine Average Inventory

4
Business Efficiency

• can be measured by the average time for
  merchandise to sell.
• The number of times that the merchandise sells
  during a certain period of time is called
• Inventory turnover
• Stock turnover

5
Average Inventory

• To determine inventory turnover, first compute
  the average inventory

May 1 25,750 May 31 21,780 June 30 22,408
23,312.67
6
Objective 2

• Calculate Stock Turnover

7
Stock Turnover Ratio

• A number that describes how quickly merchandise
  is moving.

8
Turnover Ratios

• Used for comparison purposes.
• Trade Organizations
• A high turnover ratio means __________________
• What kind of business would (should) have a
  higher turnover ratio?
• A low turnover ratio means __________________
• What kind of business might you expect to have a
  lower turnover ratio?

Products come into the store for sale and get
sold fairly quickly
Stores that sell perishables. Grocery stores,
bakeries, etc.
Products come into the store and remain for a
longer period of time before being sold.
Furniture stores, car dealers, etc.
9
Formulas
10
Calculate Stock Turnover

• During May, Ritz Apparel has retail sales of
  64,064 and an average retail inventory of
  19,712.

11
Calculate Stock Turnover

• Compute the stock turnover ratio

168,400
3.76
44,766.67
Inventory Amt. at Retail June 1 41,500 July
1 48,700 August 31 44,100
Retail Sales for the period 168,400
12
Calculate Stock Turnover

• Compute the stock turnover ratio

211,200
3.22
65,675
Inventory Amt. at Cost Sept. 1 60,200 Oct 1
68,500 Nov 1 71,000 Dec. 31 63,000
Cost of Goods Sold for the period 211,200
13
Placing Values on Inventory
Perpetual Inventory
Incoming Items Quantity Size Cost
14
Objective 3

• Uniform Product Codes

15
UPC Codes

• Uniform Product Code

1.29
Perpetual Inventory
Inventory 6
5
16
Objective 5

• Inventory Valuation Weighted Average Method

17
Weighted Average Method

• Over time, the cost of a product changes.
• How do you determine the value of your inventory
  if the prices keep moving?

5.19
5.19
5.19
18
Weighted Average 1 of 2

• Beginning Inventory 10 units _at_ 8
• June 25 units at 9
• August 15 units at 10
• Now in Inventory 20 units

10 units x 8/unit 80 25 units x 9/unit
225 15 units x 10/unit 150
50 units 455
Average cost per item 455 50 units
9.10/unit
Inventory Value 9.10 x 20 units 182
19
Weighted Average 2 of 2 14, page 294

• Beginning Inventory 700 units _at_ 1.25
• May 400 units at 1.75
• August 500 units at 2.25
• October 600 units at 3.00
• Now in Inventory 720 units

700 units x 1.25/unit 875 400 units x
1.75/unit 700 500 units x 2.25/unit
1125 600 units x 3.00/unit 1800
2200 units 4500
Average cost per item 4500 2200 units
2.05/unit
Inventory Value 2.05 x 720 units 1476
20
Objective 6

• FIFO Method of Inventory

21
FIFO Method

• FIFO stands for first-in, first-out.
• Inventory method assumes that the first products
  to arrive in inventory are the first to be sold.

22
FIFO 1 of 2 14, page 294

• Beginning Inventory 700 units _at_ 1.25
• May 400 units at 1.75
• August 500 units at 2.25
• October 600 units at 3.00
• Now in Inventory 720 units

700 _at_ 1.25 400 _at_ 1.75 500 _at_ 2.25 600 _at_ 3.00
First items to arrive are the first to leave.
720 units
600 units _at_ 3 each
120 units _at_ 2.25 each
Inventory Value 600 x 3 1800 120 x 2.25
270
1800 270 2070
23
FIFO 2 of 2 13, page 294

• Beginning Inventory 50 units _at_ 30.50
• March 70 units at 31.50
• June 30 units at 33.25
• August 40 units at 30.75
• Now in Inventory 75 units

First items to arrive are the first to leave.
50 _at_ 30.50 70 _at_ 31.50 30 _at_ 33.25 40 _at_ 30.75
75 units
40 units _at_ 30.75 ea
30 units _at_ 33.25 ea
5 units _at_ 31.50 ea
Inventory Value 40 x 30.75 1230 30 x 33.25
997.50 5 x 31.50 157.50
1230 997.50 157.50 2385
24
Objective 7

• LIFO Method of Inventory

25
LIFO Method

• LIFO stands for last-in, first-out.
• Inventory method assumes that the newest
  products to arrive in inventory are the first to
  be sold.

26
LIFO 1 of 2 14, page 294

• Beginning Inventory 700 units _at_ 1.25
• May 400 units at 1.75
• August 500 units at 2.25
• October 600 units at 3.00
• Now in Inventory 720 units

700 _at_ 1.25 400 _at_ 1.75 500 _at_ 2.25 600 _at_ 3.00
Newest items are the first to leave.
720 units
700 units _at_ 1.25 ea
20 units _at_ 1.75 ea
Inventory Value 700 x 1.25 875 20 x 1.75
35
875 35 910
27
LIFO 2 of 2 13, page 294

• Beginning Inventory 50 units _at_ 30.50
• March 70 units at 31.50
• June 30 units at 33.25
• August 40 units at 30.75
• Now in Inventory 75 units

50 _at_ 30.50 70 _at_ 31.50 30 _at_ 33.25 40 _at_ 30.75
Newest items are the first to leave.
75 units
50 units _at_ 30.50 ea
25 units _at_ 31.50 ea
Inventory Value 50 x 30.50 1525 25 x 31.50
787.50
1525 787.50 2312.50
28
Objective 8

• Estimate Inventory Value Using the Retail Method

29
Retail Method of Inventory

• Cost of goods available for sale is found as a
  percent of the retail value of the goods
  available for sale during the same period.
• This percent is then multiplied by the retail
  value of the inventory at the end of the period.
• The result is an estimate of the inventory at
  cost.

30
Inventory Value Using the Retail Method

• Procedure

Net Sales 900
500 _at_ cost
850 _at_ retail
200 _at_ cost
340 _at_ retail
700 _at_ cost
1190 _at_ retail
Warehouse For Ace Hardware
Retail Value of the Current Inventory 1190
900 290
Cost Ratio 700 ? 1190 0.588
Inventory at Cost 290 x 0.588 170.52
31
Inventory Value Using the Retail Method 1 of 2

• Page 296, 23 Piano Repair Problem

Sept. 30 43,750 _at_ cost 62,500 _at_
retail Purchases 51,600 _at_ cost 73,800 _at_ retail
Net Sales 92,500
32
Inventory Value Using the Retail Method 2 of 2

• Page 296, 24 Cell Phones Plus Problem

March 31 27,000 _at_ cost 45,000 _at_
retail Purchases 108,000 _at_ cost 180,000 _at_
retail
Net Sales 162,000
33
Practice

• Pages 293 296
• 17 Turnover Ratio
• 20 (Weighted Ave. Method, FIFO, LIFO)