1
Adeng Pustikaningsih, M.Si.
Dosen Jurusan Pendidikan Akuntansi Fakultas Ekonomi
Universitas Negeri Yogyakarta
CP: 08 222 180 1695
2
3
1.
Describe the importance of control
over inventory.
2.
Describe three inventory cost flow
assumptions and how they impact the
income statement and balance sheet.
4
3.
Determine the cost of inventory under the
perpetual system, using the FIFO, LIFO, and
average cost methods.
After studying this chapter, you should
be able to:
4.
Determine the cost of inventory under the
periodic system, using the FIFO, LIFO, and
average cost methods.
5.
Compare and contrast the use of the three
5
6.
Describe and illustrate the reporting of
merchandise inventory in the financial
statement.
After studying this chapter, you should
be able to:
7.
Estimate the cost of inventory using the
6
Describe the importance of
control over inventory.
7
Two primary objectives of control
over inventory are:
1)
Safeguarding the inventory, and
8
Controls over inventory
include developing and using
security measures to prevent
inventory damage or customer
9
To ensure the accuracy of the
amount of inventory reported in
the financial statements, a
merchandising business should
10
Describe three inventory cost
flow assumptions and how they
impact the income statement
and balance sheet.
12 11
13 12
14 13
15
250
200
150
100
50
0
FIFO Average Specific
16 14 400
300
200
100
0
371
299
130
FIFO LIFO Average cost
17 February, as shown below.
Feb. 8 Purchase 1 Rp45,000 15 Purchase 1 48,000 26 Purchase 1 51,000
15 Item QBM Units Cost
Assume that one unit is sold on February 27 for Rp70,000.
Determine the gross profit for February and ending inventory on February 28 using (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) average cost methods.
Total 3 Rp144,000
18 16
For Practice: PE 7-1A, PE 7-1B
Gross Profit Ending Inventory
(a) First-in, first-out (FIFO): Rp25,000 (Rp70,000 – Rp45,000) Rp99,000 (Rp48,000 – Rp51,000)
(b) Last-in, first-out (LIFO): Rp19,000 (Rp70,000 – Rp51,000) Rp93,000 (Rp45,000 + Rp48,000)
(c) Average cost: Rp22,000 (Rp70,000 – Rp48,000) Rp96,000 (Rp48,000 x 2)
19
Determine the cost of
inventory under the perpetual
inventory system, using
FIFO, LIFO, and average
cost methods.
20 18
On January 1, the firm had 100 units of
Item 127B that cost Rp20,000 per unit.
Item 127B
Units
Cost
21 19
On January 4, the firm sold 70 units
of 127B at Rp30,000 each.
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
22
On January 22, the firm sold twenty
units at $30.
4 Accounts Receivable 2 100 000
Sales 2 100 000
4 Cost of Merchandise Sold 1 400 000
Merchandise Inventory 1 400 000
On January 4, the firm sold 70 units
of 127B at Rp30,000 each.
23 21
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
4 70 20 1,400 30 20 600
Jan. 1 100 20 2,000
24 22
On January 10, the firm purchased
80 units at Rp21,000 each.
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
4
Sale
70
25 23 10 Merchandise Inventory 1 680 000
Accounts Payable 1 680 000
26 24
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600
10 80 21 1,680 30 20 600 80 21 1,680
27 25
On January 22, the firm sold 40 units
for Rp30,000 each.
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
4
Sale
70
10
Purchase
80 21,000
28
On January 22, the firm sold twenty
units at $30.
22 Accounts Receivable 1 200 000
Sales 1 200 000
22 Cost of Merchandise Sold 810 000
Merchandise Inventory 810 000
On January 22, the firm sold 40 units
for Rp30,000 each.
29 27
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600
10 21 210 70 21 1,470
Of the forty sold, thirty are considered to be from those acquired at Rp20,000 each. The other ten are
30
On January 28, the firm sold 20
units at Rp30,000 each.
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
4
Sale
70
10
Purchase
80 21,000
22
Sale
40
28
Sale
20
31 29 28 Accounts Receivable 600 000
Sales 600 000
28 Cost of Merchandise Sold 420 000
Merchandise Inventory 420 000
32 30
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600
10 21 210 70 21 1,470
28 20 21 420 50 21 1,050
33 31
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
4
Sale
70
10
Purchase
80 21,000
22
Sale
40
28
Sale
20
30
Purchase
100 22,000
34 32
On January 30, purchased ten additional
units of Item 127B at Rp22,000 each.
30 Merchandise Inventory 2 200 000
35 33
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600
10 21 210 70 21 1,470
28 20 21 420 50 21 1,050
30 100 22 2,200 50 21 1,050 100 22 2,200
36 34
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600
10 21 210 70 21 1,470
28 20 21 420 50 21 1,050 30 100 22 2,200 50 21 1,050
100 22 2,200
Cost of merchandise sold for January is Rp2,630,000.
37
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600
10 21 210 70 21 1,470
28 20 21 420 50 21 1,050 30 100 22 2,200 50 21 1,050
100 22 2,200
January 31, inventory is Rp3,250,000 (Rp1,050,000 + Rp2,200,000)
38
Beginning inventory, purchases, and sales for Item ER27
are as follows:
Nov. 1 Inventory 40 units at Rp5,000
5 Sale
32 units
11 Purchase 60 units at Rp7,000
21 Sale
45 units
36
39 37
For Practice: PE 7-2A, PE 7-2B
a) Cost of merchandise sold:
8 units @ Rp5,000 Rp40,000
37 units @ Rp7,000 259,000
45 units Rp299,000
b) Inventory, November 30:
40 38
On January 1, the firm had 100 units of
Item 127B that cost Rp20,000 per unit.
Item 127B
Units
Cost
41 39
On January 4, the firm sold 70 units
of 127B at Rp30,000 each.
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
42
On January 22, the firm sold twenty
units at $30.
4 Accounts Receivable 2 100 000
Sales 2 100 000
4 Cost of Merchandise Sold 1 400 000
Merchandise Inventory 1 400 000
On January 4, the firm sold 70 units
of 127B at Rp30,000 each.
43 41
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
4 70 20 1,400 30 20 600
Jan. 1 100 20 2,000
44 42
On January 10, the firm purchased
80 units at Rp21,000 each.
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
4
Sale
70
45 43 10 Merchandise Inventory 1 680 000
Accounts Payable 1 680 000
46 44
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600
10 80 21 1,680 30 20 600 80 21 1,680
47 45
On January 22, the firm sold 40 units
for Rp30,000 each.
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
4
Sale
70
10
Purchase
80 21,000
48
On January 22, the firm sold twenty
units at $30.
22 Accounts Receivable 1 200 000
Sales 1 200 000
22 Cost of Merchandise Sold 840 000
Merchandise Inventory 840 000
On January 22, the firm sold 40 units
for Rp30,000 each.
49 47
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 40 21 840 30 20 600 40 21 840
All of the 40 sold are considered to be from the January 10 purchase.
50
On January 28, the firm sold 20
units at Rp30,000 each.
48
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
4
Sale
70
10
Purchase
80 21,000
22
Sale
40
51 49 28 Accounts Receivable 600 000
Sales 600 000
28 Cost of Merchandise Sold 420 000
Merchandise Inventory 420 000
52 50
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600
28 20 21 420 30 20 600
20 21 420
22 40 21 840 30 20 600 40 21 840 10 80 21 1,680 30 20 600 80 21 1,680
All of the 20 sold are considered to be from the January 22 purchase.
53 51
Item 127B
Units
Cost
Jan. 1
Inventory
100 Rp20,000
4
Sale
70
10
Purchase
80 21,000
22
Sale
40
28
Sale
20
30
Purchase
100 22,000
54 52
On January 30, the firm purchased one hundred
additional units of Item 127B at Rp22,000 each.
30 Merchandise Inventory 2 200 000
55 33 53
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600
28 20 21 420 30 20 600 20 21 420 22 40 21 840 30 20 600 40 21 840 10 80 21 1,680 30 20 600 80 21 1,680
30 100 22 2,200 30 20 600 20 21 420 100 22 2,200
56 33 54
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600
28 20 21 420 30 20 600 20 21 420 22 40 21 840 30 20 600 40 21 840 10 80 21 1,680 30 20 600 80 21 1,680
30 100 22 2,200 30 20 600 20 21 420 100 22 2,200
Cost of merchandise sold Rp2,660,000
57 33 55
Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 100 20 2,000
4 70 20 1,400 30 20 600
28 20 21 420 30 20 600 20 21 420 22 40 21 840 30 20 600 40 21 840 10 80 21 1,680 30 20 600 80 21 1,680
30 100 22 2,200 30 20 600 20 21 420 100 22 2,200
January 31, inventory…..Rp3,220,000
58
Beginning inventory, purchases, and sales for Item ER27
are as follows:
Nov. 1 Inventory 40 units at Rp5,000
5 Sale
32 units
11 Purchase 60 units at Rp7,000
21 Sale
45 units
56
59 57
For Practice: PE 7-3A, PE 7-3B
a) Cost of merchandise sold:
Rp315,000 = (45 units x Rp7,000)
b) Inventory, November 30:
60
Determine the cost of inventory
under the periodic inventory
system, using FIFO, LIFO, and
average cost methods.
61
Using FIFO, the earliest
batch purchased is
considered the first batch
of merchandise sold. The
physical flow does not
have to match the
62 60
=Rp2,000,000
= 1,680,000
= 2,200,000
Cost of merchandise
available for sale
100 units @ Rp20,000
80 units @ Rp21,000
100 units @ Rp22,000
280 units available
for sale during
year
Jan. 1
Jan. 10
Jan. 30
63 61
The physical count on January 31 shows that 150
units are on hand (conclusion: 130 units were
sold). What is the cost of the ending inventory?
=
Rp 0
=
1,050,000
=
2,200,000
100 units @ $20
80 units @ $21
100 units @ $22
Jan. 1
Jan. 10
Jan. 30
Sold these
Sold 30 of these
50 units @ Rp21,000
100 units @ Rp22,000
64
Now we can calculate the cost of goods
sold as follows:
Beginning inventory, January 1 (Slide 60) Rp2,000,000 Purchases (Rp1,680,000 + Rp2,200,000) 3,880,000 Cost of merchandise available for sale Rp5,880,000 Ending inventory, January 31(Slide 61) 3,250,000 Cost of merchandise sold Rp2,630,000
65
Using LIFO, the most recent batch
purchased is considered the first batch of
merchandise sold. The actual flow of goods
does not have to be LIFO. For example, a
store selling fresh fish would want to sell the
66 64
=Rp2,000,000
= 1,680,000
= 2,200,000
Cost of merchandise
available for sale
100 units @ Rp20,000
80 units @ Rp21,000
100 units @ Rp22,000
280 units available
for sale during
year
Jan. 1
Jan. 10
Jan. 30
67 65
Assume again that the physical count on January
31 is 150 units (and that 130 units were sold).
What is the cost of the ending inventory?
=
Rp2,000,000
=
1, 680
=
2,200
100 units @ Rp20,000
80 units @ $21
100 units @ $22
Jan. 1
Jan. 10
Jan. 30
Sold these
Sold 30 of these
50 units @ Rp21,000
=
0
=
1,050,000
68 66
Now we can calculate the cost of goods
sold as follows:
69
The weighted average unit cost
method is based on the average
cost of identical units. The total
cost of merchandise available
for sale is divided by the related
70
Rp5,880,000
=Rp2,000,000
= 1,680,000
= 2,200,000
100 units @ Rp20,000
80 units @ Rp21,000
100 units @ $22
280
Jan. 1
Jan. 10
Jan. 30
Average unit cost: Rp5,880,000
÷
280 = Rp21,000
Cost of merchandise sold: 130 units at Rp21,000 = Rp2,730,000
Ending merchandise inventory: 150 units at Rp21,000=
Rp3,150,000
68
71 69
Now we can calculate the cost of goods
sold as follows:
72
The units of an item available for sale during the year were as
follows:
Jan.
1
Inventory
6 units @ Rp50,000 Rp 300,000
Mar. 20
Purchase
14 units @ Rp55,000 770,000
Oct. 30
Purchase
20 units @ Rp62,000 1,240,000
Available for sale
40 units Rp 2,310,000
70
There are 16 units of the item in the physical inventory at
December 31. The periodic inventory system is used.
Determine the inventory cost by (a) the first-in, first-out
73 71
For Practice: PE 7-4A, PE 7-4B
a) First-in, first-out (FIFO) method: Rp992,000 (16 units
x Rp62,000)
b) Last-in, first-out (LIFO) method: Rp850,000 (6 units
x Rp50,000) + (10 units x Rp55,000)
74
Compare and contrast the
use of the three inventory
costing methods.
75 73
Net sales
Rp3,900,000
Cost of merchandise sold:
Beginning inventory Rp2,000,000
Purchases 3,880,000
Merchandise available for sale Rp5,880,000
Less ending inventory 3,250,000
Cost of merchandise sold
2,630,000
Gross profit
Rp1,270,000
76 74 Net sales Rp3,900,000 Cost of merchandise sold:
Beginning inventory Rp2,000,000 Purchases 3,880,000 Merchandise available for sale Rp5,880,000
Less ending inventory 3,150,000
Cost of merchandise sold 2,730,000
Gross profit Rp1,170,000
77 75 Net sales Rp3,900,000 Cost of merchandise sold:
Beginning inventory Rp2,000,000 Purchases 3,880,000 Merchandise available for sale Rp5,880,000
Less ending inventory 3,050,000
Cost of merchandise sold 2,830,000
Gross profit Rp1,070,000
78
Weighted
FIFO LIFO Average
79
Describe and illustrate the
reporting of merchandise
inventory in the financial
statements.
80
If the cost of replacing an
item in inventory is lower
than the original purchase
cost, the
lower-of-cost-or-market (LCM) method
is
81
Market
, as used in lower
of cost or market, is the
cost to replace the
merchandise on the
82
Cost and replacement cost can be
determined for
—
1)
each item in the inventory,
2)
major classes or categories of
inventory, or
83
A B C D E F G
Unit Unit
Inventory Cost Market Lower
Commodity Quantity Price Price Cost Market of C or M
1 A 400 Rp10,250 Rp 9,500 Rp4,100,000 Rp3,800,000 Rp3,800,000 1 2 B 120 22,500 24,100 2,700,000 2,892,000 2,700,000 2 3 C 600 8,000 7,750 4,800,000 4,650,000 4,650,000 3 4 D 280 14,000 14,750 3,920,000 4,130,000 3,920,000 4 5 Total Rp15,520,000 Rp15,472,000 Rp15,070,000 5
84
Merchandise that is out of date,
spoiled, or damaged should be
written down to its
net realizable
value
. This is the estimated
selling price less any direct cost
85
Merchandise inventory is usually
presented in the Current Assets
86
The method of
determining the cost of
inventory (FIFO, LIFO,
87
On the basis of the following data, determine the value
of the inventory at the lower of cost or market. Apply
lower of cost or market to each inventory item as shown
in Exhibit 7.
85
Inventory Unit Unit
88 86
For Practice: PE 7-5A, PE 7-5B
Unit Unit Lower of Commodity Qty Cost Price Market Price Cost Market C or M
89
Example Exercise 7-6
Agung Jaya Motor Shop incorrectly counted its
December 31, 2008 inventory as Rp250,000,000
instead of the correct amount of Rp220,000,000.
Indicate the effect of the misstatement on Agung
Jaya Motor Shop December 31, 2008 balance sheet
and income statement for the year ended December
31, 2008.
90 88
For Practice: PE 7-6A, PE 7-6B
Amount of Misstatement Overstatement (Understatement) Balance Sheet:
Merchandise inventory overstated Rp 30,000,000 Current assets overstated 30,000,000 Total assets overstated 30,000,000
Owner’s equity overstated 30,000,000 Income Statement:
91
Estimate the cost of
inventory, using the retail
method and the gross profit
method.
92
The
retail inventory method
of estimating inventory
cost is based on the
relationship of the cost of
merchandise available for
sale to the retail price of the
93
A B C
Cost Retail
1 Merchandise inventory, January 1 Rp19,400,000 Rp36,000,000 1 2 Purchases in January (net) 42,600,000 64,000,000 2 3 Merchandise available for sale Rp62,000,000 Rp100,000,000 3
5 Sales for January (net) 70,000,000 5 6 Merchandise inventory, January 31, at retail Rp30,000,000 6 7 Merchandise inventory, January 31, at estimated cost 7 8 (Rp30,000,000 x 62%) Rp18,600,000 8 4 4 Ratio of cost to retail price: (Rp 62,000,000:Rp
94
Example Exercise 7-7
A business using the retail method of inventory costing
determines that merchandise inventory at retail is
Rp900,000,000. If the ratio of cost to retail price is
70%, what is the amount of inventory to be reported on
the financial statements?
92
Follow My Example 7-7
Rp630,000,000 (Rp900,000,000 x 70%)
95
The
gross profit method
uses
the estimated gross profit for the
96
A B C
Cost Retail
97
The gross profit method is useful for
estimating inventories for monthly or
98
Example Exercise 7-8
Based on the following data, estimate the cost of ending
merchandise inventory:
Sales (net) Rp1,250,000,000
Estimated gross profit rate
40%
Beginning merchandise inventory Rp100,000,000
Purchases (net) 800,000,000
Merchandise available for sale Rp900,000,000
99
Follow My Example 7-8
97
For Practice: PE 7-8A, PE 7-8B
Merchandise available for sale Rp900,000,000
Less cost of merchandise sold
100
Inventory turnover
measures the
relationship between the volume of goods
(merchandise) sold and the amount of
inventory carried during the period.
101
HERO
RIMO
Cost Of Merchandise Sold
Rp4,035,116,000,000
Rp87,696,796,439
Inventories
Beginning Of Year
Rp427,941,000,000
Rp24,907,993,901
End Of Year
Rp494,919,000,000
Rp28,537,693,305
Average
Rp461,430,000,000
Rp26,722,843,603
102
Generally, the larger the
inventory turnover, the more
103
The
number of days’ sales in
inventory
is a rough measure of the
length of time it takes to acquire,
sell, and replace the inventory.
Average inventory
Average daily cost of
merchandise sold
Number of days’
104
HERO RIMO
Average Daily Cost Of Merchandise Sold
Rp16,681,472,000/365 Rp11,055,112,328.77
Rp1,157,226,000/365 Rp240,265,196
Average Inventory Rp461,430,000,000 Rp26,722,843,603
