Chapter 7 INVENTORIESImportance of accounting for inventoryPhysical inventoryCosting inventoryINVENTORY COST FLOW METHODSCost of inventory must be allocated between units sold during period (expense) and units left on hand at end of period (asset)Problem: Counting the number of items on hand at the end of the period is relatively easy. Sometimes, though, the same item purchased at different times will have a different cost. So how do we assign a dollar cost to the units left in inventory and a dollar cost to the units sold during the period?Solution: inventory cost flow methods1. specific ID method – 2. weighted average method 3. FIFO – 4. LIFO – NOTE: The cost flow method chosen does not have to match the company’s physical flow of goods.Example: Inventory cost flow (valuation) methodsUnits Purchase price Total purchase per unit Beginning inventory 10 $ 5 $ 50Purchases:Oct 2 8 6 48Oct 5 5 9 45Oct 21 7 10 70$213Ending inventory 12Determine the dollar amount that will be assigned to the ending inventory and cost ofgoods sold using:a. weighted average methodb. FIFOc. LIFOComparing inventory cost flows methodsFIFOLIFOOTHER INVENTORY ISSUES1. Inventory errorsExample Inventory ErrorsAggie Company’s accountant prepared the following income statement for the year ended December 31, 2014: Sales revenue 40,000COGS:Beginning inventory 12,000Net purchases 18,000Goods available for sale 30,000Ending inventory (5,000)Cost of goods sold 25,000Gross profit 15,000Other expenses 8,000Net income 7,000However, the company’s accountant later learned that ending inventory was accidentally overstated by $500. (1) What is the correct amount for cost of goods sold and gross profit?(2) How would the error described above affect Aggie Company’s cost of goods sold and gross profit for 2015, if the error is not discovered and corrected?2. Lost/stolen items and inventory shrinkage3. Lower of cost or market4. Estimating ending inventory : may be necessary for--- Example: Gross profit method of estimating ending inventoryDoyal Banana Company owns a warehouse in Houston, Texas. The warehouse is located near railroad tracks to allow for easy access to shipping. Recently, a traveling circus was traveling by train to their winter home in Florida when the train derailed. Fortunately there were no fatalities, but the car that housed the circus’s monkeys was damaged and all of the monkeys escaped. They then broke into the Doyal’s Warehouse and ate the entire contents.Doyal has the following information available:Beginning inventory $ 400Purchases 900Sales to date $1,600 Last year, Doyal reported sales of $7,000 and gross profit of $2,100. Estimate the dollar value of the inventory destroyed by the monkeys.Using inventory informationInventory