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Vũ Quốc Thông (PhD.) 10/10/2020 Chapter Inventories Vũ Quốc Thông (PhD.) Objectives Compute the cost of inventory under the periodic and perpetual inventory system, using the FIFO,LIFO and Weighted average cost methods Compare and contrast the use of the three inventory costing methods Vũ Quốc Thông (PhD.) 10/10/2020 Contents Inventory cost flow assumptions Periodic and perpetual inventory system Inventory costing methods under the periodic inventory system Inventory costing methods under the perpetual inventory system Effect on P/L and B/S Which costing method to choose from? Inventory cost flow assumptions Business may buys identical units of goods at different unit costs  Cost flow must be assumed  First in, first out (FIFO)  Last in, first out (LIFO)  Weighted Average E.g? Vũ Quốc Thông (PhD.) 10/10/2020 First in, first out Last in, first out Vũ Quốc Thông (PhD.) 10/10/2020 Weighted Average Vũ Quốc Thông (PhD.) 10/10/2020 Periodic and perpetual inventory systems  Perpetual inventory system: Each purchase and sale of goods is recorded in an Inventory account  Periodic inventory system: Inventory is accounted for at the end of the period (what types of business using…?) Periodic and perpetual inventory systems Remember ! Perpetual inventory system Closing Balance = Opening Balance + Purchase - Sale Periodic inventory system COGS = Opening Balance + Purchase – Closing Balance 10 Vũ Quốc Thông (PhD.) 10/10/2020 Inventory Costing Methods under the perpetual inventory system  Using one of the following cost flow assumptions:  FIFO;  LIFO;  and Weighted Average Cost method  Also, stock card or inventory subsidiary ledger account are used in determining the inventory’s ending balance and value 11 Inventory Costing Methods under the perpetual inventory system FIFO Example Date Units 1st Jan Beginning Bal 300 2nd Jan Sale 200 4th Purchase 900 5th Jan Sale 500 8th Sale 300 Purchase 400 Jan Jan 30th Jan Cost per Unit $10 $12 $14 12 Vũ Quốc Thông (PhD.) 10/10/2020 Inventory Costing Methods under the perpetual inventory system FIFO Ending Inventory?  Quantity =  Value = $ Units COGS = $ 13 Inventory Costing Methods under the perpetual inventory system LIFO Example Date Units 1st Jan Beginning Bal 300 2nd Jan Sale 200 4th Purchase 900 5th Jan Sale 500 8th Sale 300 Purchase 400 Jan Jan 30th Jan Cost per Unit $10 $12 $14 14 Vũ Quốc Thông (PhD.) 10/10/2020 Inventory Costing Methods under the perpetual inventory system LIFO Ending Inventory?  Quantity =  Value = $ Units COGS = $ 15 Inventory Costing Methods under the perpetual inventory system Weighted Average cost method Example Date Units 1st Jan Beginning Bal 300 2nd Jan Sale 200 4th Purchase 900 5th Jan Sale 500 8th Sale 300 Purchase 400 Jan Jan 30th Jan Cost per Unit $10 $12 $14 16 Vũ Quốc Thông (PhD.) 10/10/2020 Inventory Costing Methods under the perpetual inventory system Weighted Average cost method Ending Inventory?  Quantity =  Value = $ Units COGS = $ 17 Inventory costing methods under the periodic inventory system Using one of the following cost flow assumptions:  FIFO;  LIFO;  and Weighted Average Cost method 18 Vũ Quốc Thông (PhD.) 10/10/2020 Inventory Costing Methods under the periodic inventory system FIFO Example: Date Units Cost per Unit 1st Jan Beginning Bal 300 $10 2nd Jan Purchase 400 $12 5th Purchase 600 $14 20th Jan Purchase 200 $10 31st Closing Bal 400 Unknown Jan Jan 19 Inventory Costing Methods under the periodic inventory system Under FIFO method, the goods purchased first are sold first Therefore:  Ending inventory: 400 units would comprise: 200 units purchased on 20th Jan (@$10 per unit) 200 units purchased on 5th Jan (@$14 per unit) Inventory Closing Balance = $4,800 20 10 Vũ Quốc Thông (PhD.) 10/10/2020 Inventory Costing Methods under the periodic inventory system LIFO Example: Date Units Cost per Unit 1st Jan Beginning Bal 300 $10 2nd Jan Purchase 400 $12 5th Purchase 600 $14 20th Jan Purchase 200 $10 31st Closing Bal 400 Unknown Jan Jan 21 Inventory Costing Methods under the periodic inventory system Under LIFO method, the goods purchased last are sold first Therefore:  Ending inventory: 400 units would comprise: 300 units of Beginning Bal 1st Jan (@$10 per unit) 100 units purchased on 2nd Jan (@$12 per unit) Inventory Closing Balance = $4,200 22 11 Vũ Quốc Thông (PhD.) 10/10/2020 Inventory Costing Methods under the periodic inventory system Weighted Average cost method Example: Date Units Cost per Unit 1st Jan Beginning Bal 300 $10 2nd Jan Purchase 400 $12 5th Purchase 600 $14 20th Jan Purchase 200 $10 31st Closing Bal 400 Unkown Jan Jan 23 Inventory Costing Methods under the periodic inventory system Weighted Average unit cost = = (3,000 + 4,800 + 8,400 + 2,000)/ (300 + 400 + 600 +200) = $12.13 Ending inventory= 400 * 12.13 = $4,852 24 12 Vũ Quốc Thông (PhD.) 10/10/2020 Effect on P/L and B/S Whatever the cost method apply, it will affect both P/L and B/S results as it impacts on:  COGS  Inventory ending balance 25 Which costing method to choose from? It depends on company’s policy LIFO is not permitted in a number of countries This is an accounting policy, therefore, it requires a consistency 26 13 Vũ Quốc Thông (PhD.) 10/10/2020 Which costing method to choose from? During a period of inflation or rising price, applying FIFO would give a higher gross profit and higher ending inventory balance as compared with the other two methods 27 Homework for Ch.8 Problem (p.353 – 354) Matching (p 355, exclude: E & F.) Multiple choice (p 355)  Refer: https://www.principlesofaccounting.com/chapter-8/perpetual-inventory-systems 28 14