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 Jun 1 Jun 7 Jun 12 Jun 15 Jun 24 Jun 27 Jun 29 Transactions Beg inventory Sale Purchase Sale Purchase Sale Purchase Units 16 11 10 12 10 8 10 Cost per Unit 300 Total Cost 4 800 290 2 900 280 2 800 270 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 Furniture Electronics Year End Quantity 100 60 Average Cost 80 300 Market Value 90 260 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 Jun 24 Jun 29 Date Jun 1 Jun 12 Jun 24 a Transaction Purchase Purchase Number of units 5 10 15 Unit cost 280 270 Ending Inventory 1 400 2 700 4 100 Transaction Beginning Inventory Purchase Purchase Number of units 16 10 5 31a Unit cost 300 290 280 Cost of Goods Sold 4 800 2 900 1 400 9 100 Number of units 15 Unit cost 300 Ending Inventory 4 500 Number of units 1 10 10 10 31 Unit cost 300 290 280 270 Cost of Goods Sold 300 2 900 2 800 2 700 8 700 First 31 units purchased are assumed sold Requirement 2 Date Jun 1 Date Jun 1 Jun 12 Jun 24 Jun 29 Transaction Beginning Inventory Transaction Beginning Inventory Purchase Purchase Purchase Last 31 units purchased are assumed sold ACCT 215 Autumn 2013 Requirement 3 Date Jun 1 Jun 12 Jun 24 Jun 29 Transaction Beginning Inventory Purchase Purchase Purchase Number of units 16 10 10 10 46 Unit cost 300 290 280 270 Total Cost 4 800 2 900 2 800 2 700 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 8 896 ACCT 215 Autumn 2013 Requirement 4 FIFO Date Jun 24 Jun 29 Date Jun 1 Jun 1 Jun 12 Jun 12 Jun 24 Transaction Purchase Purchase Number of units 5 10 15 Unit cost 280 270 Ending Inventory 1 400 2 700 4 100 Transaction Beginning inventory Beginning inventory Purchase Purchase Purchase Number of units 11a 5b 7b 3c 5c 31 Unit cost 300 300 290 290 280 Cost of Goods Sold 3 300 1 500 2 030 870 1 400 9 100 a First 11 units purchased at the time of the June 7 sale are assumed sold 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 b Requirement 4 LIFO Date Jun 1 Jun 24 Jun 29 Transaction Beginning Inventory Purchase Purchase Number of units 3 2 10 15 Unit cost 300 280 270 Number Unit Date Transaction of units cost a Jun 1 Beginning Inventory 11 300 b Jun 1 Beginning Inventory 2 300 b Jun 12 Purchase 10 290 c Jun 24 Purchase 8 280 31 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 Ending Inventory 900 560 2 700 4 160 Cost of Goods Sold 3 300 600 2 900 2 240 9 040 ACCT 215 Autumn 2013 Practice Problem 2 Requirement 1 Inventory Furniture Electronics Quantity 100 60 Lower of Cost or Market 80 260 Ending Inventory 8 000 15 600 23 600 Requirement 2 Debit Cost of Goods Sold Inventory Adjust inventory down to market 60 units of electronics X 40 Credit 2 400 2 400 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 earnings