Valuation of Inventories:

1
CHAPTER 8
Valuation of Inventories A Cost Basis Approach
.....
Issues

• types of inventory
• perpetual vs periodic systems
• goods to be included in inventory
• costs to be included

2
Periodic Inventory
Year-end adjusting entry
Inventory 80
Cost of Goods Sold 900
Purchases 925
Inventory 55
3
900
925
1,300
900
55
80
1,300
900
What Impact? Purchases recorded properly but the
count of ending inventory overstated it by 10.
4
900
925
1,300
900
55
80
1,300
900
What Impact? Ending inventory is correct but 8
of next years purchases were recorded in the
current year.
5
900
925
1,300
900
55
80
1,300
900
What Impact? 5 of inventory was improperly
recorded as a purchase in the current year and
improperly included in ending inventory.
6
Average Cost - Periodic
150 x 395,850
CGS
450 x 43 19,350
400 x 44 17,600
1,000 x 42.80 42,800
End Inv
7
Average Cost - Perpetual
Purchases Sold Balance
150 x 395,850
450 x 43 19,350
400 x 44 17,600
CGS
End Inv
8
FIFO - Periodic
150 x 395,850
CGS
450 x 43 19,350
400 x 44 17,600
End Inv
9
FIFO Perpetual Inventory
Purchases Sold Balance
150 x 395,850
450 x 43 19,350
400 x 44 17,600
CGS
End Inv
10
LIFO - Periodic
150 x 395,850
CGS
450 x 43 19,350
400 x 44 17,600
End Inv
11
LIFO Perpetual Inventory
Purchases Sold Balance
150 x 395,850
450 x 43 19,350
200
400 x 44 17,600
500
CGS
End Inv
12
Dollar-Value LIFO

• calculate base-year value of total inventory

• use base-year values to identify LIFO layers

Cur Value
B-Y Value
LIFO layers
100,000
12/31/00 Index100
123,200
12/31/01 Index110
134,560
12/31/02 Index116
123,900
12/31/03 Index118
13
Whose inventory?
Z
W

• Goods in transit (W shipped to Z f.o.b.
  destination).

• Z takes goods from W on consignment.

• W sells goods to Z with an agreement to
  repurchase at a set price.

• W sells goods to Z, estimating that 35 of them
  will be returned.

• W completes special-order goods for Z but has not
  yet delivered them.