Inventory method PDF

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FIFO LIFO Moving Average ...

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How would you describe Coles inventory? To answer this question you may like to do some research into Coles.

Coles is an Australian supermarket. It sells a variety of fresh and packaged food along with other grocery items. If you look on its website you can see they have physical shops as well as an online shop. All the items that are for sale are the inventory of the business. Coles will buy the fresh fruit from farmers, and then display the fruit in the shop. This will then be sold to customers. Inventory is a unique asset for the business because it is purchased with the intention to sell it to customers. It is an asset because it is an economic resource that brings future economic benefit - when the fresh fruit is sold, Coles will make gross profit. Inventory is a current asset, because Coles plans to sell the groceries quickly, definitely in less than one year

Write your answer in your note book: Explain the difference between supplies, inventory and equipment. Supplies, inventory and equipment: these are all assets. Their differences are: 1. Supplies and inventory are current assets, equipment are non-current assets 2. Supplies and equipment are purchased to USE, inventory is purchased to SELL to customers.

Write your answer to this in a note book. a. Record the following journal entries for Liu enterprises, assuming the FIFO method is used, and the perpetual inventory system. 1. Liu company purchased 275 units of inventory on account for $5,775. 2. Due to early payment, Liu received a discount and paid only $5,225.

3. Liu sold 150 units for cash at $55 each. 4. Liu purchased an additional 65 units for cash at a cost of $1430 5. Liu sold 100 more units on credit for $58 each b. Which journal entries would be different if you used LIFO inventory costing method? How would they be different? Solution: read this after you have completed your answer 5,77 1 Inventory 5 5,77 AP 5 5,77 2 AP 5 5,22 Cash Inventory

5 550

Cost each = 5225/275 = $19 8,25

3 Cash

0 Sales revenue (150 x

8,25 0

55) 2,85 Cost of sales (150 x 19) 0

2,85 Inventory 0 275 - 150 sold = 125 left 1,43 4 Inventory

0 1,43

Cash

0 5,80

5 AR Sales revenue (100 x 58)

0 5,80 0

1,90

Cost of sales

0 1,90

Inventory (100 x 19)

0 b. Question 5 would be different. The cost of sale would be (65 sold x 1430/65) + (35 x 19)

Draw up 3 tables similar to the tables in the demonstration videos. Answer the question. Date

Transaction

Units

Unit cost

1st

Beginning inventory

32

$55

7th

Purchase

45

9th

Sale

50

14th

Purchase

52

30th

Sale

61

Bond's November inventory activity is as follows. Bond uses a perpetual inventory system: Calculate the ending inventory and cost of sales under the FIFO, LIFO and moving average costing methods.

Solution: check after you have completed your answer FIFO ending inventory $1170 cost of sales $6670 LIFO ending inventory $990 cost of sales $6850 Moving average ending inventory $1127 cost of sales $6713

60

65

Your boss is considering using LIFO or FIFO method. She wants a method that results in the highest net income (profit), the highest inventory balance and the lowest taxes. Note the purchase price of inventory has been falling over the last decade and that trend is expected to continue. Explain the effects of using the LIFO and FIFO methods on income, inventory and taxes. Can your boss get all that she wants? Write your answer in your notebook.

Solution: check after you have written your answer The FIFO method assigns the first units purchased to cost of goods sold and last units purchased to ending inventory. In contrast, the LIFO method assigns the last units purchased to cost of goods sold and first units purchased to ending inventory.

Therefore, in a period of FALLING prices, the FIFO method will yield a highest cost of goods sold and a lowest ending inventory. The higher cost of goods sold will therefore yield a lower net income, and also lower income tax. So, under the FIFO method, the company will experience lower ending inventory, lower income and lower taxes than under the LIFO method. As a result, your boss cannot have all three desired results. With LIFO, she can have two of the three (higher inventory and net income). With FIFO, she can have one of the three (lower taxes). Helpful hint for students: While LIFO is not currently permitted for tax or financial reporting in Australia, it is useful to understand the differences. Complete this answer in your notebook. Campbell company starts the month of January with 40 boxes of bear bars costing $20 each. The following transactions occurred during the month.

2nd Purchased 15 additional boxes for $22 each, paid with cash 4th Paid freight costs of $30 on 2nd January purchase 10th Sold 45 boxes for $40 each 27th Purchased 10 additional boxes on account for $23 each 30th Suppose the inventory has a replacement value of $375 at the end of the month. What entry, if any, is required? Required Assume Campbell uses a perpetual inventory system and the FIFO costing method. Prepare all necessary journal entries . Check the solution after the completing the question 2nd Jan. Inventory 330 Cash

330

To record purchase of inventory: (15 × $22 = $330)

4th Jan. Inventory 30 Cash

30

To record transportation-in 10th Jan. Cash 1 800 Sales

1 800

To record sale of inventory: (45 × $40 = $1 800) 10th Jan. Cost of sales 910 Inventory

910

To record sale of inventory: {[(40 × $20) + (5 × $22)] = $910}

27th Jan. Inventory 230 Accounts payable 230 To record purchase of inventory: (10 × $23 = $230) 31st Jan. Cost of sales 95 Inventory

95

To adjust inventory to market: ($470 – $375) *Ending inventory = [(10 × $24) + (10 × $23)] = $470.

Teaching tip: A perpetual inventory system updates the inventory account each time inventory is bought or sold – that is, perpetually. Therefore, purchases (including transportation costs) of inventory are recorded directly into the inventory account. The lower ofcost-and-net-realisable-value rule requires inventory to be reported on the balance sheet at its net realisable value if the market value is lower than the inventory’s cost. Helpful hint for students: Two entries are required when a company makes a sale. The first entry records the revenue and the second entry records the cost of the sale and the effect on the inventory.

Item

Quantity on hand Unit cost when

Replace

acquired

(marke

R

25

$15

$19

S

60

22

20

T

34

30

33

U

50

10

11

V

13

50

55

Kmart company is preparing financial statements and provides the following information about several of its major inventory items. If Kmart uses the lower of cost and net realisable value rule, what should it report as the balance of inventory?

R $ 375 S 1 200 T 1 020 U 500 V 650

Total $3 745 The lower-of-cost-and-net-realisable-value rule requires inventory to be reported on the balance sheet at its fair (market) value if the fair value is lower than the inventory’s cost. The lower-of-costand-net-realisable-value rule is applied at the end of each accounting period by comparing inventory costs to fair values. Under the lower-of-cost-and-net-realisable-value, an inventory’s fair value is equal to the cost to replace the inventory. Companies can compare costs and fair values of (1) inventories in total, (2) major groups of inventories, or (3) individual inventory items....