ACCT$215$Autumn$2013$Accounting for Inventory – Part II Cost flow assumptions • Methods: o Specific identification o First-in, first-out (FIFO) o Last-in, first-out (LIFO) o Average cost • Note: there is no requirement that a firm’s cost flow assumption match the physical flow of goods. • LIFO is not allowed under IFRS. What if the value of inventory changes? We apply the lower-of-cost-or-market rule! • If the value goes up... o Do nothing until you sell the inventory and then you get to record the profit (difference between revenue and COGS). o In this case, the cost of the inventory is lower than the market value of the inventory, so we keep it at cost. • If the value goes down... o Write the inventory down to its market value if market value is less than original cost o Inventory market value is defined as its “replacement cost” – that is, inventory market value is the cost that it would take to replace it.ACCT$215$Autumn$2013$ Practice Problem #1: Jimmie’s Fishing Hold uses a periodic inventory system and has the following transactions related to its top-selling Shimano fishing reel for the month of June 2010: Date Transactions Units Cost per Unit Total Cost Jun 1 Beg. inventory 16 300 4,800 Jun 7 Sale 11 Jun 12 Purchase 10 290 2,900 Jun 15 Sale 12 Jun 24 Purchase 10 280 2,800 Jun 27 Sale 8 Jun 29 Purchase 10 270 2,700 13,200 Required: 1. Using the FIFO method, calculate ending inventory and cost of goods sold at June 30, 2010. 2. Using the LIFO method, calculate ending inventory and cost of goods sold at June 30, 2010. 3. Using the average cost method, calculate ending inventory and cost of goods sold at June 30, 2010. 4. Repeat 1 and 2 as if Jimmie used the perpetual method. Practice Problem #2: Home Furnishings uses the periodic inventory system and average cost method to report inventory. Year-end information relevant for applying the lower-of-cost-or-market rule is presented below. Inventory Year-End Quantity Average Cost Market Value Furniture 100 $80 $90 Electronics 60 $300 $260 Required: 1. Calculate ending inventory applying the lower-of-cost-or-market rule. 2. Record any necessary adjustment to inventory. 3. Explain the impact of the adjustment in the financial statements.ACCT$215$Autumn$2013$Practice Problem #1 Requirement 1 Date Transaction Number of units Unit cost Ending Inventory Jun. 24 Purchase 5 $280 $1,400 Jun. 29 Purchase 10 270 2,700 15 $4,100 Date Transaction Number of units Unit cost Cost of Goods Sold Jun. 1 Beginning Inventory 16 $300 $4,800 Jun. 12 Purchase 10 290 2,900 Jun. 24 Purchase 5 280 1,400 31a $9,100 a First 31 units purchased are assumed sold Requirement 2 Date Transaction Number of units Unit cost Ending Inventory Jun. 1 Beginning Inventory 15 $300 $4,500 Date Transaction Number of units Unit cost Cost of Goods Sold Jun. 1 Beginning Inventory 1 $300 $ 300 Jun. 12 Purchase 10 290 2,900 Jun. 24 Purchase 10 280 2,800 Jun. 29 Purchase 10 270 2,700 31* $8,700 * Last 31 units purchased are assumed soldACCT$215$Autumn$2013$Requirement 3 Date Transaction Number of units Unit cost Total Cost Jun. 1 Beginning Inventory 16 $300 $ 4,800 Jun. 12 Purchase 10 290 2,900 Jun. 24 Purchase 10 280 2,800 Jun. 29 Purchase 10 270 2,700 46 $13,200 Average cost = $13,200 / 46 units = $286.96 (rounded to the nearest penny). Ending inventory = 15 units X $286.96 = $4,304 Cost of goods sold = 31 units X $286.96 = $8,896ACCT$215$Autumn$2013$Requirement 4 - FIFO Date Transaction Number of units Unit cost Ending Inventory Jun. 24 Purchase 5 $280 $1,400 Jun. 29 Purchase 10 270 2,700 15 $4,100 Date Transaction Number of units Unit cost Cost of Goods Sold Jun. 1 Beginning inventory 11a $300 $3,300 Jun. 1 Beginning inventory 5b 300 1,500 Jun. 12 Purchase 7b 290 2,030 Jun. 12 Purchase 3c 290 870 Jun. 24 Purchase 5c 280 1,400 31 $9,100 a First 11 units purchased at the time of the June 7 sale are assumed sold. b First 12 units purchased at the time of the June 15 sale are assumed sold. c First 8 units purchased at the time of the June 27 sale are assumed sold. Requirement 4 - LIFO Date Transaction Number of units Unit cost Ending Inventory Jun. 1 Beginning Inventory 3 $300 $ 900 Jun. 24 Purchase 2 280 560 Jun. 29 Purchase 10 270 2,700 15 $4,160 Date Transaction Number of units Unit cost Cost of Goods Sold Jun. 1 Beginning Inventory 11a $300 $3,300 Jun. 1 Beginning Inventory 2b 300 600 Jun. 12 Purchase 10b 290 2,900 Jun. 24 Purchase 8c 280 2,240 31 $9,040 a Last 11 units purchased at the time of the June 7 sale. b Last 12 units purchased at the time of the June 15 sale. c Last 8 units purchased at the time of the June 27 sale.ACCT$215$Autumn$2013$ Practice Problem #2 Requirement 1 Inventory Quantity Lower of Cost or Market Ending Inventory Furniture 100 $ 80 $ 8,000 Electronics 60 260 15,600 $23,600 Requirement 2 Debit Credit Cost of Goods Sold 2,400 Inventory 2,400 (Adjust inventory down to market) (60 units of electronics X $40)$ Requirement 3 The write-down of inventory has the effects of reducing total assets (inventory), increasing expenses (cost of goods sold), decreasing net income, and decreasing retained