Financial Accounting – Inventory Costs | Robert Steele | Skillshare

Financial Accounting – Inventory Costs

Robert Steele

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21 Lessons (4h 7m)
    • 1. Financial Accounting Inventory Costs Overview

      6:10
    • 2. 10 600 Inventory Tracking Explained Introduction Specific Ide

      6:09
    • 3. 15 600 Inventory Methods Explained and compared FIFO LIFO Ave

      9:02
    • 4. 17 Inventory Costs

      8:39
    • 5. 20 Consistency Concept

      3:46
    • 6. 30 Lower of Cost or Market

      4:04
    • 7. 40 Perpetual & Periodic Inventory Systems

      10:14
    • 8. 42 First In First Out (FIFO) Periodic System

      34:17
    • 9. 44 Last In First Out LIFO Periodic

      34:10
    • 10. 46 Weighted Average Periodic System

      29:07
    • 11. 50 600 First In First Out FIFO Explained

      9:12
    • 12. 60 600 Last In First Out LIFO Inventory Method Explained

      7:41
    • 13. 70 600 Average Inventory Method Explained

      7:03
    • 14. Discusion Question 5 Inventory Cost

      5:01
    • 15. Discussion Question 2 Inventory Cost

      7:31
    • 16. Discussion Question 3 Inventory Cost

      6:15
    • 17. Multiple Choice 1 Inventory Cost

      9:19
    • 18. Multiple Choice 2 Inventory Cost

      11:39
    • 19. Multiple Choice 3 Inventory Cost

      9:34
    • 20. 600 CPA Exam Part 1 Inventory Methods FIFO%2C LIFO%2C Average CPA exam %26 other accounting test

      12:01
    • 21. 600 CPA Exam Part 2 Inventory Methods FIFO%2C LIFO%2C Average CPA exam %26 other accounting test

      15:40

About This Class

We cover inventory costs and cost flows, including what is included in the cost of inventory and how to account for inventory freight costs, inventory insurance costs, and discount. We also discuss inventory flow assumptions including specific identification, first in first out (FIFO), last in first out (LIFO), and weighted average methods. FIFO, LIFO and weighted average methods will be discussed using both a periodic inventory system and a perpetual inventory system. 

Transcripts

1. Financial Accounting Inventory Costs Overview: if we are a business owner who would like to run our business better by better understanding, inventory, cost flow assumptions and how they work, or a business professional who would like to advance our career by understanding the flow of inventory through different business settings and different methods, or an accounting student who would like to work inventory problems and accounting problems much faster. This course is a course for us. What will we learn? We will learn inventory costing methods, including at the first in first out method, the last end first out method, the weighted average method. And we will learn all three of those with regard to a perpetual system and a periodic system. So the combinations between first and first out last in first out weighted average when we'll take into consideration, the perpetual and periodic system can actually be a lot of different combinations. However, they set up for many of these systems can be much the same and will work on a way to set up these problems so that we can approach them and have a way to approach them efficiently and effectively. We'll also take a look at the accounting cycle It's always a good idea to get back to the accounting cycle whenever we move forward and zoom in on particular items. In this case, inventory and inventory costs flows to see how it fits into the big picture. Also, just to practice the fundamentals, those fundamentals being the accounting cycle, recording normal journal entries. Why choose this course? Although this course will have many instructional videos, it will have much more than just instructional videos, including PdF files. Pdf files that can be downloaded can be used off line as a reference those pdf files a reference to the presentations that will be in the format of instructional videos. We also have Excel practice files. We will include presentations showing how to work this problems and what the overview concepts will be. And then we will have problems toe work through those concepts, applying what we are learning most of those being in excel. We don't need to have a comprehensive understanding of excel because the files will be pre formatted. We will have the answer sheet already therefore use. You can see look at the end result and then have a file that is pre formatted to put the information in along with instructional videos. We will learn as we go just sell references, adding and subtracting and the some function in excel, the fundamentals of excel of those things we need to practice all the time and the foundation to anything moving forward. We're also gonna have practice test questions, both in terms of multiple choice and short calculation questions. They will be in the form of instructional videos so that we can talk through how this type of information might be broken down or put into small questions multiple choice type questions. How to then approached those types of questions, whether they be just wording questions where we have to start to understand the terminology and make sure that we understand how the terminology will be used for short questions as well. A short calculation questions so we can approach these calculations how to set up the process as efficiently as possible so that we can approach all these different types of methods that can go together in a systematic way when we are under a time constraint. We also have discussion questions those being designed Teoh facilitate discussion with other students as well as the instructor often a useful tool, one that students often find helpful because it does allow for us to see different perspectives of the same topics. We're then gonna have definitions. Those definitions of the key terms I do recommend going through those definitions because the definitions will be more than just the definition will give the definition in a bit of an explanation about the definitions, will also have a comprehensive problem that will be in Excel. It will have an answer key, and it will have a Excel file that's formatted to work through the problem. The Excel. The comprehensive problem is designed to go back to the fundamentals in terms of the accounting cycle, always taken a step back so that we can apply these concepts to the full picture of the big picture, where it fits into the accounting cycle. Who will we be learning from? We will be learning from a practicing, certified public accountant, someone who has accounting, experience and teaching experience as well as experience putting together courses both individual courses and Siris, of course, is that need to fit together in a logical fashion in a way that students get from them. What they want someone who has a charter global management accountant designation. Someone who has a master's of science in taxation, someone who has a lot of teaching experience and is a certified postsecondary instructor as well as curriculum design expert. Someone who has experienced putting together courses, putting together multiple courses, putting together courses that need to be structured in a way that they have some linear context to them so that students can get from them what they want. How will we be taught through viewing and then doing we will have the PdF files, along with the presentations, to go through the new topics. Then we will typically have Excel practice files to apply what we have learned to a practical problem within Excel, working through those problems of those problems, having both the answer key so you can take a look at what the formatted answer will be, as well as a worksheet that is pre formatted so that you can input the data along with instructional videos. Going step by step will have the practice test questions in terms of multiple choice questions as well as the short answer calculations. Once again, those being in video format so that we can really discuss what how to approach these questions and what the's taxi questions might look like in the realm of this topic will also have those discussion questions, which are designed to facilitate discussion. See some of these topics from different angles. Please join us for financial accountant inventory costs. It will be great. 2. 10 600 Inventory Tracking Explained Introduction Specific Ide: Hello. When this lecture, we're gonna talk about the idea of tracking inventory and recording inventory both in terms of the balance sheet as well as the income statement in the format of cost of goods sold in our example, we're going to be purchasing and selling forklift Me, We're gonna purchase four clips from the factory, and then we're gonna sell those forklifts. That means that forklifts to us will be inventory their inventory because we are purchasing the forklifts in order to resell them for the generation of revenue. That's really gonna be the definition of inventory, the purchasing of something for the resale of its, as opposed to if we were someone else purchasing the forklift in order to help us generate revenue in another way through the use of the forklift, in which case it would then be property, plant and equipment. So it's the intended use of the forklift, which will determine whether or not it will be an asset in the form of inventory or an asset in the form of format of property, plant and equipment. The first question we have here is how are we going to record this forklift on the bouncing . How we're gonna put it on the balance sheet, Will we put it on the balance sheet as one forklift and obviously we can't do that. We're not gonna put it on the bouncy does one forklift? It seems obvious, but we have to put it on the balance sheet in terms of dollars. In this case, we're going to say we purchased the forklift for $15,000. Therefore, we're gonna put it on the books at $15,000. This is similar to any other type of conversion. If we're converting from one type of currency to another diver currency, if we're converting from inches to feet, any units of linked then we have to do that same type of conversion working version here in terms of units, $2. That kind of conversion can cause us problems. And that's those are the problems will deal with as we go through some of these inventory tracking. The reason we know it's 15,000 at this point in time is because we purchased it for 15,000 on a free market. We could have purchased it with cash, or we could have purchased it with some combination of cash or something like credit. But the purchase price on a free market gives us that $15,000 amount at 74,000 200 of inventory reported on the balance sheet in terms of dollars backed up in some way by these five forklifts. Now the problem happens when we actually sell the forklift. Let's say we're going to sell this one particular for lift to the customer. We know what the sales price can because we're going to come up with the sales price and that's not a problem. The real problem is going to be the cost. What what is the cost of that? How much of this 74,200 do we need to reduce it by when we sell that one forklift? And we might say, Well, why don't we just take the five forklifts and say it's the total with 74,200 divided by five and say that one forklift is worth 8 14,040? That is one way we could do it. That's a form of of averaging the method, but we might do it a different way. In this particular case, we might take this 74,200. Assign identification numbers and say this is idea number one idea number two and so forth that will allow with them to assign specific dollar amounts, meaning that number one costs 15,000. Number two causes 14,006 Number three causes 14,400 meaning working. I specifically identify specifically, track this information and track it by the actual cost of that individual item. That's gonna be called specific identification. If we do that method, then we could say, OK, that particular forklift number one, the one we sold that one cost 15,000. If we go to the journal entries, it's important to note that there's a distinction between the cost and the sales price. The sales price might be based on the cost and, for example, we might have the cost and have some particular market like a 30% markup. And that might be how we come up with the sales price. But note that the sales price is different than what we're typically doing in tracking the costs. And when we moved to costs, tracking that often gets lost. So let's just say that we're gonna record the sale first. The sale is the 16,000 has nothing to do with the inventory cost. In this particular problem, we're gonna give that here. We're gonna say 16,000 accounts receivable. We sold it on account and sales go up by 16,000. Where are tracking comes into play is when we're going to say Okay, how much does inventory go down by? It goes down by that 15,000 that we sold and the related cost of goods sold will be going up, bringing net income down. So we're going to say that inventory then it's gonna be reduced by that particular item for $15,000 worth of forklift nous. And the expense of cost of goods sold is going to go up by that 15,000 bringing net income down. And, of course, the sales on the income statement is going to go up by the 16,000. So there's a net gain of the 1000 net income effect in that case. So now we're saying that that 74,200 is now gonna be backed up by our subsidiary Ledger, backed up by I d number backed up by specific identification, adding up the 14 6 to 14 4 the 14 to the 16,000 giving us the 59,200 in inventory. After that sales point that 59 200 then, is, of course, what will now be on the balance sheet. Now, what we've used your is specific identification. The reason we would do that is because the Four Cliffs are fairly large. We probably don't have a lot of them in comparison to other types of inventory, and they could be different in nature. They may not be exactly the same. They might have different colors and different features if we were selling something that was completely the same. And we had a whole lot of them things like coffee mugs or something, specifically identifying all the coffee. No mugs like this might be not worth our time. Therefore, we might not want to track exactly which coffee mug we then sell. If we have small things that are gonna be all the same, we might want to use some estimating method, and those estimating methods will be things like first and first out, the average method and last in first out, which we'll talk about next time 3. 15 600 Inventory Methods Explained and compared FIFO LIFO Ave: So when this lecture, we're gonna talk about estimating inventory methods, methods such as first in first out, last in first out and the average method. Last time we talked about specific identification, when we were selling the inventory of forklifts, we used specific identification, meaning we had an I. D. Number for each particular forklift and knew exactly which forklift we sold. And the cost of that particular forklift reason that makes sense for forklifts is because they're relatively large. They could be distinct in nature, and they have a fairly large dollar amount in comparison to other types of inventory. If we're selling something else, like coffee mugs over here, we may have a large amount of coffee mugs they name be all completely the same and therefore for us to give them all identification numbers and try to track exactly which mug we sold. And the cost of that particular mug may not be a good use of our time. May be better to use some type of estimating method in that case, being the first and first out last in first out or an average method. So let's compare and contrast those methods briefly and then we'll go into more detail at a later time. In this example, we're going to say that we purchased inventory in terms of coffee mugs. We're gonna buy and sell coffee mugs. In January, we bought this many coffee mugs, like eight or something here at a dollar. Then in April, we bought another amount of coffee mugs, like five more at 1 20 point being that the coffee mugs are going up in price. Even though they're exactly the same, the cost is going up. That's gonna be the typical assumption. All else equal prices go up. Why? Because of inflation, the value of the dollar goes down. The price could go down as well. If, for example, the delay is there something a coffee mug became cheaper for that the norm would be The prices go up, and then everything would be reversed if prices go down. That's how I like to think of it. At least then in July, we purchased another ah bunch of coffee mugs at a dollar to $1.50 price going up again. We haven't sold any coffee mugs yet. In this particular example, we're stockpiling them, expecting to sell them at some particular point in time. We now have on our balance sheet $23 which would be this number of coffee mugs, times $1 plus this number of copy nut mugs, times 1 20 plus this coffee mugs times 1 50 That's the $23 we have on our balance sheet as inventory at this time. We then have a customer asking for a coffee mug. We make our first sale over the coffee mug. We're gonna sell them off for $5. That's not the issue here. The issue is how much is the cost of that coffee book? What's going to be the cost is a dollar. Is it 1 20? Is it 1 50? We're not going to use specific identification. I'm not going to say, Well, let's see which actual month was picked here. We're gonna first use first in, first out as our first example and in that assumption. And it is just an assumption. We're gonna assume that that coffee mug was taken from this area in terms of $1 being the cost rather than 100 rather than 1 20 rather than 1 50 This is the most intuitive method for most people to understand because it usually follows what we think of as a normal flow of inventory. We would assume that we would try to sell the oldest types of inventory first, even if they're nonperishable something like a coffee mug. But it's important to note that this is just an assumption. For example, if we put all the new all the old coffee mugs up front on the shelf in the new coffee mugs on the back, it is possible for the customer to reach in the back and take the old coffee mug. It's important to note that we are not talking about the actual flow of coffee mugs, although this may mirror what we try to have actual flow to be. But it is just an estimate. If we have that estimate, then we're going to say that the sales prices is $5 so we're gonna say we sold it on the counter here. We probably wouldn't sold it for cash. It's a coffee mug, but we're going to call it on account $5 going up for accounts. Stable sales goes up by that $5. That has nothing to do with our cause who might have used to cost in order to come up with about $5 but has nothing do directly with the cost? What we're tracking now is the inventory being reduced in this case by $1 rather than 1 20 rather than 1 50 under the first in first out method and the cost of goods sold being the $1. So the expenses are going up by $1. We're gonna reduce our inventory by that $1. That means that if we look at what's left, we're going to say the inventory was at 23 minus that $1. We now have Indian inventory of the $22 at this point time under the first in first out method, we could make another assumption that we could say, Well, why don't we assume under a last in first out method that this particular coffee mug that we sold its 1st 1 was taken from the last batch, that we bought the most expensive batch in this case after 1 50? Most people kind of balk at this one because they say, Well, that doesn't really make sense. We would try to sell the old ones first. That might be the case, but you can make a reasonable argument to say, Hey, if it's just an estimate, I don't know which coffee mugs we sold. It's just his reasonable assumption to say that a coffee mug down here was sold as a coffee mug up here. Why would we want to make that assumption? Well, in terms of rising prices will see that what will happen is that our net income will actually be reduced. So it's possible that this Fert method came up through taxes of a need of desire to have a lower net income. But we'll discuss that later. It's a good example in terms of a difference in methods and how different in method can result in differences on the financial statements and differences in net income. So if we make this assumption, we have the same sale were going to say we're going to sell it for $5. The sales price isn't gonna be affected by the type of method that we are going to use, but the inventory is now going to go down by 1 50 rather than the dollar. The cost of goods sold is going to be 1 50 So the expenses higher, making net income lower. What happens to our balance sheet account? What? We were at Ah, $23 giving us a 2150 that is left in Indian inventory after the last in first out assumption. Last assumption we can have is going to be somewhere in the middle. And we call that the average so we can use the average method. And we can say you know what? I don't know which mug we sold. I'm no. Which if we sold the dollar mug of the 1 2150 I'm not gonna go in there and figure that out . I'm not gonna make an assumption. We're gonna say that we sold mugs that cost about 1 21 Gonna be somewhere in the middle. Now, how do we get that average? It's not gonna be adding the one the 1 20 the 1 15 dividing by three. What we would have to do is take the weighted. We'd have to say that we have to take this number of cups times one close this number of cups times 1 20 Plus this number of cups times 1 15 Divide that dollar amount by the number of cups, but we'll talk about that later. What we need to know now is that we can say whatever week up result it costs about now 1 21 And if we record that, then same sales price. But now the inventory is going down by 1 21 the cost of goods sold will be that 1 21 what's left on our balance sheet. Then we have the inventory. 23. That one cup is now bringing it down to 2179. So the essence of this is that they are estimates. So if we look at just the recap in terms of rising prices, this is how things will always be. If prices go down, you wanna flip everything, Meaning cost of goods sold under first in first out was a dollar under last in first out, it's always going to be higher in a period of rising prices. When the prices go up as we purchase it, the middle area is going to be the average, so the average is always gonna be in between. Then we're gonna have the Indian inventory. What's gonna be left. We want to know both the income statement, side cost to get sold and the balance sheet side, What's left on the balance sheet and what's left under Fife. 0 22 What's left under life? 0 2150 And what is average? It's gonna be somewhere in the middle. This is what's left on the balance sheet. Then we're gonna say net income, what with the impact on net income under Fife. Oh, we had $4 net income under life and we had the smallest amount of net income 3 50 and under average. We have the amount in the middle at 3 79 You can see that in a period of rising prices on normal time period. Scifo. Actually, it makes us look the best meaning our net income is the highest and are ending. Inventory is the highest, and life a last in first out will make us look the worst, meaning our net income is the lowest, and our Indian inventory is the lowest in the average will always be in the middle. If prices went up, all that would be flip flop 4. 17 Inventory Costs: In this presentation, we will discuss what will be included or should be included in inventory costs. So when considering inventory costs, clearly we have the cost of the inventory, which would be included. But there are other components that we want to keep aware of and keep in mind that could be included in the cost of inventory as we record that inventory cost that purchase price or the amount in dollars of inventory on the financial statements one is gonna be, do we have to pay for the shipping costs? And that typically will have to do with the terms of fo Be shipping point or F O B. Destination? It's gonna be a common question that is asked, and a common factor in practice that we need to consider. If we're saying that something is f o B Shipping point freight on board shipping point, then we're saying that the inventory is trading hands and is the responsibility of the person purchasing or the company purchasing at the point in time that it is being shipped, and typically, then the person purchasing would be in charge of the shipping costs to get Teoh the point of destination our warehouse. If that is the case, if we're paying for the shipping costs in order to get the inventory in place, it's the same kind of circumstances as if we are purchasing ah, property, plant and equipment in that we need to include those costs into the cost of the inventory as we would to the cost of property, plant and equipment if we were purchasing property, plant and equipment, anything that we had to pay for the costs of basically getting that inventory to us and ready and prepared for the sale should be a cost that is part of the inventory. If, on the other hand, we're saying it's f o B destination, then typically that person purchasing or the company purchasing is not responsible for the shipping costs, and therefore it's not an issue. A typical question, however, on it on a multiple choice question will be on the shipping cost. How do you record the shipping costs? And one of the answers will typically be you're gonna record shipping costs. That's freight expense, and the other would be that you're going to record it as the cost of the inventory and freight or shipping expense sounds really correct. If you paid for the freight, however, you paid for the freight in order to get the inventory, which has not yet been sold and in accordance with the matching principle, then we I can't record the expense or should not record it until we have used that cost in order to help generate revenue. We hadn't used the cost yet. In order to help generate revenue. We only used it in order to acquire an asset inventory, which we will then use to generate revenue in the future and then expense that shipping costs as part of the cost of the inventory in the form of the expense of cost of goods sold . A consignment is another thing we want to keep in mind. We might get a couple questions on a consignment, and certain types of industries would benefit from this kind of arrangement. So a consignment would mean. For example, if we had someone that had a farm and they were producing wine, then they could sell that wine, of course, to something like a restaurant, directly the restaurant, then pain for the wine and then selling that wine to their customers. If that's the case, then the producer of the wine would record revenue at the point of sale. However, it is possible to have a different type of arrangement. It is possible for our producer to go to the restaurant. Say, Hey, I would like to sell the wine here if you if you sell it great, you can pay me at that point in time. If you don't sell it, then that's okay. We won't charge you for it at that point in time. And if that's the case, then we're saying that we're only going to have the wine. In other words, the wine, although it's located at the restaurant, is still the inventory or the property of the owner of the wine. The producer, in this case of the wine and the restaurant is just their Teoh provide the sale and at the point of sale as they sell the wine. Then they would take some of the take a cut of that and give the difference to the consign or so. In this case, we're saying the wine producer is the consign or giving the wine to the restaurant and the restaurant have possession of the wine, however, It's not that restaurants inventory, and that's the key point here. The inventory, although it's located at the restaurant, would be the inventory of the consign or the producer. In this case of the wine, the consigning is just gonna be holding onto the wine and at the point of sale, typically will get some type of payment, of course, for the service of the sale transaction and give the consign, or that the revenues for the sale of the wine as well. Next, we have the discount the purchasing discount now note. This also often gets confused in terms of what is a purchasing discount between the sales discount. If we're the owner and we're purchasing the merchandise that we are later going to sell than the vendor that's giving us that merchandise could give us a discount, and the terms might look something like this to slash 10 in Dash 30 meaning we're gonna get a 2% discount if we pay within the discount period 10 days. Otherwise, we need to pay within 30 days. If we do take that discount, if we get the discounted amount, then that's gonna affect the inventory, meaning if this was the sticker price, and that's what we were gonna pay. But we get a 2% discount. We have to then decrease the inventory, of course, by the amount that we actually paid for the inventory. So we need to keep that in mind to to reduce the inventory for that discount. When we record that, it could be a little bit confusing because students often get what we often get mixed up when we have a sales discount and it purchased discount. The purchase discount will reduce the inventory a sales discount. The discount will go to sales returns and allowances. So this is a common question. Common multiple choice will ask about the discount in the journal Intrude related to it, and it's a common mistake that will happen that we don't. We often miss the fact that we need to reduce the inventory by the amount of the discount. Some other costs that we need to consider would be tariffs. If we have terrorists, we're going to consider those in terms of the cost of inventory. If it's related to our inventory purchase storage, also, something that's going to help us to get the inventory ready for the point of sale and therefore a cost of the inventory insurance on the inventory again, something that's necessary for us to get that inventory and get it ready for sale. Therefore, it is a cost of the inventory. If we have damaged or obsolete inventory, then we're gonna have to go through kind of thought process and say, Well, what happened to the inventory? What are we going to do with it? So it would look something like this? We can say, Well, can the inventory be sold if it was damaged? Inventory, or if it's obsolete in some way is it's still something that is sellable. If we say that it is sellable, then we're still gonna included an inventory. But at a reduced price, we're going to use what they called a conservative and principal conservative principle, meaning we don't want to overstate our books. We want We want to make sure that we're basically recording at the lower price. The really realize herbal price realize herbal price that we could get on the market to sell that inventory. If it cannot be sold, then we're gonna have to not included an inventory were you have to write off the loss at the point of time that has been determined that the inventory cannot be sold. Note that this is a huge component, all these air huge components. But this one in particular, is a huge component to inventory this idea of the conservatives in principle, because note that we typically record the inventory as most assets, what the cost of of the inventory, and if the inventory is damaged or goes down, then that could be one something that's not as easy to determine. And Teoh, Obviously, the company doesn't really like the idea of having their inventory be marked down and may not have the best method or know exactly what the realizable price for the inventory that is obsolete or damaged would be. And it could be a significant factor on the financial statements. To have these this inventory be written down to the appropriate price. Whatever that net realizable value is, 5. 20 Consistency Concept: In this presentation, we will discuss the consistency principle as it relates to inventory and inventory assumptions. First, we're gonna define the consistency principle and then apply it. Teoh and assumptions such as the flu assumption. Such as Do we use something like a first in first out last in first out average inventory system. The definition of consistency principle according to a fundamental accounting principles. Wild 22nd Edition is principle that prescribes use of the same accounting method methods over time so that financial statements are comparable across periods. So here we're considering the assumptions that were making with the flow of inventory, those being either first in first out last in first out or the average method typically for the cost flow assumptions. Because those are assumptions. They do have an effect on the financial statements. And therefore we want to make sure that we are consistent in those meaning that if we used something such as in year one, a first in first out inventory flow assumption and year to ideally we would want the same assumption as well as your three and so forth. However, and if we we do have an incentive, companies often have an incentive possibly to shift assumptions such as the inventory flow assumption, to do things like increase or decrease their net income in a particular timeframe. We can see that if we change the first in first out assumption, remember that as we look at the first in first out assumption as compared to the last in first out assumption that if there were a period of rising prices, the net income would be higher under a first in first out assumption and lower for last in first out assumption. And therefore, if we were to switch back and forth between flow assumptions like these, we couldn't manipulate that net income in some ways for whatever purpose we would like, either. Companies may have an incentive to try to increase net income, to look better on the financial statements or sometimes decreased that net income in order to look worse, possibly for lower in tax purposes and, of course, from a reading the financial statement purpose from analyzing the financial statements from being from the perspective of being able to prepare financial statements from period to period from year to year. Then we want consistency. We want those those costal assumptions to be the same across time. So that's gonna be the consistency principle. Now. Could a company ever change their flow assumption if the flow assumption is thought to be better, if there's some reason to change the flow assumption, that is not just Teoh adjust or have the income be different during a time period? But in other words, it's for better reporting purposes. Then that would be a more legitimate reason to make a one time change of a cost flow assumption. But what we don't want to see clearly would be costal assumptions changing consistently over time in order to change basically the flow assumptions and the effect on the financial statements, particularly the timing statements on the income statement and the net income due to the effect in cost of goods sold. Therefore, once we have a cost low assumption, we expect to and want Teoh stay with that cost floor assumption so that we have the ability to compare year to year, month to month time period to time period 6. 30 Lower of Cost or Market: In this presentation, we will discuss the concept of lower of cost or market. We will define this concept first and then see it and talk about how it would apply to inventory the definition of lower of cost or market according to fundamental accounting principles, while that 22nd edition is required method to report inventory at market replacement costs when that market costs is lower than recorded costs. So what we're saying here is we have We're talking about the inventory, of course, and we're saying that we have to record it at the replacement cost when that replacement cost. That market cost is lower than the recorded cost, what we actually purchased it for. So this looks like a confusing type of definition. However, it's pretty straightforward. What we're applying here is gonna be the conservative principle, meaning that if our inventory has declined in value, we have to recorded at the lower cost. We don't want to be overstating our inventory. Obviously, regulations are very concerned about us overstating something when we're talking about an asset and making the financial statements look better than they would rather than understating it and therefore what we want, what we want to default to for this concept would be under recording the inventory rather than overstating the inventory. And therefore we want to record it at the lower of the cost or the market value to apply that if you see problems such as this, of course, they're gonna give you basically two numbers that will have to be able to compare. And it's Azizi is basically picking the smaller numbers. So if we bought it at cost, if this is our inventory, this isn't ah, piece of merchandise. This is not a piece of equipment that we're selling. If we buy and sell forklifts and they are our inventory then and if we bought that for Klis for the 15,000 but the replacement cost is only 12,000 then we're saying that it went down in value and we shouldn't be keeping the inventory on the books at 15,000 which would be the general rule. The default rule, meaning we keep the inventory on the books at cost. If the replacement cost has gone down to 12,000 it's important to note here that we're not talking about the sales price, so we're not saying that the cost is what we're selling it for. We're not selling our inventory in this case, the forklift for 15. We would have marked it up for something of the sales price. We're talking about the cost of it, what it's on our books for. And we're saying that well, if it costs 15 and weakened by the same inventory for 12 then we should be putting that inventory on our books for a lower amount. And if we were to sell it, of course, it's probably the case that there would be a relationship to the sales price. That sales price probably is something that would have to be lower than the original sales price that we would have had when we had bought the merchandise at 15,000. But this problem once again has to do with how much we're reporting our assets on the books for which is not the same thing as the sales price. It has to dio typically with what we bought it for. That's gonna be the default. But if we're saying it went down in value, given the fact that we bought this inventory specifically for selling it, if the purchase price went down, then you would think that the inventory has declined in value and therefore we should not be holding it on the books, overstating our assets by keeping them at cost at 15. But putting them on the replacement cost, what, the inventory, what they seem. Inventory. The same forklift in this case would cost if we purchased it at this time. To make that decrease, of course, would make the financial statements look a bit worse. We would have to decrease the inventory, lowering the amount of assets that we have on the books and records, some kind of loss lower in the net and couldn't come at the point in time that it is determined that the replacement cost is less than the cost that we pay for the inventory. 7. 40 Perpetual & Periodic Inventory Systems: In this presentation, we will compare and contrast the perpetual and periodic inventory systems as we track inventory through the accounting process. First, we're gonna look at the perpetual system. The system we typically think of win recording transactions that deal with inventory. So if a transaction doesn't say it's using a periodic or perpetual system, you probably want a default to the perpetual system we have here. The owner. We have the customer were saying that we're selling this inventory this ink for a cost of 8452 the customer. The customer is not paying cash but pain and I O u toothy owner. Typically under a perpetual system, we break this out into two components. One the IOU or the accounts receivable or sales component, a component similar to what would be seen if we were not selling merchandise but a service company. The second component, the separate journal entry we can think of in breaking this out into a separate journal entry would be the reduction in inventory and the related costs, a good soul, the fact that we're giving the ink and recording the expense related to it. So if we consider those two, then the first journal entry we're gonna think of and remove. I would think of it as removing the inventory component as if we were so solely a service company. And then think of a second journal entry the second half of this transaction being the inventory component. So if we removed inventory in the inventory accounts, we would say if we made a sale, if we did a service sale, then the accounts receivable would be going up by that 8450. And we would have the sales or revenue going up in a service company, which is be a different name and probably called fees earned. Or it would be called just revenue or income and a merchandising company. Often times when we will see it's called sales. But it's just a revenue account, and it will go up the other side. Then we can think of, and this is the difference. This is decide that will differ between the perpetual and periodic systems will be that related to the inventory accounts. So this is gonna be what I will call the cost of goods sold entry. That's gonna be the fact that inventory is going down. We gave away inventory. Therefore it's going down and we have a related cost that will be going up the cost of goods sold. Now the inventory is not going to go down by the sales price, and that's kind of the point. And that's the reason we may use a periodic system as opposed to a perpetual one. Is that often times the person making the sale, depending on how sophisticated our system is, may not know the cost. It's not on the inventory itself. So unless we have an electronic system that knows the costs, or we only sell one particular thing to make it easy to record the cost, that's why we we may use a system that doesn't record the second half of periodic system and just record it at the end of the period at the end of the time period. So this is going to be the different factor. If we have a system that sophisticated enough to record this as we go, then we would like it to do so because that will be a more accurate system throughout the time frame. If we look at those two transactions. Then there's we're gonna analyze these journal entries. This would be the entire journal entry accounts receivable is going to go up by that 4 8050 sales is gonna go up with a credit of the 4 8050 This is gonna be the port that's related to the sales component. Then we have the cost of goods sold component which I typically think of the inventory first merchandise inventory going down with the credit 6500. The related expense cost of goods sold increasing, bringing net income down. If we analyze this, we can say, OK, what's happening to the assets, then with these two journal entries? Remember that this journal entry is the one that is different between the periodic which we're talking about now, Andy perpetual, which we'll talk about in a second. So the assets here are going up by the accounts receivable and they're going down by the merchandise inventory. So the net effect, then in the total assets, is the difference of 1950. We got something. We got an IOU, we're going to get cash hopefully and the inventory went down. Hopefully we got more, We're gonna get more money, then the cost of the inventory was that we gave up the net assets than increasing the other side. We can think about what's happening to equity or the income statement to net income. We can say OK, well, sales is going up by that 4 8050 the cost of goods sold. What? We gave up the expense related to what we gave the expense related to the inventory. The cost of that inventory is going up, which brings net income net income up. Now. This one might be a little bit more difficult to see here because we know that sales is increasing with a credit, sales has a credit balance. It goes up with the credit, so we're increasing sales. The other side is we're increasing costs of goods sold. Now that's an expense, and net income is calculated as revenue minus expenses. Therefore, the fact that cost of goods sold is going up is going to bring the net income down. So revenue is bringing the is going up. Cost of goods sold is going up, but because of its old going up brings net income down Therefore, we're going to subtract the to and we have the difference. The increase in net income of 9 1050 that increase in net income because net income it's a part of equity will also be an increase in equity and therefore, these transactions will have an increase in the assets of the same amount as the increase in the equity section. If we look at a periodic system, we can think of this same sale in terms of a periodic system rather than a perpetual one. If that's the case, we're still gonna have the first journal entry. We're gonna say, OK, we still have the accounts receivable going up and we have these sales going up, but you'll recall these seconds journal entry. We will not have. Remember, if it's a perpetual system, we would also record the second component at the point in time that the sale was made, we sold the ink we gave away the ink. We got the receivable. You would think we would record the reduction and inventory and the cost of goods sold at the point of sale. But in a periodic system, we do not. We only record the first component. Why, Typically, that would be because possibly our system is not sophisticated enough. We may have a system where we have someone like like a clerk basically making the sale, possibly, and and they only know the sales price unless they have a scanner or something that knows the cost of goods sold. They don't know what the cost is and therefore don't have the ability to record it also want to be focused on the selling of it and just giving the change back or completing the transaction in any format that can be done. Therefore, unless there's a sophisticated system to record it, usually a digital one, a periodic system might be used in that in that system. If we do have a sophisticated system, we would want to record this at the point in time of the sale in a perpetual system. If we don't weaken, just record the first component, the sales and the accounts receivable, which is on the inventories, the sticker price of the inventory and then we can record this second piece not as we go, not ask me record sales, but at the end of time period at the end of the night at the end of the week at the end of the month, at the point in time, we do a physical count to determine how much of the inventory went down and how much of the cost of goods sold then should be recorded. So that means that at the end of the time, Beard will do that physical count and we will record. This transaction will record the decrease in inventory and the increasing cost of goods sold at the end of the time period. Not for one transaction, however, but for all the transactions, all the sales transactions that happened during that time, whether it be a date, a week or a month will record all the transactions in one lump sum for the decrease in inventory in the cost of goods sold by doing a physical count, meaning will say the inventory before the count, whatever it would be, we're gonna say 100,000 now that would include the beginning inventory, plus all the purchases because we recorded those two. We know what those are, and then we're going to do the physical count, and we're going to say the inventory per the count in this case is 25,000. Then we can subtract the two and we assume that we sold then 75,000. That would be the adjustment or the cost of goods sold. Adjustment. Therefore, we would debit cost of goods sold 25 for the 75,000 and credit inventory for the 75,000. No, there's a couple things to note here. One is that we're assuming that this is what we had available for sale. This is what the count was. So the difference then we're assuming we sold those. It's possible that we had a loss or something like we lost some of them or or they spoiled or something like that. And eso that assumption might not be wrong, but we are hoping that that kind of shrinkage would be small and therefore not a material factor in our recording of this transaction, the second component of the transaction. It's also important to note that as we do the physical count here, we emphasize the physical count as a necessary part to the periodic system apart, that which, if we did not record, we would not know that caustic it sold or inventory can lead us to start to think that the perpetual system has no use for a physical count because it does record the decrease in inventory as we go through and note that that is not true. Because, of course, there could be something like shrinkage or theft or something like that. In a perpetual system, the physical count will be used in order to double check that the inventory is correct. To check to see whether or not there were problems. Problems such as shrinkage, problems, such a spoilage, theft, breaking inventory and it will be able Teoh, pick those components up those pieces up. 8. 42 First In First Out (FIFO) Periodic System: In this presentation, we will discuss first in first out or Fife O using a periodic system as compared to a perpetual system. As we go through this, we want to keep that in mind all the time. That being that we are using first in first out, as opposed to some other systems last and first out, for example, or average cost. And we're doing so using a periodic system rather than a perpetual system. Best way to demonstrate is with example, so we'll go through an example problem. We're gonna be using this worksheet for our example. Problem. It looks like an extended worksheet or large worksheet, but it really is the best worksheet to go through in order to figure out all the components of problems that deal with these costs. Flow assumptions, including a first in first out, last in first out or an average method and using a periodic or perpetual for any of them. If we could set up the worksheet that would look something like this, then we could set up the same type of format for any of those types of problems, and you can see if you mix and match the fact that we can have a perpetual or periodic system for those three methods. Fife. Oh, life. Oh, an average. There's actually ah lot of problems that could be asked that are slightly different in terms of methods with regard to inventory calls, flow assumptions. So the format of the worksheet it's gonna be three columns or three separate sections purchases, costs of merchandise sold and inventory when considering the periodic system, as proposed as opposed to the perpetual system. We don't really need this middle section until the end until we finally do the final calculation, which is where most problems will probably be focused because that's where the adjustment will happen. Until that happens throughout the time period, we're just gonna be recording that purchases, and then we're gonna record the what is still there, including what was there before, plus the purchases to see what would be in Indian inventory. In each of these sections, we have at least three components, and those components will be the quantity the unit cost and the total cost, and we'll have to do a conversion each time because clearly inventory some type of units, some types of quantity that we will then have to apply some type of dollar, too, in order to get them on the financial statements. In other words, we cannot put quantity on the financial statements. We have to put dollars on the financial statements and therefore church convert the quantity of the inventory. We have $2 in some way. We'll have the same thing for the cost of merchandise sold once again, this column not being used so much so frequently as in it perpetual system in the system, we will be using a periodic system. And then we've got the ending inventory which will have once again the quantity of the unit and the total cost. If we have this set up, then this will be workable for any kind of inventory flow, a problem generally. And we can put the information into this system and figure out not just the cost of goods sold or not just the Indian inventory, but both components of them. So, going through this problem, we're going to say that we have the beginning inventory first. So this is gonna just be the given of most problems. This is where we start this where we were at at the beginning of the month or the end of last month, and that's where we will start our worksheet. So we had 100 units. We're just gonna put them in the Indian inventory. They're not being purchased at this time. They were purchased some time before this month, sometime before March. And then we're gonna have the unit cost. We're gonna say they first inventory we had cost $50 and if we multiply 100 times the 50 we get the 5000. The 5000 then is what would be on the income statement on that on the balance sheet or the trial balance. And this is the amount that will be on the financial statements. I'm gonna repeat that over here and pull it out to the left side because later on, we will have multiple rows and will want to sum up to see what will actually be the total that will be reported on the financials. So here's our beginning balance. If we were to compare that to the financials or, in our case, the trial balance in order assets, liabilities, equity income and expenses zero representing that we are in balance, the debits being in positive numbers, the credits being bracketed and therefore debits minus two credits equals that zero net income net. Here is a loss at this point where we have no revenue, just expenses. The 500 to 9 309,020 being at 10,000 and 7 20 week, of course, are concentrated here on the inventory which now matches our worksheet. So you can see that this worksheet this is just the last column of the worksheet is tying out to what we have on the trial balance. That will be consistently what will happen. And you can compare this to If we had the accounts receivable here, for example, it has a supporting a ledger. All of these accounts have supporting ledgers, including inventory of the General Ledger by date. But remember that an account like accounts receivable wants a supporting ledger, not by date, but also by customer. Who do we who owes us money and inventory is gonna be a similar way? We want to see supporting data, not just by date, but by inventory item. What? What? How many units do we have? And what's the cost of those units now we're gonna go to the next thing that happens, which is going to say we purchased on 35 400 units at 55. Notice that the last units we purchased were at 50. We have a rising prices. That's the problem. And that's the problem, because prices don't stay the same even though we're buying the same units, these air, the same widgets, whatever we're selling the inventory we're imagining here all the same. But the price is going up due to, if nothing else, inflation. Now it is possible for prices to go down, But you want to really think of going up as the norm and then going down being pretty much the opposite. When we think of the effect on the financial statements, if we know what is happening, if we know that difference in the comparison as prices increase, we can easily just reverse them for the condition where prices decrease. So we're going to save in on our worksheets on March 5th is gonna be the next item here. We will say that we have 400 units. It's going to start off in the purchases here. We're gonna list the purchases separate so we can see all the purchases in its own section . Then we're gonna add the purchases over here to the Indian inventory to what we already have in the beginning and get to our ending inventory number. So we got 400 units in the purchases. They cost $55.400 times 55 is the 22,000. Now, we're gonna pull that information over here to the ending inventory. In order to do so, we will first bring down this number. This is gonna be our first layer. We wanna have it in the same date range because that will just make things easier to look through. So we're just gonna pull that whole thing down? We just copied this whole thing down here. Just so it's all under the same date Ranch were not copying the 5000 because that's going to sum up the full layers for any date range here for March 1st here for March 5th. It's not going to just be that it's gonna be that plus this 22 which we will now put in the Indian inventory as well. So we're gonna move that over and copied over here. So there is some repetition here. Of course, we have to copy this over and copy this over. But by so doing that we can have everything on this date line and we can show the purchases in a separate column so that we can clearly see that purchases column and the cost of goods sold column. Then we're just gonna add up these these two outer numbers under this Dateline. So remember, we only care now about everything under this green line. That's all that matters. At this point in time, we got the 5000 plus 2 22,000 means we've got 27,000 so we have two layers of inventory now . Under first in, first out, we've got the 100 units at 50. We've got the 400 units at 55 under first and first out, we would assume that we sell the 100 units first. Although remember, that's just assumption the people purchasing could purchase any unit they want because possibly we haven't even labeled them to be able to distinguish, which is which. We're just assuming that the the first units we're gonna sell first, then if we did the journal entry behind this, we would say, OK, now we're gonna record the journal entry for this purchase here that we made this purchase here and see what happens in terms of transactions. It's important to tie this work shit out to the financial statements here, so we're gonna say, OK, here's the inventory. Um, it has a debit balance of 5000. We bought 22,000 more of inventory. Note. This is not an estimate. This is gonna be the same whether we use FIFA life. Oh, average specific identification, perpetual periodic system under any of those methods. Always the same. Not an estimate. It went up for whatever it's going to go up for. We're gonna pay 22,000 because it has a debit Will do the same thing to it. Another deputy. So we'll debit inventory. We're gonna assume we didn't pay cash but purchased it on account, and therefore cash will not be decreasing. The good things not going down. The bad things going up. We owe accounts payable, so accounts payable has a credit balance. We're gonna make it go up doing the same thing to it. Another credit. So, if we post this and if we post this to our worksheet, we have the 5000 plus t 22,000 giving us 27,000. Then we post this accounts payable to our worksheet. We've got the 1 12,050 plus the 22,000 meaning we owe now 34,150. So if we were to see that all together, then here's all the numbers filled out. This is our beginning, balance worksheet. Here's our adjustment that we made. Here's where we end up. Here's the ending balance. After that adjustments, we could see that the 27,000 here matches what is on our worksheet. So it supports the worksheet. Supports what is on the financial statements. What is on our trial balance? No, there's no effect on net income. Even though we purchased inventory, we're not gonna expense inventory at the point of purchase. We will expense it when we consume it. In order to help us generate revenue in the form of cost of goods sold. However, we won't make that adjustment under a periodic system until the end of the period. The end of the month, the end of March. In this case, next item we're gonna say that there was a sale of 420 units at $85. Now, know what we're not showing here? Here. We're not showing the worksheet for the cost worksheets, because under a periodic system, we only record the the sales component of it. We're not going to record the related cost component until the end of the period until we do a physical count. This is really the difference between the two methods in terms of the transactions as we go through the period. So in terms of the periodic system, we will record the journal entry, but nothing will be recorded to the inventory accounts. Nothing will be reported to the new accounts when we go from a service company to a merchandising company. Those accounts of inventory and cost of goods sold. What we will record is the first half of the transaction that we typically think of when we make a sale of inventory. The transaction that would be the same in many respects in all respects, pretty much of a service company if they did work and got revenue. So if a service company did work and got revenue. They would say that they did. If we didn't get cash, we did it on account. We got accounts receivable. Accounts receivable would increase. So encounters tables going up by 35 7 which is 420 units, times $85 and then the other side would go to revenue. Revenue is a credit balance account. We're gonna make it go up by doing the same thing Another credit. So we would credit then revenue. So there's gonna be our transaction debuting accounts receivable, crediting revenue note as well that this $85 has nothing to do with our worksheet in terms of the cost, it only has to do with the sales price. We may use the cost to generate to figure out what the sales price will be. But the cost is what we are dealing with. Mainly in this problem, the sales price is going to be something different from the cost. We're gonna have to figure out what the sales price is. That's not what we're tracking in our worksheets. The journal entry we are not doing is this half meaning inventory is not going to happen and cost of goods sold is not being recorded. Why? Because we're using a periodic system. Why would we use the periodic system? Possibly because our system is not sophisticated enough in order to do a perpetual system. In other words, I know we know even if we have like a clerk working at the front of the store, that what the sales price will be because it'll be on the sticker price. But we may not know what the cost is, especially if we have multiple types of inventory, and therefore it will be easier to make the sales transactions what we're concentrating on when we're trying to generate money. If we just record this half of it at the sale and then recorded this half at the end of the time period. If, however, we had a more sophisticated system, such as a scanner that could report this information as it happens real time without us even needing to know about it or deal with it, then we could weaken use a petrol system, which would be better for the accounting purposes, Um, as we go. So we're gonna report or record this side. Now here's the counsel table here here's recounts receivable up here. We would then be increasing accounts receivable with a debit, bringing it up to 80,600. Then we have these sales. 35,007 credit. Nothing's in sales over here. We're gonna increase it 35,700 to 35,700. If we see the full accounts, then here's where we started. Here's our journal entries. Here's where we ended up. We can see that. Of course, the accountancy will went up and revenue went up, bringing net income up. Net income calculated asked this revenue 35 700 minus these expenses. 503 109 100. 9009. 20 Given us revenue, not a loss Revenue. These air these accounts right here of 27,980. Now note this amount is totally off because we do not record at this point. Cost of goods sold. Cost of goods sold has not been recorded. We only recorded the increase in revenue. Therefore are net income under a periodic system is very not correct until the end of the period. So we just have to recognize that as we go and not make decisions on this number because it's not accurate until we record the cost of goods sold, as well as the increase in inventory, which also is not correct at this point in time. Because we obviously gave up some inventory to generate this revenue and have not yet recorded under the periodic system. We will record it at the end of the period the end of the month, the end of March. In this case, next transaction were going to say, on 3 18 we purchased 120 units at $60 per unit. So here's where we started off last time. We're gonna continue right here on the March 18th. We're gonna say there's another purchase, so it's gonna look like a similar transaction. We're gonna be in the purchasing side here. We're gonna say we got 120 units. They cost $60. Note the rising prices from 50 to 55 to 63. Multiply the 1 20 times the 60 we get t 7200. We're then gonna pull this information over to the Indian inventory item to see what is still there. Now, at the end of the time, period. We're gonna pull down this information what we already had. So these two columns or rows, we're gonna pull those down. That inventory is still there, and then we're gonna add to it this inventory item. So now we have three layers of inventory. We've got 100 units at 50. We got 400 units at 55 120 units at 60. They're all the same widgets. They're all the same thing they have, right. They have different prices under a first in. First out, we assume we sell this one first note. We've already made a sale, and we may have made more than one sale. I just recorded one as an example, but we didn't reduce it yet. We will reduce it at the end of the time period when we do the physical count and note that because of that, because the layers could be different throughout the time period. That means that a perpetual system and at periodic system even after the end of the month after the adjustment has been recorded, could differ. Even using the same flow assumptions such as first in, first out. So if we use a perpetual system and a periodic system under first and first out. It is possible for us, but not necessarily the case that we end up with a different numbers at the end of the time period, even after the recording of the adjustment. So then we're gonna add these up. We're going to say, OK, the 5000 plus the 22,000 plus of 7002 that gives us the 34,200. This is what should be on our financial. This is what should be on our our trial balance. We're now going to record the purchase again and see that this number, which should be what we end up with with inventory, note that these purchases once again don't change under any method. First in, first out, last in first out average identification, perpetual periodic, they will be the same as will the journal entry that we will record now. So here's the journal entry. Here's our new transaction that we had here that 7200 that we purchased it is what it is doesn't change underneath their method. We're going to say that inventory is what we purchased. It has a debit balance. We're gonna make it to go up by doing the same thing to it's another debit. So we will debit the inventory. The second component will be the way we paid for it, not with cash. In this case, we bought it on account. So we have accounts payable as a liability. It's gonna go up by doing the same thing to it. Another credit. So if we post this out, then we're gonna say, Here's the inventory started at 27,000. It's gonna go up by 7200 to a total of 34,200. Here we have the accounts payable started at 34,150 is gonna go up by 7200 to 41,350. If we see all those accounts, then here's what we have. And obviously inventory went up to 34,200. That's what we have in our worksheet. Our worksheet supporting that number on our trial balance. The accounts payable is here, and no effect on the net income no effect down here. Even though we bought inventory, we didn't expense the inventory at the type purchase. We put it on the books as an asset. We will expense it when we consume it. To generate revenue in the form of cost of goods sold, However, we won't record that cost of goods sold under a periodic system until the end of the period . The end of the month. The end of March. In this case Next transaction 3 25 purchase 200 units at $62 per unit. So note we're only recording the purchases here in this worksheet, and then we might have more sales happening. But I'm not going to record all the sales because that's not what's gonna be recorded in this worksheet. We're gonna figure out the cost of goods sold related to the sales at the end of the time period with a physical count. So it's gonna be another purchase. Another familiar transaction. On March 25th we purchased 200 units, $62. Note the rising prices 55 to 60 to 62. It started at 50 at the beginning, and that gives us 12,400. We had the layers here before the 100 the 400 that 1 20 at 50 55 60. We pulled those down, so they're all under the same Dateline. So as of March 25th I only want to be working with stuff that's under this green line. So that's why we have to pull all of this down and then we'll pull this over adding one more row. So now we have 100 units of $50.400 units at $55.120 units at $60.200 units at $62 for a total of 5000 plus 22,000 plus 7200 plus 12,400 or 46,200. This then, should be what is on our financial statement after we record this transaction, which doesn't change under either method. FIFA life. Oh, average periodic, perpetual. It is what it is. Here's the journal entry we're gonna record this transaction is 12,000 that we 400 that we purchase. It's gonna be inventory increase in inventory has a debit balance 34,200. We need to make it go up doing the same thing to it. Debit in it, then we're gonna increase. Not the cash, but accounts, payable accounts, payables, a credit balance. We do the same thing to it's another credit. If we post this, then we're going to say that this is the inventory 34,200. We will increase it by the 12,004 and then it will go up to 46,600 matching our worksheet. Then the accounts payable is here. We're gonna post that to this 3 41,050 increasing it by 12,400 to 53,750. The main point here being that the inventory is matching the 46 600 matching and supported by our worksheets here. Next thing we're going to do, we're gonna say it's the end of the period now and we had Indian inventory that we will then count. And now this is gonna be the key component to the periodic system. What we have not done is record the middle column. We haven't recorded the cost of goods sold, not showing the cost of goods sold column here to save some space. We only have the purchases and the inventory. We will be working on the cost of goods sold to figure out now what we did. So how much of the inventory we sold? How first, we're gonna figure out how many units we have left with a physical count, so we'll take a physical count. We say how many years we've got left. We've got 240 units. Then we typically look at this in terms of the cost of goods sold. Calculation Note that this 240 units is in units and our numbers here are in dollars. So the fact that there's a conversion problem and more complicated by the fact that the costs are are not all the same even though we have the same amount we're kind of inventory means that we have to do some type of conversion. It's a little bit more complex. We can do this Cost of goods sold calculation in terms of both units and dollars. Cost of goods sold calculation must be memorized. It's it's kind of a ness n Shal component, and it goes like this. We got the beginning inventory where we started at the beginning of the time period. We're going to say purchases and then typically we have a subcategory, subcategory, being our goods available for sale. So whatever we had at the beginning, plus whatever we purchased through the entire month is what we could have sold during the time period. It does not mean that we had that amount at any point in time during the time period. It means that that's how much went through the accounting department or our warehouse and during that time period and therefore could have been sold at some point through the time, in our case, the month of March. Then we're going to subtract from that the ending inventory, the amount we counted, the amount recounted, and that will give us the cost of goods sold. So this will be the typical calculation. You just got to kind of memorize this note that this cost get so our goods available for sale is a subcategory. You could just have beginning inventory plus purchases minus ending inventory and eliminate this subcategory. But you wanna know that sub categories name because it will be named oftentimes and problems and in practice. So we're gonna do this first, any units and then in dollars. So we're gonna say beginning inventory and units. Was this 100 units? That's what we started with purchases. That's why it's nice to have the purchases column set out here was 400 plus 1 20 plus 200. We just add those up the quantity that units given us 720 meaning that in units we could have sold 820. Now, that again doesn't mean we had 820 at any point in time during the time period. We could have been selling throughout this entire time period. But that's how much went through the warehouse through this time period and therefore was available for sale. And could have we could have sold at that time. Then we're gonna do the physical count, the inventory count. 240. That's what we counted the inventory to be, If this is what we could have sold it. This is what went through the warehouse at any given time. And we only have this in the warehouse now, as in the end of the month, then we can subtract the 820 available, minus what we currently have and assume we have cost of goods sold of 580 note. There is an assumption there because it assumes that we sold these units as opposed to lost them, have been stolen, broke them or something like that. And, uh, and that's part of the problems with a periodic system in that in a perpetual system, we can have a new, easier calculation to kind of figure out how much might have been done to shrink its some kind of loss or theft as opposed to sales. But our hope is that most of this was sales, and the part that was theft or loss or some other component is not significantly high and therefore will still record the cost get sold as the cost of goods sold. In other words, it would be in material to decision making. Now we're gonna do the same thing in terms of dollars. The same cost of goods sold calculation. Beginning inventory was 5000. Then we had purchases, which was 22 plus two seven plus 2 12 and it purchases side purchases column giving us 41,600. If this is what we had in dollars at the beginning, this is what we purchased No estimate. Here it is, what it is. That's what we purchased. Four. Then we're gonna have 46,600. Notice that again. This item here is gonna be the same under I. Any method it's gonna be first in, first out, last in first out perpetual period. It purchases what we purchased. So we got the 46,600. Now we've got the Indian inventory. That's where the problem is, because we know the units. But I can't just convert the units $2 because we know that the units all costs different amounts. We have to use it caught. That's where the estimate is going to play in. So this is kind of where we have to stop until we go back to the worksheet and say, OK, well, which units did we sell and how much did they cost? And so we're gonna do that here. Remember, we had 100 units at $50.400 units at 55 1 20 units at 60 and 200 units at $62. Under a first in first out method. We assume we sold these units first. Now note what we have here This is our worksheet. We got the Indian inventory and the cost of goods. Sold COLUMN Now this column that we haven't used the entire time put, which we are now using at the end of the time period. You could think of this problem a couple different ways. If you see it in multiple choice questions, they may only ask you for, for example, what is left in Indian inventory or what is the cost of goods sold. But you really want to be able to set up the problem so you can do both sides and be able to answer both both questions. That's why worksheet like this is good to be able to set up. So in other words, there's 240 left here so we could start at the ending inventory and try to figure out OK, well, if I sold these ones first, that I've got the 200 left and I could try to figure out how much of the 2 40 is left, or we can say if we sold to 40 than the unit. I mean, if we have to 40 left, then we sold 580 and we could try to figure out Look at the same data and think of it from that side we could say, Okay if we sold 580 we sold this first and then this second. So that's how we're going to do it here. We're gonna We're gonna use this 580 number and try to figure out what we've been sold and record that in this cost of goods sold side. So, in other words, if we sold 580 units were using this number, then we saw all of this 100 units at 50. We assume that that is gone, so this whole room has been wiped out here. So this rose basically gone, and then we sold 400 at 55. This rule is basically gone. We sold all of those because we're trying to get up to 580 and those are gone. And now we're gonna say, OK, how much do we have left here? Well, we got 500 eighties. What we needed minus 401 100 or 500. That means we had 80 units that we must have sold at this layer So we had 80 units that we sold at $60 and that's going to give us 404,000 and 800. So this is gonna be the layers we had. Of the 580 units, 580 units, we sold 5100 of them at $50. 455. 80 at 60. That's the assumption we have. And that's gonna be our calculation if we add those up. Well, let's first see what we have left Now then, if we see what we have left the these remember, we wipe these out. So those air gone. So this this row is now gone. This rose now gone because 400 minus 400. So here's the 400 minus 2 400 is zero the 100 minus. The 100 is zero. And then the 1 20 and uh minus 2 80 is going to say that we have 40 units left there, and that's gonna be that. And then the 200 of course, is just has not been touched. We have the 200 left. So what we have left then from these layers, is these layers down here. 40 units at $60. 200 years at 62 given us 2400 plus the 12,400 or 14,800. So we really need to be able to look at this from two perspectives. What we sold what the cost of goods sold is and what we have left. Now we have the ability to complete this. We can say the the, uh, the Indian inventory is gonna be that 14,800 and then the 46,600 minus that 14,800 will be the cost of goods sold. 31,800 or 5000 plus 22 plus 4008 would give us that 31,800 if we go and we can't and we make the journal entry Now the final journal entry that we have not been making this entire per time period. This is the journal entry. We would be seen every time we make a sale under a perpetual system. That one, we have not been seen. Every time we make a sale under a periodic system, we haven't even shown it all the time. Just one time. Just a show. I have a difference Will be this. So this is the second half. Remember, when we make a sale typically under a perpetual system, we break that journal entry into two components to think about. Theoretically, one is the sales side and the accounts table side, increasing accounts receivable. Increasing revenue. That's what we have seen. What we have not seen. What we did not do is the other side. Every time we make a sale, decreasing the inventory for what we sold, an increasing the cost of goods sold. That's what we're gonna do now for the entire time period for all sales that happen through the time period through the month through March. So we're gonna say it cost to get sold is going to increase by cost a good soul, the 31,800 the inventory. Then it being a debit balance is gonna go down by all the inventory we gave up throughout the month 31,800. Once we post this, then this inventory will be left with what we calculated in an inventory to be 14,800. So let's post this. We're gonna post to 31,800 cost cuts told at zero increases 31,800 to 31,800. We'll post the inventory then. So the inventory started at 46,600. Increase seen or its are decreasing with a credit of 31,800 to 14,800. That then, of course, matching our 14,800 here. And that's gonna be the key component here. If we see all the accounts put together, we see the 14,800 are ending balance matches. What we calculated here, we see now that our net income is affected dramatically, it's going down. If the net income is this 50,900 revenue minus all the expenses, this expense cost of goods sold huge expense has just increased, bringing net income way down from 40,000 net income down by 31 8 to this 3 8080 This is still income. It's not a loss. But until we record this huge component, this huge expense cost of goods sold big number than under a periodic system or net income is drastically wrong until that adjustment happens at the end of time, period. So we just need to recognize that. Of course, if we see our calculations, then we know that the cost of goods sold calculation. We can tie it out to the worksheet and tied out to our numbers on the trap ounces going to the ending. This are Indian trial balance now. So we've cut the cost of goods sold. Is here would match the 5000 plus the 22 plus 2 4008 same number here. And of course, it's the same number on our trial balance. We can see that the Indian inventory is 14,800 here also 14,800 on our worksheet and 14,800 on the trial balance. 9. 44 Last In First Out LIFO Periodic: In this presentation, we will discuss the last in first out inventory system on a periodic basis rather than a perpetual basis. As we go through this process, we want always be comparing those 21 the life Oh, or last in first out system to other systems such as first in first out and average, as well as comparing the perpetual system to the periodic system. We're gonna go through this by looking at a problem. The problem going into a worksheet such as this, I do recommend learning this worksheet. This worksheet should look repetitive if you seen the first in first out presentation as well as presentations for the perpetual system. That's because this worksheet can be used in order to work most of the flow assumption problems. And there's a lot of them. If you think about the combinations we can have, including the last in first out method, we will be working here or the first in first out method and the average method. Both those can be done either on a perpetual or periodic system, so there's a lot of combinations we could have, but they could all fit into this type of work sheet. Note that problems could ask a comprehensive worksheet such as this, or problems could ask for small components. If we learned the entire worksheet, however, we can fit that problem or that worksheet to all the problems related to this type of system. Inventory flow assumptions. That format would be three sections that would be purchases and then the cost of merchandise sold and then the Indian inventory. Within those sections, we're gonna have the quantity, the units and the total for each and that will be able to allow us to separate the purchases from the cost of goods sold and the ending inventory. When we're working in a periodic system, as we are now, we won't be working with this middle column until the very end when we make the adjustment at the end of the time period, recording that cost of goods sold and the related decrease in inventory. So the beginning transaction will be the beginning inventory. So we're going to say that we start off with the beginning of the month in this case March , by the way as well. Note that these formats for the periodic system will look very similar for the systems, including first in first out and the last in first out until we get to the end of the problem. But we do want to go through there's and just put together this worksheet so that we can see how it's formatted and compare and contrast these journal entries as we enter them. So we're gonna put in the beginning balance 100 units and they're at $50.100 times 50 is 5000. So that's where we start. That's the beginning balance that we are starting with at the beginning off March. Note the conversion we have to do here, one from units to the dollar amount to get the $5000 that will be reported on the financial statements. We're gonna pull that 5000 over to the right because later on, we'll have multiple layers, and it will be easier to see if we pull this out to the right. This being the amount we would see on the financial statements, we have the trial balance here. Here is gonna be our tribe bounce. It's an order, assets, liabilities, equity, income and expenses. We know we're in balance because the debit balances are represented without brackets or positive numbers credits with brackets or negative numbers. And if we were to add all of them up, they add up to zero. Net income currently is a lost, There's no revenue and we have these expenses. 503 9 109,024 loss of 7 10,020 This is our Indian inventory that the last component that we just pulled over from the worksheet 5000 is what is in inventory that matches what is on our financial statements or trial balance here. That's our starting point. It's important to remember that this worship is, in essence, backing up supporting being the detail behind this inventory. Information on the trial balance or balance sheet, if we go through the next transaction were going to say that there's a purchase of 400 units at $55 notes that the prices rising, they were $50. Now they're $55. That's gonna be the normal scenario. So the normal process, our prices rising. We want to consider factors as prices go up and then kind of reversed. What would happen if there was a decline in price. So we're gonna say, On March 5th, we bought 400 units which will clearly go in the purchases section, and they cost $55 to give us a total of 22,000. Note that this would be the same under five photo life. Oh, average it would be the same under a perpetual or periodic in either system. This is not an estimate or assumption. We're then gonna pull that over to the Indian inventory added to what we already have. We want to have everything, however, under this line at this date line so that we don't start getting confused as the worksheet grows. Therefore, were first gonna pull this down. So we're just going to say this is the same information we just pulled down here, and now we have 100 units at $50 then we're just gonna pull this over toe, have the 400 units at 55. So we have a total of 500 units, 100 of them cost us $50. 400 of them coughed just $55. If we were to sell something at this point in time and record it, we would assume under last in. First out, we sold the last ones we purchased these 401st however, we want to do that until the end of the problem. When we counted under the periodic inventory system, we're gonna add these up the 5000 and 22,000 giving us the 27,000. That ban will be the amount on the balance sheet or the trial balance. If we then record this, we're recording this purchase. There's 22,000. Member doesn't change under whatever inventory method we use. We're going to say that we bought inventory inventory has a debit balance. We got more of it, so we're gonna do the same thing to it. Another debit. Well, debit the inventory, and then we will credit something, not cash. Cash is and going down where crediting instead, accounts payable the liability as a credit balance were increasing it by doing the same thing to it. Another credit. So there's gonna be our transaction. If we post this, then this inventory a 22 will be posted here, the 5000 going up by the 22,000 to 27,000 this 22,004. The accounts payable will be posted here to accounts payable to 12,150 will go up by 22,000 2 34,000. 150. That's gonna be our transaction Note. Vet. This 27,000 now matches what is on our inventory worksheet. If we look at the totals here, we see that they're back in balance. Of course, we're back in balance, Deputy equal in the credits. And there is no effect on net income meaning nothing happened in the revenue or expense accounts. All we did was purchase inventory. Inventory is not an expense when we purchase it. If it's an asset when we person to purchase it, it will be expensed, However, but not until we use it In order to help generate revenue, not until its expense in the form of cost of goods sold. Next transaction 39 Sale of 420 units at $85. This is the only sails transaction we're gonna show here because under the periodic system , we would not be recording this toothy worksheet. We're only gonna be recording the sales half, which is not located on our worksheet. We we will post the Journal Outrageous to show the journal entry. If it were a perpetual system, then we would be recording the second component, and we would be recording it to our worksheet. We would be decreasing in other words, inventory at the point in time of sale and recording the related cost of goods sold. However, here we will not. So if we think about a sales journal entry, we typically under perpetual system, which we're not using here, think of it as two types of journal entries, or we can think of it that way. And it's really helpful to win learning these two journal entries or the Sails transaction of inventory. One related to the same type of thing happening if we were a service company, eliminating inventory and related accounts and the other having to do with inventory recording the decrease in inventory. If we think about the first half of the transaction, the half that we could eliminate inventory accounts be very similar to If we were a service company, we'd say we made a sale on account. We didn't get cash, we got something else. We got an IOU accounts receivable. It has a debit balance of four equal hasn't debit balance. We need to make it go up because people always more money. We do the same thing to it. Another debit and then the other side of it will go to revenue. Whatever that revenue called service company might be fees earned, it might be income, revenue or sales, depending on the type of company. It's all the same thing in terms of the type of account. Revenue revenue has a credit balance. We increase it with a credit, so this will be the same under a periodic or perpetual system. Also note that we have the 4 20 times 85 to bring us to that amount. What will not be the same is we won't have the second transaction here. Under the periodic system, we won't record the cost of goods sold, the expense related to this transaction or the inventory. Now you might ask, why Why wouldn't we do that? It seems reasonable to do that. We clearly had given up inventory and it should be going down, but it's usually with regard to the sophistication of our system. If our system is not on electronic system, we want to focus more on the sales process. So especially if we have something like a clerk or something making the sales, they may know the sales price, but they may not know what the cost is and note the costs will be different. That costs will not be this 85 dollars. It'll be what we paid for the inventory, what we're tracking on the worksheet. And if we don't have a sophisticated system, we might not know that at the point in time of sale or want to have to deal with that at the point in time of sale, we will deal with it periodically as we count the inventory at the end of the time period. Also note that this 35,700 dealing with this 85 times 420 uh, once again, this 85 is not something that we're going to see in our worksheet at all. It might have something to do with the cost. We might have used the cost to derive the sales price, but it has nothing to do with our cost worksheet. If we were to post this out, then we're gonna say accounts receivables here accounts receivables there on this journal entry. It's going from 44,900 up by 35,700 to 80,600. Then we're gonna post the income, the revenue or the income. The sales going from zero up by 35,700 to 35,700. Here's all the accounts. If we note the effect here, we see that net income is going up substantially by the income here it was at a loss. We have this revenue. This is not a loss. This is revenue over expenses 35,000 minus the 500 miles 300 miles of 9009. 20. Giving us revenue. Note that this net income number is substantially wrong because we haven't recorded the cost of goods sold under the periodic system. It will be right at the end of the month when we do the calculation of the physical count of Indian Indian inventory recording the decrease in inventory and the related cost of goods sold This 27,000 also wrong. Until we get to the end of the month, count the inventory, make the adjustment. So we're still at this 27,000 on the worksheet. Next transaction, we made another purchase. 120 units, $60. Note the rising prices 50 to 55 to 60. That's the norm. You want to think about that is normal. And then if they reverse that, if you see the price is going down, you'll just have to reverse some of the assumptions we make or some of the outcomes that will happen. So we're gonna say, on March 18th we have 120 units in the purchases section, of course. And we are saying they're $60 each. If we multiply 120 times 60 we get 7200. Once again, we want to take this information and put it below this line and have everything below this line. To do that. We're gonna say everything at this state line below this line is what we had before 100 units at 5400 units at 55. We're just gonna bring those down to our new section here, and then we're gonna bring these items over. So now we're gonna add the new rose. So that's what we have. Now we have 100 units at 50 we got 400 units. At 55 he got 120 years at 60. If we were then to add these up, we would say that we have total inventory at 34,200. In terms of dollars, we're gonna then record this purchase. And remember, this purchase doesn't change whether using FIFA life Oh, average perpetual or period. If we then do the recording, we're going to say that we got this 7200 purchase inventory is at 27,000. We need to make it go up, will do the same thing to it. A debit debuting inventory the other side not to go into cash. We're gonna assume we didn't pay cash, but bought on account. Therefore, the accounts payable credit will go up in the credit direction 7200. Then we're gonna post this out. So here's the inventory. Here. Here's their inventory there. It's starting at 27,000 going up by 7200 to a total of 34,200. Then we have the accounts payable here. It's going to go to the accounts payable there starting at 1 34,050 going up in the credit direction 7200 to 41,000, 350. This Indian inventory. That's where we're focused because that matches what we're tracking the support of that number. That being the inventory worksheet, we look at all the numbers. Here's what we have. We note that there's no effect on net income. Net income isn't affected because no income revenue or expense accounts are affected. We will expense the inventory, but not at the time of purchase at the time we sell the inventory in order to generate revenue. We won't do that a periodic system until we count the inventory at the end of the period. In this case, the end of the month, the month of February, next transaction, another purchase. So we purchased 200 units at 60 to know what. We're not recording all the sales here because the sales aren't affecting this worksheet. And this is one thing we have to note when we work through these worksheets, we have to note that we're zooming in a particular thing and still have an idea of how it fits into the overall picture here. So that 200 is going here and note. If we were in a perpetual system, we would be recording the cost of goods sold here as we go. So now we're gonna say, On March 25th we had 200 units, $62. Note the rising prices 50 to 55 to 60 to 62 200 times 62 gives us 12,400. Now we're gonna bring everything below this line here. We want everything below this line on the Indian inventory. Very jagged line. Or like some crazy curve. But here's what we had before. 100 units at 5400 units at 55. 120th 60. We still have those, or we may not physically have those, but they're still recorded. Honors our inventory sheet. We did make sales and have sold some of those. But we haven't known which one yet. We'll do that at the end of the process. So we're really calculating goods available for sale here. So here we have those here. Now we're gonna add the new layer. There's the new layers, and now we got 100 units of 5400 units at 55 120 units at 6200 units at 62. 5000 plus 22,000 plus 7200 plus 12,400. Giving us 46,600. So that 40,600 should be What should be on the financials or the trial balance. We're gonna record this to the trap ounce. Remember that. This amount, the purchase is not an estimate. Doesn't change whether using fivefold life Oh, average or perpetual or periodic. We're gonna record this purchase once again. Your country should look familiar. We're gonna say that inventory has a debit balance. We bought more of it. It's going to go up by doing the same thing. Another deputy. We didn't pay cash. Instead, the bad things going up rather than the good thing going down accounts payable, liability increasing has a credit balance. We increase it doing the same thing. Credit. So there's our journal entry. Here's inventory. There's inventory here. It starts at 34,200. It's gonna go up by 12,400 to 46,600. Here's our accounts payable here. Here's their accounts payable there. It's starting at 3 41,050 is gonna go up in the credit direction by toward 12,400 to of 53,000, 750. The concentration note here inventory 46,600. Supported now by our schedule, the 86,600. Next, we're gonna take a look at our ending inventory count. So we're going to say that we counted the inventory to be 240. This is at the end of the time period. Month is over. Now we're gonna do a physical count. And now we do that in order to help us decide in a periodic system. How much of this available for sale inventory? How much of these layers of inventory or the 100 plus the 400 plus the 1 20 plus 2 200 units that we have right now. How much of those have we sold and kept to do that? We typically look at a cost of goods sold calculation and mandatory calculation one that we need to understand. No matter what system we are using, we can see it in terms of units we could do the same calculation in terms of dollars both or something that is necessary for us to know the format will be beginning inventory. This is the generic format that we apply all the time. Beginning inventory, um, plus purchases that gives us the sub total available for sale. That sub total representing what we had available at any given time, doesn't mean we had that inventory at any point in time. But throughout the entire month, that's how many widgets went through the warehouse. That's how many widgets we could have sold. Given the fact that we had them at some point during that time process, then we're going to subtract. From that are count our Indian inventory, which we would get from the physical count here. And if this is what we have available throughout the time period and this is what we still have at the end of it, the difference between those two will be our cost of goods sold, so it's beginning. Inventory plus purchases gives US goods available for sale minus ending. In ending inventory gives us cost of goods sold. Note that we this is just a sub total. You could eliminate this if you just want a formula for algebraic reasons. Because questions could ask this in any format. They could give you all the numbers except one of these. And you just write out this same algebraic equation in order to solve it. What you don't want to dio is to figure out and memorizing equation for purchases. You just want to say that if purchases is the unknown, then we're gonna use the same formula right out algebraic lee and solve for purchases. If they don't give you beginning inventory, then you don't want to write out this same formula and solve for beginning inventory, so you could just call it beginning inventory, plus purchases minus ending. Inventory equals cost of goods sold and write that formula out. You do, however, need to know what available goods available for sale is or need to be able to interpret that sub total because it is often used in questions and in practice. So in our problem, the beginning inventory was $100 or 100 units at $55,000 So we're going to start with units 100 units and then we purchased. And this is the reason we have this. Purchases broke out separately, 400 plus 1 20 plus 200 giving us 720 that will give us the available for sale 7 20 plus 100 or 820. That means that we had 820 units that went through the widget warehouse at some point in time and therefore could have been sold at during this period this month. Then we're going to the physical count. We counted what's still in the widget warehouse, and there's so 240 still there. So if there's 240 still there and we could have sold 820 the difference, then is 580 or cost of goods sold. Now note that it could have something else could have happened. We could have lost him. We could have damaged some damaged goods. Or what a spoiled goods or whatever. But we're assuming that under the periodic system, and that's one of the faults of a periodic system that it's so sales that happened here. This this number is due Teoh selling things and the shrinkage of other things that could have happened, hopefully is in material Ah, the perpetual system. When we do, the same calculation is primarily or one major purpose of it is not to record the inventory , but to detect that kind of shrinkage and problems with the inventory. Now, if if we knew exactly that thes inventories were all purchased for the same amount, and then we could just do an easy conversion and figure out what the dollar amount is, however, they're not purchased for the same amount. This was 50 55 60 62. These were all the same widgets, but because purchased at different times, they cost different amounts. So that's our problem here. So doing the conversion, I'll get a little bit tricky. Let's go through it. Same calculation. Cost of goods sold calculation with dollars. We started with $5000 worth because we can do that conversion. That's where we started at the end of the last time period. And then we had purchases of 720 in dollars. We know exactly what we're gonna pay. It was 22 7000 to 12,004. Even though these air different dollar amounts, we know exactly what they're gonna pay. It's not an assumption there's no difference in either method. FIFA life. Oh, average perpetual, periodic. We're gonna work that we bought 41,600 of purchases, so the goods available for sale then is 651,000 plus 41 6 That's what we have here. That's basically what we've been tracking on our worksheet. What we don't have is the Indian inventory in units. We know that. I mean, in dollars. We know that units were 200 for the units here, 240. And those consists of these units, some of these units. So 240 of these units here, the 100 to 400 that 1 20 in the 200 that we purchased throat throughout this time period are still there. The question is, which one of them are still there? And how do we break out this number 46 600 between Indian inventory and cost of goods sold , and that's what we'll do. That's where this cost flow assumption will come into play. The last in first out assumption. So we have the last in first out assumption. Now, note. You could kind of you this from either a, uh, Indian Indian ending inventory point of view or a cost of goods sold. Point of view. Meaning you could say, Hey, Andean inventory is 240. And if I sold the last in was the first out, I would have sold these ones first. The 200 therefore, figure out how much of them are still left. Go back up here and try to say this to hunt this 100 would would be there and try to get up to this ending inventory of 240. Or you can do what we're gonna do here. We're going to say there's 580 that were sold according to the number of units, and therefore we're gonna go into this column column. We haven't used the entire time period that the cost of goods sold column and figure out the cost of goods sold not for one single time period, but for the entire month, the month of March. So we're gonna make our assumption here. Here's our layers. They cost 50 55 60 and 62. Here we have our cause. Flow work shit again. We've got the 100 units at 53 455 the 1 28 60 and the 200 at 62. We could take this. We could look at that ending inventory and try to decide how much is left. We're talking about a last in first out system. Therefore, these are the last ones we purchased at the bottom. Those would be the first out, so we can think of what's left, and we could start saying, Okay, this 100 would still be there because those would be the last to go. So of 240 that are still there, that 100 would be there and then see how much would be left of 140 of this layer would be left. Or we can think of it first as the cost of goods sold. What did we sell? This is the new thing that we haven't been dealing with with this entire problem. Until now, they call them. We would be dealing with on a perpetual basis at the point of sale under a perpetual system . But under a periodic system, we're only gonna be recording at the end of the time period. So we've got the cost of goods sold than 580. Meaning we sold 580 units so we could record over here which ones we sold, meaning under at last in first out, the last ones being at the bottom. We're gonna count up from 200 up until we get to 580 eliminate what we had in inventory in this format. No, you might be thinking, What's a little backwards? Why would we be selling the last ones first? What kind of company would want to sell the last inventory first? And the assumption probably is not as as accurate in terms of the actual flow of inventory or at least a desired flow of inventory. But because it's just assumption, we we don't know which inventory was sold. We're not tracking them. We could have. They could have taken any of the inventory. They're all the same types of widgets. Therefore, we could make the argument that a last in first out method is just as plausible as a first in first out method, given the fact that we just don't know. And so here we go, we're going to say that the 200 here is gonna be wiped out. First those of the first units sold. So we're gonna say these air gonna be gone at 60 to 62 is pulling over. And that's the 12,004 That's part of the cost of goods sold part of the 580 units we sold here is the dollar amount related to 200 units of that 5 80 Then we're gonna say that this 120 these are gonna be wiped out as well at $60. If we multiply that up, that's the 7200. Those have helped and sold. Now we're at 320. We need to get to 580. So we're gonna go into this 400 pick out as many as we need to get there. We could do the math of 580 minus 120. Minus 200 gives us 260. Or, in other words, 260 plus 1 20 plus 200 gives us the goal of 580 Those air How many units we sold. So these 260 will be at $55. If we multiply that out of 260 times 55 we get the 14,300 the 12 4 plus the 7002 plus the 14,300 that is our cost of goods sold for the entire time period the entire month, the month of March. Then we're going to figure out what is left, How much is still in ending inventory. And so, what we're gonna do there it seems a little bit bad. It's a little bit more difficult to think about this than the first in first out where we could just kind of compare top to bottom. We can compare here, we can say, Well, this bottom layer is wiped out. I'm gonna leave some space, and I'm gonna put the entire four Collins here. So of the four columns, the to hundreds what we did first. So that's 200 right here. Time minus. The 200 means we have zero of those left at 60 to those air gone and the 1 20 here's the 1 2120 minus 1 20 It zero those air gone at 60. So these at 60 there's none left. And then of the 400 the 400 and minus the to 60 gives us 140 left that will still be there . Those air at the 55 for 140 times 55 means we have Indian inventory of 707,700. And then of the 100 of course, those are all going to be brought down here. They haven't been touched. And there's the 50 and there it is. And so that's gonna be the effect of the last in. First out, we might have these old layer on there forever, because if we never we always have new layers. We never get to sell that old layer. And over time, this $50 will be quite low in comparison to what they actually cost at some at some point in the future. Now we can populate this information over here. We're gonna say Indian inventory. Well, if we add this up, we got the 5000 plus to 7700. Everything below this line is where we're working with now, 12,700. That's gonna be the ending inventory. We can now calculate cost of goods sold as either costing goods available for sale for 6600 minus 12,700 or take the same amount should be the same. 12,004 plus 7002 plus 14,003 will give us that 33,900. Now we'll do the adjusting entry. That entry we haven't been doing under the periodic system, which we would see under a perpetual system reducing the inventory and recorded the related cost of goods sold at the point of sale under a perpetual system not being done until now until the end of the month the end of March, in this case, in a periodic system. So note that when we make a sale under a perpetual system, we record the first half of the journal entry, increasing the accounts receivable and increasing revenue, debit accounts, evil and credit revenue. What we do under a perpetual system that we don't do under a periodic is at the point of sale record. The decrease in inventory and related costs of goods sold and in the periodic system will do that. At the end of the process. We're recording that second half. Not for one transaction Onley, however, but for the entire period, the entire month, the month of March. We can see that. Of course, The inventory now, before that time period is overstated as is will the cost of goods sold is understated. Its at zero. Right now. Until we make this adjustment. So the adjustment will be inventory has a debit balance. We need to make it go down for all the sales we have made through the month of March. So we're going to the opposite thing to it. A credit cost of goods sold is an expense account. And so we need to make it to go up for the expense of what? We have consumed inventory in order to help us generate this revenue over the month of March. So we will debit, cost of goods, sold debit in the expense, crediting inventory. So this is gonna be that journal entry, that journal entry that again, we would see this form every time we make a sale under a periodic under perpetual system, every time we make a sale. However, under a periodic system, we only see it at the end of the time period, recording the costs of goods sold and the reduction in inventory for the entire month in accordance with the physical count. So that's how we determine what the adjustment will be. It's going to be coming from this cost of goods sold. So once we post it or to record the cost of goods sold and the reduction of inventory, the reduction of inventory then should result in an Indian inventory of 12,700. You can see that we have currently 46,600 which is our goods available for sale, which we are now allocating between what is left in Indian inventory and what has been sold and is now in cost of goods. Sold the income statement accounts. So if we post this out, then we're gonna say cost of goods sold started at zero. It's going up by 33,900 to 33,900. Inventory started at 46,600. It's going down by 33,900 to 12,700. That 12 7 matches. What's on our worksheet here, as does the 33 9 and cost of goods sold if we look at the full transaction, then we can see that our inventory is much lower than before this in period adjustment and our cost of goods sold is much higher, which brings net income down substantially. So net income was 40,000 won 80 before this went down by 33,900 to 6000 to 80. So until we record this adjustment under a periodic system, we can't rely on our net income number. It's gonna be completely wrong because the cost of goods sold is the biggest expense. Typically, for a merchandising company, our assets will be a way overstated as well, because they will not be recording the inventory being decreased as sales happen until the end of the time period. So it will be, ah, good system at the end of the time period once this adjustment has been made, If we look at all the components here, we can see our our matching of the cost of goods equation. We've got the ending inventory here, the ending inventory on our worksheet and the ending inventory on the trial balance, we have the cost of goods sold in the cost of goods sold calculation that cost to get sold would be the same number here, 12,004 plus 7002 plus 14,003 adds up to 33,900 we see it here in the cost of goods sold on the trial balance. 10. 46 Weighted Average Periodic System: In this presentation, we will discuss the weighted average inventory method using a periodic system they weighted average method as opposed to a first in first out or last in first out method, that periodic system as opposed to a perpetual system. We want to keep the other systems in mind as we work through this, comparing and contrasting, we're gonna be working with this worksheet entering this information here. It's important to note that this work she is a worksheet that can typically be used with any of these inventory flow type problems, of which there are many. We have first in first out last in first out the average method, and then we have a perpetual and periodic system, which can be used with any of those methods. It's also possible for questions to ask for just one component, such as cost of goods sold or Indian inventory and therefore it consume like there's more types of problems that we can have in that format as well. If we set up everything in a standard way, even if that weighs a little bit longer for some types of problems, it may be easier because we can just memorize that one format to set things up. This would be a format to do that. This would be breaking up the information into three components purchases cause of merchandise sold and inventory or ending inventory. Within those three components, we're gonna have the quantity the unit cost and in the total cost and in each of these three sections. And then we'll enter the data through this worksheet as we go, starting this time with the beginning inventory. So this is where we start at the beginning of the month. In this case, the month of March, we're going to say the beginning inventory is, ah 100 units costing $50.100 times 50 being 5000. We're gonna put that same 5000 out to the total column just to give a Nen vacation. As we go through this worksheet of what the total is in its own distinct column out in the total section so that we have that 5000 units. That's where we start. If we look at our trial balance, it will be in order assets, liabilities, equity revenue and expenses, debits, non bracketed or positive numbers credits, bracketed or negative numbers, the debits minus the credits equaling this zero. We have net loss in this case, meaning revenue of zero minus days. Expenses 53 and 9 9020 Giving us a loss of 10,007. 20. We're focusing here, of course, this time being the inventory on inventory. This 5000 matching what we just put into our worksheet. That is our beginning. Balance. That's where we start. Next, we will have a purchase of 400 units at $55. We're gonna put that into our worship in the purchasing section. Remember that the purchases will not defer, no matter what method we will be making. Whether that's FIFA life Oh, average, perpetual or periodic, it will be what it is. In March, it was 400 units that we purchased and $55 noticed the rising prices from 50 to 55 4 The inventory units we are purchasing same units costs going up. That's gonna be the standard assumption that will happen. You want to just remember going one way, as if costs increase would be the norm. And then if it goes the other way, then we can kinda just reverse some of the effects that would happen. So in other words, as costs rise, what's gonna be the effect on Indian inventory and cost of goods sold under the three methods life 050 an average and then reverse the effect. Obviously, when costs then fall. So we have the 400 times the 55 that will be the 22,000. Then we're gonna do our average calculation. Now it's possible. Since we're doing a periodic system, Teoh, just do all of the purchases and then calculate the average at the end. But we're going to calculate the average as we go to get practice calculating the average. It can be something that people find a little bit more confusing because of the weighted average that we will be using. So what we're gonna do is we're going to calculate her average by putting the calculation all under this line under this Dateline again moving this amount down. So there's are hundreds units at 50 or 5000. Then we're gonna move this column over and there's our 400 units at 55. So we started at 100 units at 50 we had 400 units at 55. What we want to do now is created the average. Now I'm gonna show the wrong way to do this, first of all, and then we'll calculate the weighted average. So the a normal average of just two to prices would be 50 plus 55. Those two numbers, divided by two, would give us an amount right in the middle of them at 50 to 50 which seems reasonable. 50 to 50 seems reasonable. However, it's not exactly right because there's a lot more of the 55 units 400 than the 50 units 100 therefore the weighted average. Taking that into account would be closer to the 55 event to the 50. So that's the mistake. We just have to kind of avoid How are we going to do this? We're gonna take the total here, the total dollar well spent and the total units and then divide those out so it can look a little bit confusing on the worksheet cause we're first going to calculate, or some up the units 104 100. We're not going to sum up the unit cost. That doesn't really make any sense because it's the unit cost. We can sum up the total here. 5000 and 22,000 4 27,000 and then take this. 27,000 divided by 500. So now we're simply taking the 27,000 divided by 500 that gives us the 54 which is closer to this number. That's the waited at the 400 units. So we get 54 as our total. If we pull that out to the outer column, then the 27,000 what is what should be on our financial statements in ending inventory and our trial balance, we're gonna record the journal entry here. Now, here is gonna be our new thing that happened. We purchased another 400 units for 22. We're gonna ah, just inventory inventory has a debit balance. We're gonna make it to go up by doing the same thing to it. Another debit of 22,000 then the other side's not decrease in cash, but increasing the liability accounts payable. Therefore, we will increase accounts payable by the 22,000 posting this out. Then we have the inventory. Inventory is up here. It started at 5000 It's gonna go up by the 22,000 to 27,000. Then we have the accounts payable accounts payable 1 12,050 going up by 22,000 to 34,001. 50. Note. Once again, this transaction is gonna be the same no matter what method we are using. If we see everything here, we're going to say that we're still in balance. No effect on net income. The purchase of inventory was not expensed at the time of purchase. It will be expensive, but not till it's used. In order to generate revenue in accordance with the matching principle, that will be a win costs when we sell it in the form of cost of goods sold. However, under a periodic system, we're not gonna get around to recording that cause to get sold until the end of the time period. Until we do a physical count the end of the month, the end of March. In this case, next transaction, we're gonna say there's a sale of 420 units at $85. Now, if we were using a perpetual inventory system, we would have to record the reduction of inventory and the cost get sold along with the sale into our worksheet. We're not looking at the work shed here because we're in a periodic system and we're not going to record that component until the end of the period with a physical count. What we will record is just the journal entry just to demonstrate this journal entry, the sales journal entry, which will be the same under the two methods a periodic and perpetual the second piece being the difference. So remember that if we make a sale on a merchandising company, we typically assume that it's gonna be a perpetual system. And we often break out that journal entry when considering it and thinking about it into two journal entries, meaning we have to sail side. And then we have the, um, the inventory Acosta good soul side of the journal entry. The sale side we can think of as similar as if we were a merchandising company and we can just eliminate the inventory. Say, Hey, what would happen if we had a sale or did services and got paid or on account meaning we got in accounts receivable? What would be the Journal entry cash is not affected. Accounts receivable has a debit balance. We got more of it. People OS money, therefore accounts stable will go up with another deputy. So we're gonna debit accounts receivable and then we're gonna credit something, and they something will be revenue that revenue for a service company might be fees earned , or it might be revenue or income. And it could be called sales for a merchandising company. But it's all just a revenue account, so it's going to go up in the credit direction. This is kind of our normal journal entry that we see whenever we make a sale, whether it be merchandise or a service type business accounts table, going up, revenue going up, Then we have the second component that we typically think of when we make a sale as a merchandiser, meaning we sold merchandise, inventory should be going down and the related cost of goods sold should be going up. We're not going to record this under a periodic system. That's the difference between a periodic system and perpetual system. We're only gonna record the decrease in inventory and related costs. Goods sold expense at the point at the end of the period the end of the month. In this case, the end of March. After we do a physical count, why why would we do that? Why would we not decrease the inventory? We know the inventory went down, and it's probably just the sophistication of the system. If, uh, if we're have a clerk or someone recording the sales, it's easy to know what the sales prices. But this sales price has nothing to do with the cost of good sold. Or, in other words, the cost of goods sold might have been used to make that sales price. But this There's no direct relationship between these two things. The sales prices No. One when we make the sale. So 420 times 85 that's the 35,700. That's what we want to focus on collecting the revenue in making the sale at the point of sale. We don't want to spend all of our time training people how to record the the class tickets sold or inventory if they have to do it manually, because that could take some time, especially if there's multiple products that we're selling. If, however, it's an electronic scanner system that does it at that point in time without us even needing to know what the cost is, then that makes it a lot more doable to do a perpetual system, which would be better from an accounting standpoint. If we don't have that sophistication, we may be using a periodic system, which will simplify the process. But we know that it won't be entirely accurate until the end of the time period. So if we post this out, them accounts receivable debit balance were posted this 35,000 to it going from 44,900 up by 35,700 to 80,600. Then the revenue is going up from zero were posting this revenue up from zero by 35,700 to 35,700. If we look at our full transaction, where back in balance net income is going up drastically went up a lot went up by 35,700 so 35,700 minus these expenses is 9 24,080 So that's gonna be our net income note. It's really not exactly correct. Now, of course, because we haven't recorded the cost of goods sold, and that's gonna be a substantial expense that we haven't recorded. We haven't recorded the decrease in inventory, so our assets are overstated. We will do so at the end of the time period. The end of the month, the end of March. Next, we have on 3 18 purchased 120 units at $60 per unit. So once again will be in the purchases column. This will be the same as in any method. First in, first out, last in first out average, perpetual periodic. These purchases are what they are. This is what we will actually pay for the inventory. We're gonna have the 120 units at $60. Note the rising prices from 50 to 55 to 60. That's not because the units got better. That's not because we're buying better widgets or better inventory. The price is just going up, and that's gonna be deeds. Standard prices increase in the standard for these types of problems to standard for practice, a swell due to inflation. If nothing else, the 1 20 times the 60 will give us the 7200. Now we're going to calculate the average once again. Remember that if we're doing a periodic system, we could calculate the average basically at the end and some of all of them. But I want to calculate the average each time we make a new step because this is the most complex component. Typically, what we're gonna do is draw line here. We're gonna bring this amount down. So this is what we had before we had 500 units at $54. That's 27,000. Then we're gonna pull over the new information. Here's the new information. What we are not going to do when calculating the average what you want to avoid, be careful of is to just take the amounts that 54 plus 2 60 the 54 being the old average Plus what are new inventory costs and taking that and dividing it by two. What's the problem with that? It looks like a reasonable number, but it's not taken into account. The weighted average. It's not taken into account that we have 500 years at 54 only 120 at 60 and therefore this number should not be right in the middle, but leaning towards the 54. So instead, what we're gonna dio is sum up the total units we have the 500 the 1 20 then some of the total dollar amount that we paid for those units 34,200. And then we'll do the division problem. That division problem being the 34 200 divided by the 620 units giving us a number of 55. 16. Note. It's not going around specifically to the penny. That's okay, that happens in practice were going around it to the paint because we're talking about dollars and cents here. So we're gonna say that calculate that that's that number here is gonna be in this number divided by this number with a total dollar amount divided by the quantity. So that's going to give us the 34,200 that we want to get to on our trial balance. Now, in our financial statements, we're gonna do that recording the journal entry. The journal Nature will be the same under any method. FIFA life Oh, average, because it is a purchase. That's not decide that differs The side that's differing is when we make the sale. So we're gonna say that inventory has a debit balance. We need to make it to go up, so we're gonna do the same thing to it. Another debit. So here's the debit to inventory. The other side's not gonna be paid with cash. We're gonna increase the liability. So the liability has a credit balance. We're going to increase account PayPal, therefore, by credit of 7200 posting this out, then we have the inventory in the journal entry. The inventory up here in the assets we started with 27,000 it's gonna go up by 7200 to 34,200. Then we have the accounts payable. We have the accounts payable. Here. It's at 1 34,050 We're gonna increase it in the credit direction 7200 to 3 41,050 So there's gonna be our transaction this 34,200 matches what we just calculated on our worksheet that 34,200 the inventory worksheet supporting the inventory amount reported on the trial balance or the balance sheet here is gonna be the full transaction. We still have the 34,200. We're back in balance. Indicated by the green zeros. No effect on net income. No effect on these accounts, the revenue or expense accounts. We will be affecting the revenue expense accounts by the inventory that we purchased not at the point of purchase, but at the time we sell the inventory in the form of cost of goods sold. However, under the periodic system, we won't be recording that until the end of the period. When we do the physical account, we're going to another purchase here, purchase 200 units at $62. So we're gonna be in the purchases column once again, the $200 per 200 unit purchase at $62. Note the rising prices going from 50 to 55 to 60 to 62. Same units. Unit costs going up because of, if nothing else, inflation. That will be the norm. You want to think that it can go down, but you probably want to think the norm will be increasing prices and then reverse your thought process for it to go down the 200 times that 62 gives us 12,400. We're gonna calculate our average now. And we could do this at the end of the time period under a periodic system. For the average method, we're gonna do it as we go, this being the key component to the average system, calculating that average cost to do so we're gonna draw a line under their last Dateline, and we're gonna be putting this new information here, taking this to 620 down, just copying that down, and then we're gonna pull over our new information. And once again, we're going to say what not to do, which is a common common error in calculating this. And that's gonna be taking the 55.16 plus the 62 or the two prices. And just dividing by two. That's an average. But it's not the weighted average because it's right in the middle of those two costs and that it should be leaning towards the 620 it being weighted higher it having more inventory in it. So what we're gonna do instead is well, sum up the 6 20 and the 200 to get the 208 120. Then we'll some of the 34,000 $212,400 amounts you get to the 46 600 then we can do our average. We're gonna take the total dollar Mountie 46 600 divided by the 820 units, giving us a average of 56. 83. Rounding up, not worried about the fact that we have all these decimals. We're going to use that rounding to the pennies talking dollars and cents. So that's going to give us the 56 83. That's gonna be this number divided by this number. There's the total that we are going to be reporting on the financial statements. Or we will now record the journal entry for that new purchase. The purchase of the 12,400. Remember that the journal entry will be the same under life oaf. Ifo average periodic, perpetual, all of them. This is not an estimate. We're going to say that the inventory started at the debit balance and we're gonna increase it. We bought more inventory with a debit of that 12,400 we're gonna credit. Not cash, but the liability of accounts payable, increasing the accounts payable. Posting this out. We have the inventory year going to the inventory. They're starting at 34,200 increasing by 12,400 going to a total of 46,600. Here's the accounts payable there. It's gonna be posted here. We've got a credit balance starting at 41,003. 50 increasing 12,400 to 53,750. Noting that the inventory that we end up with is supported by our inventory worksheet. Now, we're going to the inventory count at the end of the time period. This is what we're going to in a periodic system in order to record the cost of goods sold for the entire period, what we have not been doing for the entire period and record the related reduction in inventory, something we haven't done. So you'll note that as we go in our worship, we've just been doing purchases and we've been increasing and increasing with purchases, not recording the decrease in the inventory for the sales. And we're gonna do that at the end of the time period do to and with the help of a physical count and the cost of goods sold. Calculation, cost of goods sold. Calculation. A mandatory calculation. Something we really have to know both in terms of units and in terms of dollars. The format will look like this beginning. Inventory plus purchases gives US goods available for sale or amount available for sale minus the Indian inventory will give us cost of goods sold. That's gonna be our calculation. Now note that Ah, a multiple choice question might ask you for any component. Just give you 31 unknown for this formula. They might give you the beginning inventory as the unknown, for example, or they purchases as the unknown. Now you could write this formula as beginning inventory plus purchases skipped the sub total beginning inventory plus purchases minus Indian inventory equals cost of goods sold and write it out as an algebraic equation. Giving any of these unknowns then, as long as we only have one, we would then be able to find out any of these amounts. So keep that in mind. You don't want to remember multiple different equations to figure out, for example, purchases or beginning inventory. You want to remember one equation Gostin get sold that can answer any of those types of questions. You do need to know this sub total, however, by name, even if you don't use it in the equation. If if you pull it out for an equation because some problems will refer to it as well as in practice, we're gonna do this calculation first for the units, and then we'll do the same catfish in in terms of dollars. We started off with 100 units. That's what we began with. We purchased 720 units 400 plus 1 20 plus the 200 the purchases section That gives us 820 available. That doesn't mean we had 820 at any given time in our warehouse, but within the widget warehouse we had 820 go through it, meaning we started with 100. We purchased 720. We may have sold items throughout here. We don't know what we sold, but we know what we purchase and therefore had available for sale. Hence the name goods available for sale, and that's 820. Then we're going to the physical count. So we're gonna say there's 240 which it's the left in the widget warehouse. So there's 240 left. So we had 820. We could have sold 240 are still there, given our physical count than the difference between the two is 580. That's what we sold in terms of the widgets. It is possible that we had shrinkage or theft of source boil it or something as well, Which is why the perpetual system would be nice to use because it couldn't verify or better verify that type of problem. But our assumption is it's sold. And the assumption is that the shrinkage off any kind breakage theft is in material and in relation to it, and therefore we're gonna record this entire amount to cost of goods sold. So know what we did here? We just basically said, Hey, this is the amount we had available and then allocated it out between either what's still left in ending inventory and what has been sold. We're gonna do that same thing with dollars. It would be a very easy conversion if the dollar mountain were the same throughout the entire period. But very often it is not even though we're talking about the same. Widgets were not buying different types of things. It's all the same. But the dollar amounts are increasing. That makes a little bit difficult. If we see this, then we're going to say, Well, we started with $5000. That's are beginning balance. We know that we purchased 720 we purchase them for 41,600. We can't convert from 7 20 to 41 6 easily because of the different dollar amounts. But we know what we purchased. We can just look at the GL and say, Hey, we we increased inventory. That's how much we're gonna pay. It's not an estimate. This is what we're gonna pay 22,000 plus 7002 plus 12,004. That's a given. That's not an estimate. And so if we add those two up, we're at 46,600. That's where we stop Now. We're gonna allocate that out between ending inventory and cost of goods sold. However, we know that there's 240 units that were still in Indian inventory. But now we have to figure out our conversion here because we need to know which of those units we purchased. Some for 50 some for 55 some for 60 some for 62. That's what we'll do now in the average method. And the average method, because we've been calculating it as we go, is nice and easy right now. We're just going to say, Well, yeah, some of them cost 50 55 50 to 60 whatever, but they all cost around about an average if we average them all out a weighted average of $56.63. So we're gonna say whatever we sold in this case 580 units those 580 we sold for this 56 83 about if we multiply 580 times 56 83 we get 32,960 93 that's our cost of goods sold. This is the cost of goods sold. We haven't been recording the entire time period. It's the cost of goods sold that we would record every time we make a sale under a perpetual system, The cost of goods sold. We are now recording for all sales happening during the time period. In our case, the month, the month of February, March, month of March. So we have 820 units that we had before minus the eight. The 580 means we still have left 240. So we did this allocation. Of the 820 units, 580 have been sold and 240 are still left. They are at 56 83. If we multiply 240 times the 56 83 we get 13,006. 39 02 So now we can fill out the rest of this form we can say, OK, the ending inventory is 969 13,036 39 02 And we could subtract this out then and notice We did take off the round in here. So here we have the pennies here we remove the panties. It's just rounding. So if we take off the 46 600 minus 13 6 39 we get the 32 9 61 which is also matching this amount. 32 9 60 rounding 9 61 So that's how that ties out. We're going to our final journal entry. Now, this would be the journal entry that we would see under a perpetual system every time we record a sale or a similar one, at least one that would be reducing inventory and recording cost of goods sold. Ah, but under a periodic system, as we're doing now, we will only see it one time at the end of the period, whatever period that maybe for our case, the month, the month of March. So we're gonna record the reduction of inventory for the entire time period. Inventory is a debit balance. We're gonna make it go down by doing the opposite thing. A credit and the related cost of good soul cost to get sold is an expense. It's gonna go up in the debit direction, bringing net income down. So here's the cost of goods sold and there's the inventory. So once again, this is the journal entry. We would see each time under a periodic system as we record sales, it's gonna be the second half of the sales transaction, but under a perpetual under a periodic under. That would be the case under a perpetual system, but under a periodic system, we're only gonna record it for the entire sales all sales made during the period at the end . So if we record this year is caused to get sold here, is cause to get sold here. It's going to go from zero way up by the 9 32,061 to 9 32,061 hears inventory. Here's inventory. It's at 46,600. It's going to go way down by 32,009 61 2 13,006. 39 This number now matching the 13,000 in Indian inventory. This number now matching our cost of goods sold Calculation. So note that before we did this transaction, our net income was way too high. And now it's way lower. So that's gonna be the case for the periodic system. Are are net income cannot to be trusted until we do this transaction. The cost of goods sold being huge for a merchandising company, typically also, our assets will be way overstated. Until we do this end of period adjustment because once again, the inventory is typically a fairly large asset and it's not being reduced as we make the sales. So we gotta wait till the end of the period to have an accurate number there. If we look at the comparisons, here's our calculation. Here's our worksheet. Here's our trial balance. We can see that we have the Indian inventory. Here we have the ending inventory on the trial balance, which would be on the financial statement. We have the Indian inventory on our worksheet. We have the cost of goods sold here on the cost of goods. Sold calculation costs could sold on our merchandise. Cost a good so worksheet. And then we have the cost of goods sold here on our trial balance as well, which would also be on the income statement. 11. 50 600 First In First Out FIFO Explained: Hello. When this lecture, we're gonna be taking a look at first in first out inventory method, we will be selling coffee mugs and we won't be specifically identifying the coffee mugs. In this case, as we've talked about in a prior lecture of this time, we're gonna be using a cost flow assumption that cost flow assumption being the first in first out assumption this time to set up this problem in any cost flow assumption, I highly recommend putting together a worksheet that worksheet, including headers of purchases, columns. Then we got the cost of merchandise columns. Then we have the Indian inventory. I highly recommend setting up I work sheet like this, whether it's by hand or in a computer or in excel, because it answers all the types of questions that could come up with an inventory cost, low type of assumption within those sections. We will then have the quantity and then the unit cost and the total cost were asked if we sell something we're calculating. The cost of that sale were the same thing without the quantity the unit cost and the total cost, and then the Indian inventory were saying, What is left again. We could represent that with the quantity of the unit cost. And then I have to Costs are totals here because there's gonna be different layers. So we're the first cost is going to be the cough layer. The second costs were going to be adding up total later. That'll make more sense. As we go, we're gonna start off here with inventory on the trial balance represented in terms of dollars of 5000 trial bounce represented in terms of dollars. Remember that when we look at inventory, it's gonna be represented in terms of units, and we're gonna convert those units in $2. So when we see it on the tribe bounds, we need to back that number up any similar way that we needed to back up. Say, the accounts receivable by customer who owes us that 44 900 in terms of inventory, what makes up that $5000 worth of inventory? In this case, we're gonna start off with 100 units times the $50 other very expensive coffee mugs. They don't look like much, but 100 units times $50 that's going to give us the 5000. So that is the only layer. So that's gonna be the total cost that 5000 represents the 5000 on the tribe mounts. Let's take a look at some journal entries and see how we track this first transaction will be the purchase of 400 more units at $55 in terms of units. That means, of course, we had 100 units. Now we purchased another 400 units, meaning we have 500 units. The journal entry is pretty straightforward because we pay for what we paid for. It's not. There's no estimate involved in the journal entry. That's the cash we pay. We paid 400 times $55. So we're going to say inventory is going up with a debit of 27,000. Plus, the debate of 22,000 brings inventory honor trial bounce up to $27,000 worth of inventory, and then we're going to say we bought them on accounts of the credits going to go to accounts payable. We had 1 12,050 We're gonna credit increasing accounts payable to 1 34,050 That's what we have at this point in time Now, the challenge here, of course, is that we're gonna have to back that number up. This 27,000 now needs to be backed up on our worksheet. Last time we left off with one layer of 100 units at $50. Now, of course, we've got that 100 units plus 2 400 to 500 units. What we're gonna do is draw a line under the prior transact. First, we're going to say that we have purchases. The purchase is there going to be 400 units in the purchases column? We purchased them for $55. Note that. That's a higher cost than they were before. Rising prices in this case, 400 times 55 gives us that 22,000. Then, in terms of Indian inventory, we now have two layers. We had some that cost $150 some that caused 55. I want to have both those layers under this red line. As of the point in time of the latest transaction, this purchase. Therefore, I'm just gonna bring this number down. I'm just gonna bring these down here 100 units at $50 gives us that 5000. Then we're just gonna bring these over here and say the second layer was 400 units at $55 for 22,000. So the 5000 closed up. 22,000 gives us the total cost of the 27,000. That dollar amount now is what is represented on our trial bounce. We have that backed up. Now, of course, the question will be when we make a sale. Which ones did we sell them? We sell the cheap ones, the old ones at $50 or the more expensive newer ones at 55. Remember that the mug itself completely the same. It's just the increase in price due to the time period in which we purchased it. Answer. When we look at Fife, oh, will be the old one. The first ones that were in will be the first ones that were out in this case, being the cheaper ones. But we are getting ahead of ourselves. So let's take a look at a sales transaction. We'll say we sell 420 units at $85. There's two journal entries related to the sale. Remember that the first half of the journal entry is no different. We're not tracking the sales price. If they give us the sales price in a problem common for us to think, Well, what does that have to do with our cost sheet? Nothing. I mean, we might have used to cause she to come up with the sales price, but the sales price is not what we are tracking. First half of the journal entry, nothing is different. We're gonna take the 420 times the 85 that's gonna be our journal entry in terms of the units, of course, we've got the 500 units minus 24 20 gives us the 80 left. That's what we're gonna have left transaction for the first half of the journal entry will be the debit of the 35 7 before 20 times the 85. And that will be increasing the receivable, assuming we made the sale on account. So we're increasing the receivable, and the second half of it will be the revenue account because we're earning revenue at that point in time crediting the revenue for the 4 20 times 85 increasing the revenue. This journal entry often gets neglected when we're looking at the cost low assumption, because that's not where we're focusing in on. But we need to recognize that when make a sale that that journal entry is still there. That's a journalist we normally focus on when we make the sale. What we need to track now, of course, is the decrease in the inventory. We had 27,000 in the inventory. What's the cost of those 420 units that were sold? That's when we need to go to our work shootings and whom? Well, we have. We're gonna say these two layers 100 units at 5400 units at 55 we sold 420 units of. Therefore, we're gonna be working in the cost of merchandise because that's what we're trying to calculate the cost of the goods sold here and we're saying which ones did we sell first? Well, if we sold 420 units, we sold the old ones first under the first in first out, those being the units at $50 there's only 100 of them. We sold for 20. Therefore, we're wiping out that entire 100 units. We thought 100 units at 50. That's the assumption that we're making that's given us that 5000 This layer wiped out. Then we have 400 units and we sold 420. So I would say the 420 minus the 100 that we took out of the prior layer means we have another 320 that are in the second layer. Those air, at $55.3 20 times 55 gives a steets 17 6 So 5000 plus 17 6 That's the cost of goods. Ah, question could ask that or that could be asking what's left in Indian inventory, which we would then have to calculate using our worksheet here we're gonna say, Well, there was 100 units on this layer. We sold all of them 100 miles. 100 means they're zero left. Their 40 times are about 50 is zero. Then we had 400 the second layer we sold 320 of them leaving us with that 80. There's that 80 and those 80 that are left then are at that higher cost of 55 80 times 55 is 4400 of the zero in the first layer in the 4402nd layer gives US 4400 that is left in Indian inventory. So remember, we have two things here that are going on. That question could ask, What's the cost of goods sold? 22 6 That's the journal entry that we need to record leaving us with with left in ending inventory. After we record that journal entry, which will be 4400. Let's post the journal entry. So here is gonna be our journal entry for the cost of good side of this sales. And we're going to say that the inventory is going down by that 22 6 that we just calculated, and we're gonna credit the inventory. So that's gonna bring the inventory down to that 4400. That's what's left. Cost of goods sold. The X Spence related to us using the inventory in order to help us generate revenue 22,600 bringing the cost of goods sold to that 22,600. There's the transaction, and we can see that that 4400 now, of course, matches what is in our worksheet 12. 60 600 Last In First Out LIFO Inventory Method Explained: Hello. When this lecture, we're gonna be talking about the last in first out inventory method. We will once again be selling our coffee mugs here. We will not be specifically identifying the coffee mugs that we sell, but rather using a cost flow method. That method being a last in first out of this time whenever doing a cost flow method, I do recommend setting up a worksheet to such as this, with three parts to it having the purchases, the cost of the merchandise and the Indian inventory and then calculating the units that were going to sell that unit costs in the total cost for those particular categories. As we will do here. This will answer the most amount of questions in any format that those questions could be asked. What we're trying to do here is, of course, say that the inventory that is reported on the trial balance needs to be backed up in terms of a worksheet. Why? Because on the trial balance, its report in terms of dollars. And of course, when we think about inventory, we often think about it in terms of units. We then need to back up this dollar amount with a unit amount and the cost per unit. That's what we're doing with the cost flow assumptions. We're going to start off with 100 units. We're gonna say those 100 units started with a cost of $50 meaning that the total cost will be 5000. And that's the only layer we have so far. So the total is 5000. That $5000 now matches what is on our trial bounce. That will be the purpose of this worksheet. Next, we're going to say that a purchase happened. We purchased 400 units at $55. Therefore, in terms of units, we have the 100 units. Now we purchase 400. We have 500 units. The purchase price. The journal entry for the purchase. Straightforward. It's the same for Fife. Oh, or life. Oh, or average. It is what it is. We bought 400 units at $55. We're gonna have to pay that either. And now or sometime in the future. There's no estimate going on in terms of the journal entry. We're gonna put on the books 55. Are we going to say that $55 times the 26,000 inventory increasing from 5000 in the debit direction of 22,000 to 27,000. And then the other side, we're gonna say we bought it on account will then go to accounts payable, increasing the table by the 22,000 to 34 1 50 No change with that journal entry. However, we now have this 27,000 on the books. In terms of inventory, we need to put that into our worksheet and be able to back that up with the amount of units that we then have. At this point in time, we have the 100 units at $50. We're going to say that we bought another 400 units. So we're gonna go into the purchases column and say that we have 400 more units at the $55 for a total of 22,000 we're gonna have two layers. I'm gonna put all the layers under this red line. This red line represented the last transaction. We wanna have everything in Indian inventory under this red line as of the end of this process, and therefore we're gonna bring that 100 units at $50 down, and we're gonna pull this 400 at $55 over. Therefore, we have 100 units that cost 5400 years. That costs 55 for a total of 5000 plus the 22 giving us that 27,000. That, of course, is the amount that we have on our trial bound. So we have now backed up the dollar amount using our worship. Now, the question will be when we make a sale. Which ones did we sell? The older ones that at 100 units at 50 or the newer ones at $55 under life. Oh, we will be selling the newer units. You would think we'd want to sell the older ones first, but it's just an inventory assumption. And if we don't know which ones were actually sold, we can make whatever assumption we want. In this case, we're making the assumption that we sold the newer ones. But once again we're getting ahead of ourselves. Let's take a look at a sales transaction in which we sell 420 units at $85. So we had 500 units of minors of all 120 units in terms of units, we're then gonna have the 80 units left after this process. The sale journal entry often is overlooked when we focus on the cost of goods sold because we're looking at the cost, not the sales price. So when we see this $85 in a problem when we spent so much time working on the cost sheet, we may try to figure out how that 85 ties into the caution it doesn't. So when we do this first journal entry of the two sales journal entries, there is really no different. That happens. We're gonna say the sales price that's going to be on the sticker price times the number of units 420 mean that we're gonna have accounts receivable. Assuming we sold it on account of the 35 7 the 4 20 times 85 that will increase the receivable and the revenue will then be the same amount for the 4 20 crediting revenue, increasing revenue for the amount that we saw. How much did the inventory go down by in terms of dollars and how much of the cost of good soldiers should be report. We know the number of units that we sold. We don't know the cost of those units without our worksheet. So let's go to our worksheet. We're going to say another red line. Here we have these two layers. We've got the 100 units at 50 the 455. Which one of those are we going to take Pull from first? Assuming we use a last in first out assumption if we sold 420 of them. Answer is the last ones we purchased. So the 400 the newer ones were going to say in our costs of goods Sold column. We're gonna say we sold the entire 400 units and those costs $55.400 times 55 will give us the 22,000 we sold 420 told whole. So if we sold 400 wiped out that layer, we're gonna have to sell the rest for 20 minus 400 or 20 to give us the total of 4 20 And that's going to be of the $50 units and that will give us 20 times 50 of 1000. So this is the calculation of the cost of goods sold off 22 plus the one hunt 1000. And now we're gonna have to figure out what is going to be left. What's gonna be left? Well, of that 400 units, we sold all of them. So that second layer, I'm gonna take that off first. That's gone of the first layer, we had 200 units. We sold 20 of them 100 miles. 20 gives is that 80 that are left at the $50.80 times 50? Is that 4000? And then, of course, the 4000 plus the 100 gives us that 4000. After we do this journal entry, the cost of Good Soldier Country 23,000. We will then be left with in Indian inventory on the trial bounce a dollar amount of 4000. Let's see that process. So we're going to the second half of the journal entry reducing inventory, recording costs of goods sold for the amount we just discussed inventory going down by 23,000 crediting 23,000 bringing inventory from 27,000 down by 23,002. That 4000. And then we're going to debit the cost of goods sold second half of that journal entry, and that will increase the cost of goods sold, bringing down net income. Now, of course, the point being is that after we recorded that cost of goods sold half and the reduction in the inventory, we are then left with $4000 worth of inventory, the amount that matches our inventory worksheet. 13. 70 600 Average Inventory Method Explained: Hello. When this lecture, we're gonna be talking about the average inventory cost method. We will be selling our coffee mugs again, and we will not be used in a specific identification, but rather a cost flow assumption that assumption being the average method, we will be using the same worksheet. I highly recommend working a worksheet such of this win win doing any cost flow assumption for inventory, which will include a purchases section they cost of merchandise section and an Indian inventory section in which pieces we can then calculate the unit cost times the quantity to give the total cost for each of the sections. This can answer the most amount of questions that can be asked for this top. If we take a look at a trial bounce, we could see that the inventory on the trial balance is at 5000. That's $5000 worth of inventory. What we need to do is convert that and be able to see that in terms of the units, because we often think of inventory as units. For example, 100 units here. How do we convert that to the $5000 worth on the trial bounce. That's what we need are worksheet for in order to have back up that number on the tribe, bounce on the balance sheet. What we're going to start off with is the 300 units at $50. Yes, they're expensive coffee mugs here, and that's going to be $5000. That's the total of the $5000 of that is on the try amounts of That's where we will Then start. We're gonna have a purchase off 400 units at $55. So in terms of units, of course, we had the 100. We now purchase 400. We have 500 units. The journal entry to record that is straightforward. It's the same under all the methods that we have been using. There's no estimate for the journal entry related to the purchase because we purchased it for whatever we purchased it for in this case, 400 times 55. So if we purchased it on account, we're gonna have a debit to the inventory of the 22,000 which will increase the inventory from 5000 by 22,000 to that 27,000 and the credit will be to accounts payable. We're gonna pay it sometime in the future. That liability than increasing. At that point, this 27,000 is a straightforward journal entry. But it's not so straightforward to think about what the worksheet will be. We're going to put this, of course, on the worksheet. We need to back up that $27,000 worth in terms of units. Last time that we have the 100 units had $50. Now, of course, we're going to put on the new purchase of 400 units at $55. That gives us the 22,000 dollars worth 400 times the 55. We are going to do a similar process in terms of pulling the layers down as we did last time. But then we're going to calculate the average method. So we're gonna put the first layer down. We still have the 100 units at $50. We have the second layer off 400 at $55. But when we sell, the units were not going to sell them in terms of which $50 units are $55 dunes. We wanna have on average here we just want to say they all cost about some amount. You might be tempted to take an average of 50 plus 55 divided by two. That doesn't necessarily work because it's not a weighted average. You'll note that there's a lot more units 100 units at. I'm sorry there's a lot more units at the 55 400 units than there are at the 5100 years, and therefore we need to calculate the weighted average. The way to do this on this worksheet is to calculate the total quantity Ah, 100 plus 405 100 units. The total cost 22 plus the five being 27,000. So we have 27,000 total cost 500 units. 27,000 divided by 500. Means that all the units cost about Yeah, $54. Therefore, when we make the sale, we're just going to say that they cost about $54 at this point, that's going to give us the total, which we can calculate a couple different ways. It was the five plus 2 22 and of course, now the 500 times the 54 equals that 27,000 are average. That averages, of course, what's on the trial balance at the 27,000 in inventory. Now let's record are transactions for a sale. We have a sale of the 420 years at $85 in terms of units were saying it's the 500 units minus 24 20 gives us 80 units that are left over the sale. Remember, has two separate journal entries the first half of the journal trees straightforward because the sales price has nothing to do with the cost worksheet that we have been tracking. So keep that in mind if you see that it's sale happened at $85. The sticker price sticker price doesn't have anything to do with the cost that we've been tracking. So that's gonna be a straight for journal entry we've seen in the past. The first half of the sale would be a debit to account stable if we sold it on account, and that would increase the receivable, the assets and a credit to the income account 35 35 700 being for 20 times 85 increasing revenue, that is gonna be the same transaction we've seen in the past. Just remember that when you see that sales price that sales price doesn't have anything to do with the cost worksheet. What does? Well, now we need to figure out the second half of the journal entry. We reduce inventory and calculate that cost of goods sold on record across the Krystle. We need to know what that number is. How much do we reduce it by? For that? We need our worksheet. And this part's really straightforward in terms of the average method because we already calculated the average in this case where we said it was the 54 units. So where l villians we sold, which in this case are for 20 are gonna be me about $54. Meaning we have the cost of goods sold of 22,606 80. That's going to be the cost of goods sold. That leaves us with. Remember, we had a total of 500 units minus the 4 2080 units, and they all still cost me a about $54.80 times the 54 means that were left with 3 4020 That's the total that's going to be left. Therefore, what we're gonna do is we're going to record the cost of goods sold Transaction for the 22 6 80 reducing inventory, recording Gaza. Get sold, then we'll be left with an Indian inventory on the tribe. Bounce off 3 4020 Let's see that process. Second piece of the transaction will reduce the inventory by that 22,680 reducing inventory from 27,000 by the 22 6 82 that 4320 second half of it cost of goods sold. Being the debit, the expense side of the transaction, Iranian costs could sold up to that 22 680. The point now is that that 3 4020 is what is represented on the trial bounce and is backed up by our inventory worksheet for the dollar amount for those 80 units that are left 14. Discusion Question 5 Inventory Cost: In this discussion, we will discuss the discussion question of discuss the steps of a periodic inventory system . So a periodic inventory systems what were in essence, defining here, going through the process of how to record the periodic inventory system. To do that, we might want to compare and contrast a bit to the perpetual system. But focus here mainly on a periodic system. A periodic system is one in which we're going to Onley, record the reduction of inventory and related costs of goods sold at the end of the time period with the use of a physical count. We can contrast that to a perpetual system where we will be recording the reduction in inventory and cost of goods sold at each point that we make a sale in other words, perpetually during a perpetual system and only at the end of the period, the end of the day, week month for a periodic system. So the steps we would basically do then is that we would have purchases and the purchases would be recording, such as a debit Teoh inventory, increasing inventory when we buy the inventory credit Teoh, the accounts payable or or cash typically accounts payable when we purchased the inventory . Note that side of the transaction will be the same, whether we use a periodic system or a perpetual system, so that will be the same each way. Every time we make a purchase, we will be debuting inventory and crediting the accounts, payable for the amount that we will be paying for that. Also, there's no estimate involved in there. It's is the same under life oaf Ifo average. Then when a sale happens, that's where the difference is going to be between the periodic and the perpetual. Typically, we think of a periodic system. When we make a sale for inventory. It's That's kind of like the default that if you see a sale of inventory, it will have inventory involved in the journal entry. But in a periodic system, we're going to eliminate half of the transaction. So in other words, if we had a perpetual system, the normal kind of system you would think of when we sell inventory, we typically break that journal entry into two journal entries so that we can process it better, thinking of it easier. One side being similar to a service happening for a service company. The recording of the revenue, it and the A R accounts receivable, the other being related to the accounts that are due to our related to inventory, inventory and costs of goods sold the first half then being if we sold inventory, if we made a sale or if we're limb, if we remove the inventory and say we did services and earned revenue, would be accounts receivable going up and I are you going up with the debits and we would credit then the revenue account. So in a in A in a merchandising company that would typically be sales and then the other side of it that we would not record under a periodic system but would be recorded under a perpetual one has to do with inventory going down because clearly we gave away inventory in order to get it where the credit and debit ing the expense related to us using that inventory to help generate revenue that cost of goods sold. That second part is what we're not going to be recording under periodic system. In essence, it's an easier system. During the period during the recording of the sales were just gonna record the sales price . So if you think of yourself in a store, whatever is on the sticker price, that's what we record. We only record that side. We don't know what the cost was. If you pick something up in the store, we're not gonna worry about it. At this point in time, we're only gonna worry about it periodically at the end of the period, day, week, month. So then at the end of the time period, we will then make that adjustment how we're gonna do a physical count at the end of time, period. And then we will adjust the ending inventory and the cost of goods sold at the end of the time period. Typically using our cost of goods sold. Type of calculation, which would be began in inventory plus purchases, equals goods available for sale minus Indian inventory gives us that cost of goods sold. So given that information, given the physical count, we can then make our adjustment that we would be making each time on a perpetual system. We make it on a periodic basis. However, for the entire period that is being covered, a debit to cost a good soul in a credit to inventory for all the sales that have been made through that time period, it's important to note that we also have to account for any any type of price changes in terms of the inventory. So if we paid for the freight to the inventory, Teoh get to us than any any type of payments we needed to make to get the inventory ready to be processed should be included in the inventory as well. If we take any discounts, If we got any kind of discounts on the purchase of inventory, we would clearly need to reduce the inventory for any discounts that we would have. 15. Discussion Question 2 Inventory Cost: In this discussion, we will discuss the discussion question of discussed the effects of using different inventory costing methods. So when considering different inventory costing methods, we may 1st want to list out what those methods may be. And they are typically the first in first out method, the last in first out method and the average costing method. We could also have a specific identification method. May name were actually tracking the inventory and the related costs specifically to that unit. However, we may want to focus in on the assumption methods, which would be life oaf Ifo and the average method, and then consider the effects of each of those methods because these are estimates about assumed flows of inventory, which we don't know because we wouldn't be tracking them under those methods, the determination being it's not cost effective to do so. Therefore, we apply one of these assumptions, then they will have effects on the financial statements. They were be timing effects that should reverse each other out over time periods. However, they will have differences in the financial statements from period to period, so we would want to discuss those those differences where we're going to be the differences to the financial statements, and there's gonna be typical type of question if you have it in a multiple choice format or in a discussion format. So typically, I would think of this in terms of what would happen if we had rising prices. If we had increasing prices, what would be the effect of using life? Oh, ARF, iPhone or average and rising prices, meaning the cost of the of the goods were buying are going up over time as we purchase the same units of inventory. But price of those units of inventory are increasing. It's often easy to start with the easiest to start with Fife. Oh, first in first out versus life. Oh, last in first out because the average will typically be in the middle, it will be the average of the two kind of extremes of these, which would be Fife. Oh, and life. Oh, if we have a period of rising prices and we're and we're gonna use Fife Oh, you may want to also think that Fife owes off is typically going to make you look better from a financial standpoint, in terms of rising prices when prices go up life. Oh, is typically going to make you look works last in. First out, typically making you look worse. Why would you want to use life? Oh, you might be just a memorizing in your mind. It might be something that people would think advantages for tax purposes, because it could lower making Elizabeth look worse, lowering net income resulting in lower taxes. That doesn't mean it's always a good tax strategy cause because the rules basically would say that you'd have to use the same method for the books and the taxes. So they tried toe reduced using two different methods. But just from a memorization purpose, first in First Out typically makes more sense to most people to try to align with. What you would want to have is that the cost full assumption last in first out typically doesn't make a lot of sense to most people as what you would want for a flow assumption. Why would you use it, possibly to lower net income, possibly for for taxes could be away toe, memorize it. So in other words, if you're looking at first in first out, there's two things that that are mainly affected the the balance sheet side, which is the asset of inventory, the income statement side, the expense of cost of goods sold. If you're assuming that the first in first out method, the first stuff you bought would be the cheaper stuff under a first in first out method. And if you then make the sales, you're selling the cheaper stuff and holding on to the newer, more expensive stuff. Now again, it's all the same units. It just happened to go up in price because of something like inflation or something like that. But in theory, on the on the books, your assets, then our consisting of the newer goods which are more expensive. Therefore, your your assets on the balance sheet, your inventory amounts will be higher under first in first out than last in first out on the income statement, then saying what you're doing is you're selling the lower costs and good because you're selling the goods that you purchase prior the previous goods and they were at cheaper cost cause we have rising prices. Therefore, the cost of goods sold is going to be lower under first in first out, then last in first out. And because costs get sold isn't expense and net income is calculated as revenue minus expenses, net income would be higher. So the result of this, the short result of this is that Fife Oh, when we have a period of rising prices, the norm will be resulting in the company looking better, having both assets larger in terms of net income and in terms of net income being higher because the cost of goods sold will be lower if you if you went to life. Oh, we're assuming we're gonna sell the last units in a period of rising prices. Those are the most expensive units that we have. So, in terms of the assets, when we make the sale were holding onto, we didn't sell the old units, the cheaper units and we deal did sell the more expensive units. So the stuff we have left that were reporting is still on the books is now cheaper. And that's why the inventory under life Oh, under if we have rising prices would be lower. And then the stuff were selling under life over assuming we're selling the more expensive stuff under life. Oh, and therefore the cost of goods sold would be higher under life. Oh, than Fife. Oh, cost of goods sold isn't expense. And as expenses go up, net income calculated revenue minus expenses would be going down. Now you're gonna wanna just reverse that. All you got to do is say, Well, the reverse is that is true if there's declining prices. So I would rephrase it as what would happen under normal time periods when prices rise. And then under what would happen under the unusual time period when prices go down for some , For whatever reason, input costs are lower and therefore prices are going down for the inventory that we purchase will. The opposite would be the case then. So that would mean that first in first out would make us look worse. Last in first out would make us look better, meaning if prices were falling first in first out would result in lower assets, lower inventory, and it would result in higher cost of goods sold resulting in lower net income. And so you want to be able to work through those relationships. These questions are gonna be asked a lot of these air kind of theory questions that could be asked in any format. They're really good for multiple choice type formats. So you really want to get this this relationship down one way or the other? And again, I would remember it as rising prices being the norm, memorized what the effect is, and then and then just able to reverse that effect. When you're talking about prices going down now, the average method, of course, will be in the middle each time, so it's going to kind of smooth out the effect. It's also important to note that first in First Out doesn't follow the actual physical flow . But it's closer to what we would think that physical flow would be. And last in first out does have ah theory advantage in that what we sell, we would assume, would be closer to the current cost of the inventory because we're selling the later stuff . So therefore, the current costs that were reporting maybe closer to the actual cost at the point time of sale 16. Discussion Question 3 Inventory Cost: In this discussion, we will discuss the discussion question of discuss the perpetual inventory system. So we basically have a definition here, a perpetual inventory system that we need to describe and discuss. In order to do so, the perpetual inventory system can be compared and contrasted to the periodic inventory system, and it's often best Teoh point out the benefits and pros and cons of a perpetual system when relation to or with relation Teoh a periodic system. So a perpetual system means that we're gonna be tracking inventory perpetually as we go. So we're the inventory in theory, then should be accurate at any given time as we are recording it as we make purchases and we make sales. We can contrast this to a periodic system where we're only going to be recording the sales component and adjusting the inventory to the proper amount as well as the related costs. A good sold at the end of the time period, whenever that may be, whether it be daily, weekly, monthly or monthly. Typically, we're gonna make that adjustment at the end of the time period. Now we can see an obvious ah benefit from a perpetual system to a periodic system in that we would be reporting the inventory properly or more properly, at least on a perpetual basis. So every time we make a sale, we would be updating the inventory and the cost of goods sold, having a more accurate net income any time we want to look at the financial statements, whereas in a periodic system, the net income would would not be correct in the inventory would not be correct until the end of the time period, when we do the physical count. So what are the benefits of the periodic system? Then why would someone use a periodic sense system as compared to a perpetual system which , clearly from a bookkeeping standpoint, would be beneficial? Ah, the perpetual system problems. The pitfalls of the perpetual system would be that you have to have more information at the point of sale. Note that if you go to the grocery store, we know what the sales prices. And if we would bring something up toothy clerk and even if they didn't have a scanner, they could look up the sales price and we could have a system to collect the money and record the sale and and and give back the proper change and have all that taking place. However, if they didn't have a scanner, they wouldn't know the cost of goods sold. The people that are checking the stuff out don't know the cost of whatever it is that we brought up Teoh be checked out, and in order to know that we have a nice system, a scanner system that can do that electronic Lee. If we have the electronic system, then we can use the perpetual system and record our accountant as we go. And it's perfect. But if we don't have that scanner system, it could be too much to ask from somebody to try to record the cost. Get sold at every time we make a sale when we're trying to concentrate on making the sale, not on recording the cost of goods sold so typically the perpetual system is better. From an accounting standpoint, however, it takes more work, typically taking a more sophisticated system toe. Help us out to record that the cost component, which isn't on the sticker price at the point of sale when we actually make the sale of the periodic system, will then account for the cost or the decrease in the inventory related cost of goods sold periodically through the physical count at the end of the time period. It's important to note that we will still use a physical count in a perpetual system. It doesn't eliminate the physical count. It doesn't eliminate the cost of goods sold calculation that will still need that calculation. But in a perpetual system, rather than using the physical count in order to adjust inventory to the proper, you know, to the proper amount. Because we haven't been reducing the inventory, it's going to be used. Teoh primarily look for shrinkage things like loss or theft inventory going down for reasons other than sales of inventory. In other words, we're recording the purchase of inventory and the sale of inventory. What we're not gonna be able to know about, of course, is if there's any problems in terms of shrinkage or loss of some kind, and therefore we need to do a physical count once we do a physical count. If it's less than what we have been reporting, we need to make some type of adjustment to the physical count and that adjustment would be something that had been lost or something happened during the time period, so the physical count will still be there. But the physical count will be, ah, in there to check double check that that the inventory is correct and the cost of goods sold is correct under a perpetual system versus a periodic system where we need it just to record the proper inventory and record the cost of goods sold. It's also important to note that the when we record the purchase, the purchases will be the same under either method. So under the either method, we're still going to record the purchase of inventory. It is what it is under the perpetual and periodic and under life oaf iPhone average. But when we make the sale, that's when the difference takes place under a perpetual system. We break that sail into two components, one having to do with a similar type of sales transaction. If we were not a merchandising company and that would be something like we would debit accounts receivable and credit sales, no inventory accounts or related accounts involved in that transaction, we can record that that half of the transaction the transaction that were not recording under a periodic system that we would record under a perpetual system. The half of the transaction relates to those inventory accounts, meaning the inventory would go down with a credit and we would have the cost of goods sold being recorded. That's gonna be the difference under the two methods. Every time we make a sale, we would be recording a debit to the cost of goods sold a credit to inventory under a perpetual system, not under a periodic system at the end of the time period. Under the periodic system, we will make up for that discrepancy by recording one time for the entire period a debit to cost of goods sold and a credit to inventory. 17. Multiple Choice 1 Inventory Cost: in this presentation, we will take a look at multiple choice questions having to do with inventory and costs. Flow assumptions First question Damaged inventory that can still be a sold A are not counted as inventory be are included in inventory at cost D are not included in inventory. E are given a value of zero f are included in inventory at Net. Realize herbal value Once again, the question being damaged inventory that can still be sold will go through these questions . See if we can eliminate some of them. A are not included as inventory. So if it's dammit inventory, then we might save him. Well, maybe it shouldn't be inventory if it's damaged, so I'm gonna keep that there. For now. Be says included an inventory at cost. That's what the normal thing would be. We would record it at cost, but if it was damaged, you would think would be at going down in value. So I'm thinking that's probably not gonna cross that out. Should be less than cost or not at all. I would think, De says are not included in inventory. Uh, eso that's these damaged inventory that can still be sold eso I'm going to keep that. They're I think maybe possibly not included an inventory A and D look awfully similar. And then e are given a value of zero. So once again, if it could still be sold, I mean, possibly and then f says are included an inventory at net realizable value. So we have this first phrase here once again, damaged inventory that can still be sold. The fact that it can still be sold tells me Well, maybe it should still be in inventory in some way, although it should probably be at an amount lower than it was before. So not counted inventory and are not included in inventory. Um, one. They sound like the same thing. Those two components, those two answers. So A and D I'm thinking those can't be it one, because it seems like it could still be sold and should be there somewhere. And two because of the same. And we can't have both of them as the same answer Being correct, E says. Given a value of zero now, if we're gonna included an inventory, maybe we would included at zero. But it seems reasonable that it still has some value if we can still sell it, so F sounds the most reasonable says are included in inventory at the Net realizable value . So I'm going to go with F on that one. So the answer, then being f damaged Inventory that can still be sold f are included in Inventory Act. Net realizable value. Next question. What makes up merchandise inventory? A. All goods owned held for sale be all goods at company location. See all goods shipped to company de all undamaged goods E. On lee Good that have not gone down in value. Once again, we'll go through this and then cross off some of the questions and see if we can eliminate some options. What makes up merchandise inventory? A all goods own held for sale. If they're owned, it's probably and held for sale. That sounds like it could be it that you would think that would be the difference between inventory and other tax of assets Were holding them for the purpose of selling them. So I'll keep that for now, he says. All goods a company at company location, all goods at the company location. It kind of that kind of hinges on what goods mean? Are we just talking about inventory goods? There could be other goods. I'll keep that for now. See Says all goods shipped to company all goods that are shipped I'm going to think that the shipping of the goods probably wouldn't be the factor that makes them merchandise inventory. So I would think would be the possession of the goods or whether they are are owned by the company or not wherever they are located, most likely at the warehouse, but not necessarily. So I'm gonna say that that's not it. Across out C d Onley undamaged goods when we saw from the last one that damaged goods could possibly still be an inventory if they can still be sold. So I'm gonna think that that's not it. We could still have damaged goods in there if we but they would be marked down and value e on lee. Goods that have not gone down in value. Clearly wanting a d and e are kind of similar. So D says Onley undamaged goods. Andy says only goods that have not going down in value Well, if they're going down and values probably cause they're damaged or if they're damaged, they have probably going down in value. We can't have both of those. So you would think that D and E have basically canceled each other out and he eliminated each other, not being able to take both of them. Once again, we're left with a and B question being what makes up merchandise, inventory a all goods owned and held for sale, or be all goods at company location between those two. I would think that the is not very specific. A has the specific component that would make something inventory, that being it's held for sale. That's the purpose that's of the inventory. So I'm gonna say, Go with a here and we're going to say that the answer is what makes up merchandise inventory? All goods held for sale. Next question. When our goods in transit included an inventory when our goods in transit included an inventory. A always the when they must pay freight charges when we met. Pay freight charges the company when the supplier pays freight charges de when goods are shipped F o B destination and E, when goods are half way to the destination. So let's go through that one more time. See if we can eliminate some of this when our goods in transit included in inventory. So we have to first consider what goods in transit are. That means the inventory that's being shipped to us and typically when we think about that we're considering fo be shipping point or f o. B Destination often is is part of that. Ah, that questioning. So if they're being shipped to us, when we're the goods be included, an inventory, a always not typically the case. I mean it really depends if if were responsible for the shipping or not, B says, when the company I'm saying must pay freight charges when we must pay freight charges with the company must pay freight charges. If we're paying the freight charges, then it may well be that we can assume that it's fo be shipping point and that we might be responsible for it. I'm gonna keep that one for now and see what else we have, SI says. When the supplier pays frank charges, if the supplier is paying the freight charges, then I would think that they would still be in charge of the inventory during the freight time, which means we wouldn't We wouldn't be including the inventory. It would be f will be destination. In other words, so I'm gonna say, See, doesn't sound right. And then D says, when goods are shipped F O B destination Now that's the term I was looking for. But F will be destination with me and that this seller, the person that was selling it, is still responsible for the inventory as it's being shipped. And therefore it wouldn't trade hands. It wouldn't be in the purchaser's inventory until it reaches the warehouse. So it's not gonna be in transit as the purchasers. And then e says, when goods air halfway to destination that, you know, that sounds actually kind of reasonable with you. Think once it's halfway there. Now it's now it's ours. But typically that's not gonna be the case, because typically, one of the other parties, the shipper or the receiver, is going to be responsible for it as it's in transit. So it's not gonna be that one. It's gonna be It's got to be one of the other, so I'm gonna read it one more time when art, or maybe more than once but when our goods in transit included in inventory. A always and when I say that's actually not true, even always is not the case. It's get's clearly gonna be the responsibility of one of the other parties. And then these are answer here. It's got to be left with me even though it doesn't have a term are really looking for, which is an F o b shipping Point B says Ah, when the company must pay freight charges so when we must pay or the company must pay for it charges. And that would mean that if we're paying the freight charges, it's most likely in the case that we have an f o b destination because we are in charge of the freight in charge of the charges and therefore that inventory, although not at our warehouse, is ours, were responsible for it during the shipment. So final answer wind goods are in transit included an inventory when the company must pay freight charges 18. Multiple Choice 2 Inventory Cost: In this presentation, we will look at the multiple choice questions related to inventory and inventory costs. Assumptions first question. Consignment goods A. Our goods given by owner to the consign me who sells the goods. Four. Owner or b are consign ease inventory. See goods given to consign er who sells the goods for the owner de not consign er's inventory e paid by the consign e when they take possession. Once again, we're gonna go through these and then see if we can cross out or eliminate some of the options. The question being consignment it goods, and we'll go through these and see if we can eliminate some of these now. It's of course, good if we can try toe, define what consignment is first and note that the consignment is something that will come up from time to time. It's not with a major. Focus typically is, but it's something we need to be aware of because it does affect how much we are going to be recording in the inventory and it beans, basically that the owner of the goods is giving the goods to some other person to sell them . Although the goods have not been sold to that second individual. They're still owned by the owner. For example, if we had a painter that had paintings and they want to put those paintings in a restaurant to be sold then and hang them up and see if people would want to buy them in the restaurant as they eat, then they could ask the restaurant to put the paints paintings up on consignment, meaning the restaurant doesn't buy the paintings. They just put them up for the painter, and then once they're sold, then the restaurant would take a percent and give the difference to the to the painter. And so that's one form. Now note that those paintings air still the painters there, the inventory of the painter, even though the restaurant has possession of them. So here we go 1st 1 says our goods. So consignment goods A. Our goods given by owner to the Consign e. Who sells the goods for the owner. And that sounds pretty good according to our definition. But if we didn't quite know, it will go through all these and see if we can eliminate some of them are Consign, ease inventory. Now there's gonna be these terms all the time with it, with different types of accounting terms, like consigning you consign Orly. See Elise Or and so they consigned me is the person who is who is receiving the inventory in our case, the restaurant and they're getting the inventory, and they and they haven't physically. But it's not really there's It's the consign orders inventory. That's the tricky thing about consignment. So it's not, be and then see says goods given to consign or who sells the goods for the owner. Now this one sounds a lot like a and so I'm gonna keep it for now. And then we'll go back through those and see see which of those is the most correct because they look very similar, De says, Not consign ors inventory eso that consign or is the one who is giving the inventory? Our case, the paintings to the restaurant. But the consign order is that is one the painter in our gaze, and they are the owner of the inventory. They just don't have physical possession of it at the time. It's at the restaurant, although it's owned by the consign or the paint, or so it's not that one, E says, paid for by the consign e when they take possession. And that's the difference between the consigning buying the inventory and it being on consignment that pay. The restaurant, in our case isn't paying for the paintings. They're just holding onto the paintings and displaying them for the owner of the paintings . So that's not correct. And note. If we didn't know any of these, we might be suspicious. Just about A and C anyway. So if if I had no idea what it consignment was, and I read thes options, I might be saying, Well, whom A and C sound exactly the same. They sound the most descriptive of all of these descriptions, and there's only a few words difference. So if I had no idea what consignment was, I might look through A and C and see what you know what. The difference between those two aren't and impossibly narrow it down to them just by the format of the answers. So once again, the question is consignment goods A. Our goods given by owner to the Consign e who sells the goods for the owner or C goods given to the consign or who sells the goods for the owner. Now the difference between this goods given by the owner or goods given by the consign or are the difference of who's giving the goods while the owner sounds correct, giving the goods to the consign me who is the restaurant? If we're talking about goods given to the consign or the problem, there is the consign or is the owner. So the consigning is the one who would be receiving the goods in this case and then selling them and obviously off also, who sells the goods to the owner? Uh, the consign e should be getting the goods. It wouldn't be selling into the owner. They'd be selling them for goods for the Onoda mess, not goods for the owner. So it would be the consigning selling the goods for the owner. So in any case, it's gonna be a here. It's gonna be our best option. So once game consignment goods A. Our goods given by owner to the consign me who sells the goods for the owner. Next question Cost of goods available for sale is allocated at the end of the period between a beginning inventory and ending inventory. Be Indian inventory and shrinkage. See net purchases and ending inventory, de beginning inventory and cost of goods sold and e ending inventory and cost of goods sold once again will read this question off and go through the and see if we can eliminate some of the answers. Cost of goods available for sale is allocated at the end of the period between. So if you consider that cost of goods available for sale, we should have an idea of what that is. And we should once we see anything that that is within our costs of goods sold formula, I would just write down that formula and see if it gives us any clue to what the answer would be so that the cost gets sold. Is beginning inventory plus purchases. And that's going to give us our goods available for sale. So cause goods available for sale. That's our sub total. And then we say, minus ending inventory. No, this is really terrible graph here, and that gives us cost of goods. So what happened there? So beginning inventory plus purchases gives us cause to goods available for sale. That's this item minus the Indian inventory gives us cost of goods sold. So the cost of goods available for sale is basically what we could have sold during the time period, which is then going to be subtracted by the Indian inventory. The amount we count to be there to give us the cost to get So what? We did sale the cost of things. We sold the expense on the income statement. So if we read through this cost of goods available for sale is allocated at the end of the period between a beginning inventory and ending inventory More. If I look at the formula here, I don't see ending inventory, but not beginning inventory. I see Indian inventory and cost of goods sold, so I don't think it's gonna be that be says Indian inventory and shrinkage. Uh, you know, you might think that at first because we might be thinking we're trying to figure out what is in ending inventory. What? You know, we lost souls. I'll leave that for now. See says net purchases and Indian inventory net purchases. That's gonna be what What? This is our purchases here and Indian inventory here. Eso that you know. Those are both in our equation, but we're really breaking out the cost of goods available for sale between Indian inventory and cost of goods sold. So I don't think that's gonna it. D says, beginning inventory and costs of goods sold beginning them and towards in our formula. But it's way up here, and we're really down here. We're really working, but low cost of goods sold because we're breaking out that cost of goods sold. So I don't think it's that he says Indian inventory and cost of goods sold. And I think that's gonna be it, of course, because in our formula we have caused the goods available for sale minus the ending inventory gives us cost of goods sold. In other words, cost of goods sold is being broken out between Indian inventory and cost A gets and cost of goods sold so once again caused the goods available for sale is allocated at the end of the period between either be inventory and shrinkage, and I don't think that's gonna be it. It's There's no shrinkage in here or E, which I believe is the answer Indian inventory and caused a good soul. So the answer is gonna b E one more time cost. The goods available for sale is allocated at the end of the period between e Indian inventory and cost of goods sold. Next question. Merchandise inventory does not include hey, invoice price of inventory purchased minus any discount Be inventory transportation in costs See inventory storage costs, de inventory insurance costs, e inventory that cannot be sold. Once again, we're gonna go through these and see if we can cross out anything that doesn't belong. Merchandise inventory does not include a inventory price of inventory purchased minus the discount. And that would be the most obvious thing that would be included in inventory. The price of it. And we would have to take out the discount for the inventory as well. So I don't think it's gonna be a being inventory transportation in cost. Now if we paid for the transportation cost, it is something that we would want to record an inventory. It wouldn't be just afraid in expense. We would be including it in inventory because we used the transportation in order to buy the inventory. We will expense it in the form of cost of goods sold when we sell it so it's not going to be SI says inventory storage. And that's gonna be the same scenario. If we have to pay for the storage in order to get the inventory in place for sale, then we're not just gonna expense it At the time we pay the storage, we are going to include that cost in the inventory, so it will be an inventory cost. De says. Inventory insurance, same concept here. The insurance, if we have to pay for it in order to get that inventory ready for sale, will be included in the cost of inventory. And he says, inventory that cannot be sold. And so that's gotta be it, because we crossed everything else out and E. And it makes sense because if it cannot be sold, it should no longer be an inventory. We should write it off as a loss. It shouldn't be in the inventory price because the definition of inventory is something we're holding onto with the expectation of selling. So that answer is merchandise. Inventory does not include e inventory that cannot be sold 19. Multiple Choice 3 Inventory Cost: In this presentation, we will take a look at multiple choice questions related to inventory and inventory calls. Flows First question. Physical inventory counts A are not needed When using a perpetual system, the must be taken weekly. See requires the use of electronic counters de are not necessary at all. E are necessary to adjust the inventory account to actual. Once again, we'll read this off and go through. See if we can eliminate some of the items Physical inventory counts. A are not needed when using a perpetual inventory system. And now this is the one that probably trying to get you on the most. And when we use the perpetual system as opposed to a periodic, the physical count serves a different purpose. But we still need one. And the purpose for a perpetual system is to check to see if we have any loss in inventory , inventory shrinkage, inventoried damage, spoilage, things like that. So that's not gonna be it. B says must be taken weekly so physical inventory counts must be taken weekly. It really depends on the system. We're gonna have what we might be taking a physical inventory account daily or even each shift, possibly for employees shift or weekly or possibly monthly. So it's not the case that we have to do it monthly just depends. You know, that's kind of the system that that would rely on. So it's not be see requires the use of electronic counters, uh, requires the use of electronic counters. So that would basically imply that a physical inventory couldn't be done. You know, just by counting them in market that off Elektronik counters might be needed in some types of counts, but it is possible to do a traditional physical count as well. So I'm going to say, That's not it. The are not necessary at all. And that's clearly probably not true. A physical count is gonna be one of our major internal controls for inventory. So we're left with E where says are necessary to adjust the inventory account to actual, and that would be the case. Typically, we want to make sure that we have the physical account to adjust the inventory. So basically, through the process of elimination, we've got E here. Note that the physical count This might not be the first thing you thought of when you think of a physical count necessary to adjust the inventory to actual because if we're using a perpetual inventory system, our inventory should be fairly accurate as we dio. But if there's any shrinkage or anything like that, the account will allow us to right down to the counts of the physical count is what we're gonna ultimately go by and record our inventory to that. So the answer. Then, once again, physical inventory counts e are necessary to adjust the inventory account to actual next question. Which method results in the highest net income when costs rise, a specific identification method be average cost method, see, first in first out method de weighted average method or E last in first out method. Once again, which method results in the highest net income when costs rise. So we're gonna go through these and try to cross some of them out and then try to think through this more specifically, one a specific identification. Now, specific identification means that we know exactly which item of inventory is being sold. So it really has No, we don't have any control over which Adam is being sold. So, uh, we wouldn't really know if that would have a positive or negative income impact on having the highest net income just depends on which items we sold, and specific identification is usually used if we have large items, lightens that are kind of unique in nature in terms of inventory. So I don't think it's gonna be specific identification. Be average cost method. Now the average cost method, because it's an average is you would think somewhere in the middle, somewhere in the average, somewhere between two extremes. So I'm not sure that I don't think, then, that it's going to get the highest net income if we're talking about a method that's in the average method, so I'm gonna say he's probably not it. See, says the first in first out method. That means we're gonna account for things. The first ones they come in are gonna be the first ones we assume to go out. That one. I'm gonna keep their that I'm not quite sure, D says weighted average method, which sounds very similar to the average method and also is an average. So if it's an average once again, I would think would be not on the extreme. I think I would think that would be in the middle so B and d sound similar, which may eliminate them as a possible option and they build have averages. So I think I'm gonna eliminate that as an extreme meaning the highest method with the lowest method. And then e says life Oh, last in first out method. So I think it's gonna narrow down to see first in first out and e laugh last in, First out. So now we gotta really kind of think about it narrow down between those two. Which method results in the highest net income when costs rise. Now, I would try to memorize You're gonna get these questions all the time. With this topic, I would try to memorize that Costs rising is the norm. Typically, when we purchase inventory, meaning when we purchase them into where the costs are going up over time And with that normal condition, we would think that the first in first out leaves us in a favorable position, makes us look better and lasting first out typically makes it look worse. So it just as a defoe kind of ah memorization tool. That's what I would memorize his head in terms of normal rising prices. The first in first I out makes us look better last in. First out makes it look worse. Well, how could it make it look better? First in first out results in higher, um, inventory as it's the assets would be reported higher and a lower cost of goods sold, which would result in a higher in net income That last in first out, would result in a lower asset account for the inventory, a lower cost of goods sold and therefore a higher net income. So between those two, you just gonna have to, you know, find some way to memorize that you can think through it, Teoh, and try to think through the cost flow. T know that if you're still in the first ones first, the first ones were the cheaper ones. That means you're left with the more expensive ones on the balance sheet in inventory, so your inventory, therefore, is higher under first in. First out. If you're selling the cheaper ones, your cost of goods sold is lower. That's an expense, and the revenue minus the expenses then would be higher. So and then the reverse would be true. if we had the reverse costs going down. So the answer then, is C question. Answer. Which method results in the highest net income when costs rise? See first in first out Fife. Oh, method. Next question. Which method smooths out cost changes? A specific identification method. Be first in first out method. See weighted average method. And I think that should be D, which would be last in first out method. So once again will read this through, and then we'll see if we can eliminate some of the options. Which method smooths out cost changes a specific identification now that once again, not really a cost flow assumption method. We don't really have control over the flow method there. It's just whatever the customer decided to pick in terms of inventory, usually for larger pieces of inventory. So it doesn't. We really couldn't tell whether or not that's going to result in changes that will be smooth or not. And we have to just see what which items sold. And so I don't think that's gonna apply. We're really looking for the flow assumption methods. B says First in first out method. Ah, so I'll keep that for now see says weighted Average, Ah, Method and and D, which should say the last in first out method. So of those 23 methods, we would think that the two extremes air first in, first out and last in first out. So if we're talking about something that smooths out costs, I would think that would be some type of average. So even if we don't know the methods, I would assume that if this was a legitimate method, one of the methods and it's an average type method that it would be one that would smooth out the extremes of the other methods, which is the case here. So first in First Out will have the extremes in terms of the inventory and ah, across of goods sold amounts and the lifeboat would be in the opposite extreme. Weighted average will typically be somewhere in the middle. Therefore, answer is gonna be See this. See, it's which is which method. Smooth out cost changes see weighted average method 20. 600 CPA Exam Part 1 Inventory Methods FIFO%2C LIFO%2C Average CPA exam %26 other accounting test: Hello. When this lecture, we could continue to do some shorter test type problems, problems that could be fit into a multiple choice formats that we have. A company here uses a weighted average perpetual inventory system and report stuff all in. So we've got some purchases and sales and they give us the units and the sale in the purchase price. What is the per unit value of ending inventory at obvious 31st. Okay, So any time we do these, whether it be average by phone or life Oh, I would generally use at least six basically Rose and let me show you kind of why that would be I would have the sales rose here that we would have lined out is gonna highlight those so we can see them and then I'm gonna have three more, and this is gonna be related to basically that purchases in the ending inventory. So if we start off here, we've got a purchase. So we have a purchase that happens. And I'm not gonna put the date in right now, but I'm gonna put that in my last 30 sales because we're gonna have three pieces of information. We got the units. We've got the cost per unit, and then we've got the total. So we've got the units of nine. We've got the cost per unit of $11 if we multiply that out, then our Indian inventory that would be on the balance sheet of nine times 11. And that's where we at we are at. At this point, we don't need to average anything. The per unit cost is $11 at this point. Then we purchased another Ah, 11 units. So we're just gonna purchase again, Going to go over this? These columns over here. We purchased another 11 units at tab, $15. Tab. I'm gonna multiply that out. So now we've got 11 times the $15. So now we have this issue where we're gonna have a problem if we sell the units because we have some that cost 11 some that cost 15. We're not gonna use the life over the fire phone. We're gonna average them so we could do that. Now, how are we gonna average this items how we're gonna average this? Well, we can add these up. We can say the some of the total units are nine and 11. And that would say we have 20 units and then I'm gonna skip over here. I'm not going to some these up. That wouldn't make any sense because these air unit prices to add them up. It's not like, you know, the one unit price would be the some of those. So we're going to sum up the totals though the total that we have on the balance sheet here . And then we could take the average because they had This is how this is the numerical value we have in the balance sheet. Some of them cost 11. Some of them costs 15 But we're just gonna come up with, yeah, average number. So the average then would be equal to the cost that to 64 divided by the units 20. And that would give an average of 13 20. So we bought him for 11. 15 were averaging 13. 20. Then we have a sale that happened. So we have a sale. And of course, this is the only row we really care about at this point. This is the only row that is of relevance at this point going down and I'm gonna say the sale is over here. That's why I have these other three rows because there could be two pieces of information, depending on what type of question they ask. So it's good to just always kind of put these out, at least in these types of Rose. And the sales is going to be, in this case, 18 units and then the cost. If they want to give us maybe ask for the cost of sales. But they could. That's why it's it's good to break him out. And that cost is going to be this 13 20 13 20. So it's not the 11 not the 15. It's the 13 20. Why can't put that in there and then if we multiply that out than the cost of sales? Is this times this now we don't have the sales price. They didn't even give us that. If we did, we'd need three more columns here giving us the sales side of it. But we're only dealing with the cost side of it. That's why we're just using these six columns, and now we're going to see what's left there. What? We had 20 and we just sold 18. Therefore, we've got 20 minus 18 left or force to, and we know that they all cost 13.2 because that's the average. And so we're going to say what's left on the balance sheet two times 13.2. Okay, so then we got one more person. This is what's on the balance sheet at this point time. Then we got one more purchase that happened so that we purchased and we don't need anything in these columns. We're gonna go over here now. It went up because to 14 it's kind of inflation. This is like the normal. I'm sorry, the units were 14 but the cost was also going up to 14. And that's kind of like inflation. You know, you would think the costs per units would go up, but they don't have to. They could go down at some points for some different reasons, but all else equal kind of you think costs would go up over time, But in any case, we multiply that out. Well, now we got 14 units times the $14 her unit, and that now cost us the 1 96 So this is where we were at last time. And now we have the what we have here that we just purchased. So we can then take those and find the average again. So the average would then be the sum of that to that we had before, plus the 14 that we just purchased. And that would be 16. And then we're gonna add the totals, not the unit amounts. We're gonna have the totals we're gonna say, All right. We had $2020.40 on the balance sheet, and then 1 96 that we purchased. That's 1 22 40 If we take the average than the average cost would be that 2 22 40 on the balance sheet, The total cost divided by the number of units being 16 at this point, average cost being this 13 90 $13.90. Next one says the company's inventory record reports the following. And then we have the argued that beginning bounced and two purchases and then on August 15th sold 64 units using the Pfeifle perpetual inventory method. What is the value of ending of the inventory? August 15th. So it if you know the FIFA when you can see these fairly well. You can basically see that The Fife. Oh, if if we're talking about the inventory we're talking about what is left at the end, that's gonna be the amount that it's gonna be left here. So we could basically some these up and see counting backwards how much would still be left after the sales amount. But I'm going to set this up in a similar way that you know what kind of work, no matter what they asked, and eso this would be a little bit longer of a process. But it will work basically for most of the different types of problems. So once again, I'm gonna have, like, six columns. They went 34561 for the cost of sales and one for the purchases. And then anything over here? What self? We have the beginning balance beginning balance. I'm gonna put that over here. Now there's two pieces of information. 32 units at $22 Means that we're starting off with 32 times 22 for a dollar amount of 704 And then we had a purchase that happens. So of course the purchase was 27 at 21. And so that means that we have 27 times 21 that gives us the 5 67 So the total up at this time, we have basically two layers, and that is the 704 in the 5 67 And then we have another purchase, and that's gonna be at $31. And I mean 31 units at $22 if we most by that out 31 units times $22 that gives us the 6 82 Now, if we think about that the units that were sold there were 64 units sold. So remember what we're gonna eat up these, then eat up these and then these. That's the three layers that we're gonna eat up. And because it's first in, first out, we're gonna take the oldest ones first. So I'm gonna put the purchase down here or the sale here, and I'm just gonna take it layer by layer. So if we sold 64 units, that's greater than 32. Therefore, the 32 is gone. We're selling all those at the $22 so if they asked us for the cost of goods sold, which they didn't, they asked us for the ending inventory. But the cost of goods sold would include that 32 times to 22 here. And then we got the 32 that in the 27. That adds up to 59 which is still less than the 64. So we're gonna take all that 27 is going to be gone at 21 units, and if we multiple those out, then the cost of the goods sold would include this amount. And now we need to get 64 units. So we're gonna take whatever else we need to to get up to that 64 from this later. Now the 31 layer. So I'm gonna do it this way. I mean, say 64 minus the 30 to minus the 27 is what we're going to need to make this plus this. Plus this equal the 64 units which we are selling so over these 31. Then we're going to sell five of those and those cost 22 units. And if we multiply that out, then we have five times 22 there we have this. Now, now we're gonna basically see what our layers are. And of course, this layers wiped out this layers wiped out. We're only left with part of this 31 this 31 minus these five units. That's what we're left with. Those costs $22. Therefore, what we have left in Indian inventory is the 26 times the 22. So that's what we have left. That's the Indian inventory. They could have asked us for the cost of goods sold of this and notice what that would be is that some of these 3 1081 next woman says company reported the following income statement informations. We have sales, we've got the cost of goods sold and we have gross profit calculations. It then says that the beginning inventory is correct. However, the Indian inventory figure was overstated by 24,000. Given this information, the correct gross profit would be what? So we could just basically re calculate this? I'm going to just say sales is one for 1000 We know they cost of goods sold. Calculation is going to include the beginning inventories beginning inventory 1 38,000 plus cost. Plus the the purchases. So I'm just pulling these numbers down, and there's telling us that this these numbers were correct Make this a bit larger so we could see that. So the purchases then is just, uh, this number to 77 1000. Therefore, that costs available. This Plus this. I'm gonna go ahead and underline this number. Home tab, fonts underlines. All we did was take the 1 38 plus that to 77 to get what is available. And then we have the Indian inventory. So the Indian inventory and this is where the problem happened. They're saying that this number is too high. It's overstated. So therefore we got to reduce that number by the 24,000. So I'm just gonna take this number Indian Inventory 1 48,000 minus 24,000 to get the correct number after accounting for the overstatement, and that will give us this 1 24,000 Then we can have the correct a cost of goods sold, which I'm gonna put over here in this column for for my purposes so we can pull that cost to get sold out and then have the gross profit in the outer column. So I'm going to scroll down, since we don't need that information anymore, and we're gonna say this equals the cost of goods available minus what's an Indian inventory that is now the cost of goods sold? The new adjusted cost gets old. Growth profit is then calculated as the 1 40 in the 4 14 minus the 2 91,000 given the revised gross profit of 1 23,000 21. 600 CPA Exam Part 2 Inventory Methods FIFO%2C LIFO%2C Average CPA exam %26 other accounting test: Hello. When this lecture, we're gonna continue with some test type questions, smaller questions that could fit into a multiple choice format. So we have a company's normal selling price for it. Product. 23 per unit. However, due to the market competition, the selling price has fallen to $18 per unit. Of this company's current inventory costs are 230 units purchased at 19 per unit. However, the replacement cost has fallen to 16 per unit. Calculate the value of this company's inventory at the lower of cost or market. So the idea being here that we if there's a reduction in the value of the inventory, we generally want to put it on there at the lower amount because we don't want to overstate our inventory. Remember, when we're talking to our reader, we would basically, from at least a regulatory standpoint, we would rather understate our assets basically, because rather than overstate our assets from that standpoint, So by doing that, we're gonna basically put our inventory on their that lower of cost or market. So we have the units here, the to 30 units, and the lower of the cost or market is 16 or 1919 or 16. And in this case, the lower is of course, 16. Therefore, we're gonna have to have the 230 units times. This should be 16 man 160 16 230 units. Times 16 would be this 6 3080 This would be the dollar amount, and we would have to basically adjust our inventory to the lower of cost or replacement costs. Next Woman says that the company has inventory of 14 units at a cost of $9 each. In August 1st August 3rd, it purchased 24 units at $12. 16 units are sold on August 5th. Using the Fife Oh perpetual inventory method. What amount will be reported in cost of goods sold for the 16 units that were sold. So we could basically kind of just think this through and try to figure out to be cost of the goods sold. I like to basically put these into a table, though, because if we do so, then it will allow us to answer basically any type of question. They asked, notice what they asked us. Here is what was the cost of goods sold of the fit 16. They could have asked us, however, how much is left in Indian inventory. And if we set thes same kind of problems up in a similar way, we can set them up in a way that we can always answer basically both of those questions. So in order to do that, I would basically make a column of 66 column kind of grid and we're gonna talk about the ending inventory, and the purchase is over here and the cost of goods sold over here and it would look something like this. And once you get used to doing something like this, then it becomes fairly easy to set these things up. So the company has inventory, So this is gonna be like the beginning balance that we're gonna start off with. And I'm just gonna put those in the last three columns because it consists of the units times the dollar amounts of 14 units times $9. So I'm gonna go ahead and multiply those out. This equals 14 units times $9 that gives us the 1 26 That's what's on the balance sheet at the beginning. And then we have a purchase. Hear that happens. And I'm just gonna put that in the same column over here. So we got the purchase. That happens. And that will be 24 units at an increased price of $12. Therefore, if we take the 24 units times 12 we are at the to 88 and then it just says 16 units are sold. So then we're gonna the sale. Not gonna put the sale over here because this is where we'll catch Think the cost of goods sold. And this is where we will put the ending inventory that is still left. So over here, we're gonna have to think about well, which more units were sold under the first in. First out, we sell the oldest first, which were the 14 at nine. Then we'll eat into the newer ones, so these are gonna be so first. But there's only 14 of those. We sold 16. Therefore, these air wiped out. So the sale this is the sale is wiped out at the 14. Those air $9 cost. This equals the 14 times nine now knows the thing that people get often very confused on is that they start to want to think about the sales price here. There is no sales price in this because we're not thinking about the sales price that we're thinking about the cost. The sales price will have to be given to us. If we were actually to make make the sale, we're trying to think about how much the cost of the sale was. So then we had we remember we sold 16 minus this 14. So that means we have two left, 14 plus two being of that 16. And those are gonna be at the $12 up here. So those air at $12 therefore we have two times 12 and that gives us the 24. So if we some those up, then the cost of goods that sold with its 1 26 and 24. If, however, they asked us what's left in Indian inventory, which is quite possible, then we would have to say OK, well, these air wiped out. We sold all 14 of those and then we have 24 minus two. We have 22 left at $12. Therefore, Indian inventory equals that 22 times 12 So if they asked us what the cost of goods sold is it would be this if they asked us how much is still left. An infant ending inventory after the sale over the 16 units. It would be that next woman says, given the phone information, determine the cost of inventory at June 30th using the life. Oh, perpetual inventory method. So once again, we're gonna I'm gonna set this up with basically those six columns again. Said all these kind of up whether this FIFA life over average and I was going to say, Okay, we're not be six columns. He's going to the sales columns. This is gonna be what's left and the purchases. And so, in this case, we start with a beginning over here, 32 units act 10 12 $20 each. So that's given here 32 units at $20. If we multiply that out 32 times 20 we have 640 units. And then on June, we had a sale of, ah, 24 of those units, so we're gonna sell 24 units, so I'm just gonna say 24 units at and there's only one layer here. We've only got one layer. So that makes it fairly easy to under the last in. First out. But we only got the one layer, so we're going to say that's at $20. So we're gonna say this is 24 times 20 and that's gonna be the cost of sales. What do we have left, then? Well, we had 30 to minus 24 that we just sold. That means we have eight units. They all cost $20 because we only have this one layer. So we've got eight units, times 20. Okay, so then the next thing that happens is we have a purchase. So we have a purchase, and we're gonna put that over here. Now we have another layer. Now, we're only counting this layer here. This is kind of done for us now. Now we're here, and we're adding like a new layer to it. That new layer being 24 units at $25 for the price. Wind up all all things else equal. That would be the case normally. So we've got 24 times 25 each. That gives us the 600. So what's left in Indian inventory. The some of this layer that's still left and this layers. We have eight units at 24 1 16 24 years at 25 that gives us the 7 60 This is what is an Indian inventory in terms of dollars on that is that company has operated with 30% average growth profit ratio for a number of years. It had 10 2000 in sales during the second quarter of this year. It if it began the quarter with 18 2 of inventory at a cost of 72 2 of inventory during the quarter. It's estimated ending inventory by the gross profit method is what? Okay, so I'm going to set this up, basically showing what the calculation would look like on the income statement and then back into the numbers. So I'd like to kind of look at it as if it was in the format oven income statement first. So we're gonna say that starts office sales. I'm gonna put that in the outer column, and they told us the sales was 102 ah in during the first quarter. If it began the quarter with 18 2 of inventory at a cost of 72 2 I'm going to calculate the cost of goods sold now, and that usually starts off with the beginning inventory. And it says we began the quarter with 18 to in inventories of 18 200 inventory. And then we purchased, so purchased, Ah, 72 200. So 72,200 of inventory was purchased, and then we should usually subtract ending inventory ending inventory would then be subtracted. And of course, that is the unknown. That's what we do not know yet. So I'm gonna say Indian inventory is yellow. You can make it an X or something like that in an inventory abbreviated in some way. If you're writing this down, so then I'm gonna indent this. I'm gonna indent this, and that would usually give us the cost of goods sold, which we would put in the outer column up here. But of course we can't calculate it because we don't know this number, So we need to get that number that's an unknown to us at this point, and that would give us the gross profit so the gross profit then would be here, which would be sales minus cost of goods sold. That's how we calculate grills profit again. We don't know it. We're going to back into all those numbers with this one added piece of information that was given, which was this 30% average gross profit. Now, I usually put this number this 30% next to the gross profit here and so will put 300.3 30% is 300.3. If you move the decimal two places to the left, I'm gonna go the hometown. I'm gonna go the numbers group gonna make that a percentage like so. And you might be asking, why do you put it there? And that's because the calculation is generally gross profit divided by sales. So we want the gross profit percent I'm gonna put it appeared Roast profit, her scent that's going to equal the gross profits divided all to enter, divided by sales growth, profit divided by sales. I'm gonna go ahead and center that here. I'm going to go ahead underlining. That's our ratio that we will be using. And we could put an equal sign here. So we're gonna say this equals that. Okay, so then if we plug in our numbers. Then, of course, we've got 0.3. Is the gross profit percent gonna go the home tab Numbers, percent ties that and that equals this gross profit. We don't know what the gross profit is that the ex cult enter over the sales, which we do know of 102 1000. So we have that and I'm gonna go ahead and center that I'm gonna go ahead and underlined this and we get so for the GP growth profit kind of like we solve for X Now, you might do this a bit at some other ways, the more intuitively ways we can kind of think about that. We could say that's okay. So if this 30% is this number which is the unknown divided by that, then it's either going to be a division problem or a multiplication problem to figure this number out. And in this case, it's gonna be a multiplication number. We're gonna say it's going to be, uh, this number times 30%. Well, give us there's 30,006 and then we can. Then we can figure out and check if that is the case, because then we can do our calculation and say All right, well, does 30,006 divided by the 10 2000? Does that equal 30% or 300.3? It does. So then we've kind of checked our work there, and that works. Then we come back into this number a couple different ways. We could say, All right, I know that this number minus this number equals that number. And if we wrote that out algebraic way, it would be 10 2000 minus X equals the 30,006. And we could solve for X and say, OK, well, then X, I could have put that on both sides, and that equals I'm gonna I'm gonna flip the sign right now by saying one of Wallace to 30,006 minus 102 and that'll give us this 74. And I got a flip the sign because this would really be negative, X and negative, Whatever. 71 4 So I could say X then equals 71 4 positive. And that's what then this number would be 71 4 And so we have that. And then we could test that again. Of course, we contest that we're gonna be alright. Does that work? We're gonna say 10 2000 minus 71 4 gives us gross profit of 30,006. Now, some a lot of books will actually back this in a different way, They'll say, Well, if that's 30% then the girls profit has got to be the other piece of it. Which is gonna be, of course, 100% 1 minus 10.3 or let's go home tab numbers and 70% so we could calculate it. That way we could say, OK, well, then this has got to be the 10 2000 times 70% and that's another way you can look at it. And then we got back into this number here. So I'm gonna I'm gonna delete some of this and give us some space, and we're going to say All right, so we know that this plus this minus this equals that. So if we wrote that out algebraic, it would look like this. Not with a percent there. No percentage there. Okay, We're gonna say 18 to plus 72 to minus the unknown of X is going to equal. I'm gonna pull this over on the whole, this whole thing over here and that's going to equal the, uh, 71 4 and we could solve that outbreak. Lee, we could say, Alright, this equals a 72 to plus 18 to minus X equals 71 4 And then if we solve for X, we would say ex then is going to equal this equals the 71 4 minus the 90,004. And of course, this is really negative. X So it's really X. I can flip the sign by multiplying both sides, and that would be that now, Now again, you might do it more intuitively, you might say, OK, well, if this plus this minus this equals that, then I can kind of add those up. That's one number. It's 90,004. So it's that one number minus this equals that. So you might say then, Well, how about I take some of these two and then minus this number? It's got to be addition or subtraction, and then you could double check your number. You're going to say, and that obviously I got the same number here, but then you could double check your number with the trustee calculated with the normal calculation. 18 to bless 72 Tu minus the 19. Does that give us 71 4? It does so know what we have to do is often the case with the smaller kind of problems with these multiple choice type problem. We had to back into the numbers to get to hear when normally we would add, we would do it this way. Get that formula. So in order to do these, you need to memorize costs, get sold formula beginning, beginning inventory plus purchase of my Indian inventory. And, of course, we need to know the sale. The growth profit that's gonna be sales minus crosscut sold gives us the growth profit. And we need to know the growth profit percent, which is going to be gross profit, divided by sales.