. Inventory: It is defined as tangible personal property:
1. Held for sale in the ordinary course of business.
2. In the process of production for such sale.
3. To be used currently in the production of items sale.
.Inventory valuation and cost flow methods:
1. Specific identification 2. Weighted average
3. Simple average 4. Moving average
5. Lower or market 6. Losses in purchase commitments
7. First in, First out (FIFO) 8. Last in, last out (LIFO)
9. Dollar value LIFO 10. Gross profit
11. Standard costs 12. Direct costing
13 Market 14. Cost apportionment by relative sales value
There are tow approaches used in accounting for merchandising transactions:
1- Perpetual inventory 2- Periodic inventory
1. Perpetual inventory systems: In which merchandising are recorded as the occur, purchases of merchandise are recorded by debiting as asset account entitled inventory, when merchandising is sold , there will be tow entries one recognize the revenue earned and the other recognize the related cost of goods sold
2- The accounting features of a perpetual inventory system:
1. Purchase of merchandise for release or raw materials for production are debited to inventory rather to purchase.
2. Freight – in, purchase returns and allowances, and purchase discounts are recorded in inventory rather –in separate
Accounts
3. Cost of goods sold is recognized for each sale by debiting the account, cost of goods sold, and crediting inventory.
. Periodic inventory system: In which the quantity of inventory on hand is determined as its name implies periodically, all acquisition of inventory during the accounting period are recorded by debits to a purchase account.

4. Perpetual Versus Periodic:-
Beginning inventory 100 units at $6 = $600
Purchase 900 units at $6 = $4500
Sales 600 units at $12 = $7200
Ending inventory 400 units at $6 = $2400

Periodic inventory system Perpetual inventory system
The inventory account shows the inventory on hand at $600


Purchase 5400
Accounts Payable 5400


Accounts Receivable 7200
Sales 7200
(No entry )










Inventory (ending , by count ) 2400
Cost of Goods sold 3600
Purchases 5400
Inventory (beginning ) 600
1.Begining inventory ,100 units at $6 The inventory account shows the inventory on hand at $600
2. Purchase 900 units at $6
Inventory 5400
Accounts payable 5400
3. Sale of 600 units at $12
Account receivable 7200
Sales 7200 Cost of goods sold 3600
( 600 at $6 )
inventory 3500
4. End of period entries for inventory accounts , 400 units at $6 :
No entries necessary.
The account , inventory , shows the ending balance of $2400
($600+ $5400 - $3600).







. Goods in transit

Sometimes purchased merchandise is in transit – not yet received – at the end of fiscal period, there are tow types
1. F.O.P shipping point, title passes to the buyer when the seller delivers the goods are shipped the common carrier, who acts as an agent for buyer.
2. F.O.B destination, title does not pass until the buyer receives the goods from the common carrier, who acts as an agent for the buyer.
2. Inventory Cost :-
Purchase Price
+ Freight –in
+ Costs in curred preparing goods for sales
= Inventory Cost
Goods on consignment is :
Consignee- Exclude from physical count
Consignee- Add to physical count
Cost of Goods on Consignment = Inventory + Cost of shipping
Cost to consignee
3. Cost of Goods Sold :-
Beginning Inventory +Net Purchase
= Cost OF Goods Available for sale +Ending Inventory
= Cost of Goods Sold.

Average cost method: Price items in the inventory of the basis of the average cost of all similar goods
Available during the period.
Date of invoice no. units units cost total cost
March 2 $2,000 $4,00 $8,000 March 15 6,000 4,40 26,400
March 30 2,000 4,75 9,500


Total goods available 10,000 $43,900




Weighted –average cost per unit $43,900 / 10,000 = $4,39
Inventory in units 6,000 units
Ending inventory 6,000 * $4,39 =$26,340




Cost of Goods Available for sale $43,900
Deduct : Ending inventory 26,340




Cost of goods sold $17,560



First in. First out (FIFO): Assumes that goods are used in the order in which they
Are purchased.
It assumes that the first goods purchased are the first used
Or sold.
ILLUSTRATION:
FIFO Method – Periodic Inventory
Date NO. Units Unit Cost Total Cost
March 30 2,000 $4,75 $9,500
March 15 4,000 4,40 17,600


Ending inventory 6,000 $27,100

Cost of goods available for sale $43,900
Deduct : Ending inventory 27,100


Cost of goods sold $16,800

ILLUSTRATION
FIFO Method-Perpetual Inventory:-
Date Purchased Sold or Issued Balance
March 2 (2,000* $4,00 ) $8,000 2,000*$4,00 $8,000
March 15 (6,000* 4,40 ) 26,000 {2,000*$4,00 }
$34,400
{ 6,000*$4,40}
March 19 { 2,000*$4,00 }




4,000*4,40 17,600

{ 2,000*$4,40}
($15,800)
March 30 (2,000*4,75) 9,500 { 4,000*4,40 }

27,100


{ 2,000*4,70 }
.In all cases where FIFO is used, the inventory and cost of goods sold would be the same at
The end of the month whether perpetual or periodic system is used.
. Last in, Last Out (LIFO) THIS METHOD FIRST MATCHES AGAINEST
REVENUE THE COST OF THE LAST GOODS
PURCHASED.
The example assumes the cost of the 4000 units withdrawn absorbed the 2000 units purchased on March 30 and 2000 of the 6000 units purchased on March 15 , the inventory and related cost of goods sold would be computed as follows ,


ILLSTRATION
LIFO Method – Periodic inventory:-
Date of invoice NO. Units unit cost Total cost
March 2 2,000 $4,00 $8,000
March 15 4,000 4,40 17,600


Ending inventory 6,000 $25,600

Goods available for sale $43,900
Deduct Ending inventory 25,600


Cost of goods sold $18,300


.If we use another method
ILLUSTRATION
LIFO Method-Perpetual Inventory:-
Date Purchased Sold or Issued Balance
March 2 (2,000 * $4,00 ) $8,000 ( 2,000*$4,00) $8,000
March 15 (6,000 * $4,40 ) 26,400 2,000*$4,00}
$34,400
6,000*$4,40}


March 19 (4,000 * $4,40) 2.000*$4,00}
$17,600 $16,800
2,000*$4,40}

March 30 (2,000 * $4,75) $9,500 2,000*$4,00}
2,000*$4,40} $26,300
2,000*$4,75}



.Net realizable value: It is the estimated selling price in the ordinary course of business less reasonably predictable
Costs of completion disposal.
. The rule of lower cost or market value:
In which inventory is valued at the lower of cost or market, with market limited to an amount that is not more than
Net realizable value or less than net realizable value less a normal profit margin.
Inventory Valuation –
Lower of Cost or Market CEILING
NRV
{Not More than} REPLACEMENT COST MARKET
COST
{Not less than}
GAAP NRV
Lower of Cost or Market FLOOR
. Designated market value: Is always the middle value of three amounts,
1. Replacement cost
2. Net realizable value
3. Net realizable value less a normal profit margin
ILLSTRATION
COMPUTATION OF Designed Market Value
Net Realizable
Net Value Less a
Realizable Normal Profit Designed
Replacement Value Margin Value
Food Cost (Ceiling) (Floor)
Spinach $88,000 $120,000 $104,000 $ 104,000
Carrots 90,000 100,000 70,000 90,000
Cut beans 45,000 40,000 27,500 45,000
Peas 36,000 72,000 48,000 48,000
Mixed vegetables 105,000 92,000 80,000 92,000


Designed Market Value Decision :
Spinach: Net realizable value less a normal profit margin is selected because it is middle value.
Carrots: Replacement cost is selected because it is middle value.
Cut beans: Net realizable value is selected because it is middle value.
Peas : Net realizable value less a normal profit margin is selected because it is middle value
Mixed vegetables: Net realizable value is selected because it is the middle value.




DEMONSTRATION PROBLEM
The Audiophile sells high-performance stereo equipment. Massachusetts
Acoustic recently introduced the Carnegie-440, STATE-OF-THE-ART
Speaker system. During the current year, The Audiophile purchased 9 of these
Speaker systems at the following dates and acquisition costs:
Units Unit Total
Date purchased cost cost
Oct. 1 ……………………………………… 2 $3,000 $6,000
Nov.17…………………………………….. . 3 3,200 9,600
Dec. 1 ……………………………………… 4 3,250 13,000
Available for sale during the year …………. 9 $28,600
On November 21, The Audiophile sold 4 of these speaker systems to the
Boston Symphony. The other 5 Carnegie-440s remained in inventory at
December 31.
INSTRUCTIONS: Assume that The Audiophile uses perpetual inventory system. Compute(1)
The cost of goods sold relating to the sale of Carnegie-440 speakers to the
Boston Symphony, and (2)the ending inventory of these speakers at Dec.31
Using each of the following flow assumptions:
A. Average cost
B. First-in, first-out (FIFO)
C. Last-in, first-out (LIFO)
Show the number of units and the unit costs of the cost layers comprising the cost of goods sold and the ending inventory
SOLUTION TO DEMONSTRATION PROBLEM
A. (1) Cost of goods sold (at average cost):
Average unit cost ay Nov.21
[($6,000+$9,600) /5 units]……………………..$3,120
Cost goods sold (4units*$3,120 per unit)…………………….$12,480
(2) Inventory at Dec.31 (at average cost) :
Average unit cost at Dec.31:
Units remaining offer sale of Nov.21
(1 unit *$3,120)……………………………$3,120
unit purchased on Dec.1 (4units *$3,250)….$13,000
Total cost of 5 units in inventory……………$16,120
Average unit cost at Dec.31………………. $3,224
Inventory at Dec.31 (5 units * $3,224 per unit)…………………. $16,120
B. (1) Cost of goods sold (FIFO basis): (2units * $3,000
+2units*$3,200)……………… $12,400
(2) Inventory at Dec.31 (4units *$3,250 +1unit *$3,200)……………. $16,200
C. (1) Cost of goods sold (LIFO basis): (3units*$3,200+1unit*3,000)…... $12,600
(2) Inventory at Dec.31 (4units * $3,250+1unit*$3,000)………………$16,000