PRI

NCI
PLESOFACCOUNTI
NGI
I
Chapt
er1
Account
ingf
orMer
chandi
singI
nvent
ori
es

1.
1Inv
ent
ori
es
Merchandi seI nventoryisi t
emsorc ommod i
tiesh eldf orresalet ocu stomers
i
ntheor dinaryc ourseoft heb us i
ne ss.
I nMe rc handisingEn terpri
se ,
The seitemsh avetwoc ommonc ha r
a ct
e r
istics:
1.Th eya reown e db ythec omp a ny,and
2.Th eya reinaf ormr e adyfors aletoc u st
ome rs.
I nMa n uf
a ctur
ingEn terprise,
Arec l
a ssif
iedint othree :
1 .Fini
s hedGoodsI nven t
ory:c ons i
stsofc omp l
etedp rodu ctsready
forsa l
e.Th i
sinv entoryiss i
mi l
a rt
ome r
ch and i
seinven t
ory.
2 .Wor kI nProc ess( Goodsi npr ocess) :con sist
sofp roductsi nthe
proce ssofb eingma nufactur
e db utn otye tcomp l
eted.
3 .Ra wMa ter
ialsInv entory:ref
e rstot heg ood sac omp anya cqui
res
tous einma ki
ngp r
od ucts.
I nt hisc our sewewi l
lf ocusont heac count i
ngpr i
ncipl
esandc oncepts
ofmer chandiseinv entory.
INVENTORYSYSTEMS
Therearet woi nv ent
orya ccou nti
n gs y
ste msu sedt oc oll
ectinforma ti
ona bout
costofg ood ss oldan dcos tofi nventoryonh and .Th etwos ystemsa rec al
led
Per
iodica ndPe rpetual
.

1.
2Per
iodi
cInvent
orySy
s t
em
Ap er
iodicinventor
ysystemrequi
resupd at
ingth ei
nvent
oryaccounton l
yat
theendofap eriodtoref
lectt
hequant
it
ya ndc ostofbot
hg oodsonh andand
goodss ol
d.Itdoe snotrequi
recont
inualupda t
ingoftheinvent
oryaccount
.
Thecomp anyrec or
dsthecostofnewme rchandiseinatemporarypur
chases
account
.

Wh en me rchandi
sei ss old,r evenuei sr ecordedb utth ec ost of the
me rchandi
sesoldisn otye trecordeda sac ost.Whe nfinanci
als t
a t
eme nt
sa re
prepared,thecomp an ytak esap hysi
c alcountofi nventorybyc ount
ingt he
quantit
ies ofme rchan di
se on h and,a tt hee nd oft hep e r
iod.Cos tof
me rchandi
seonh andi sd et
er minedb yr el
ati
n gth equ anti
ti
e sonh andt o
recordsshowinge achitem’sor i
g i
nalcost.Thec ostofme rchand i
s eonh andis
thenu sedtocomp utecos tofg oodss old.Theinventoryaccoun tisadjust
edt o
ref
lecttheamou ntcomp ute dfrom thep hysi
calcoun tofinvent
or y.

Periodicsyst
emswe rehi
stori
cal
lyusedbyc ompaniessucha shardware,
d r
ug,
andd epar
tmen tstor
esthatsoldlargequanti
ti
esofl ow-val
ueitems.Without
today’scomp uter
sa ndscanners,
itwasnotfeasi
bleforaccounti
ngs y
stemst o
tracks uchs ma llit
ems a sp encil
s,toot
h past
e,p aperc l
ips,socks,a nd
Toot hpi
cksthroughinvent
oryandintocust
ome rs’hands.
1.
3Per
pet
ualI
nvent
orySy
s t
em
Ap er
petualinvent
orys y
stem keepsac ontinualr
ecor
d oft heamou ntof
i
nvent
ory on h and.A p er
p et
uals yst
em a ccumul
atest hen etc ost of
merchandi
sep ur
c hasesintheinvent
orya ccountands ubt
ract
sthec ostof
eachsal
ef r
om thes ameinvent
oryaccount.Wh enanitemi ssol
d,it
sc ostis
r
ecordedinaCos tofGoodsSoldaccount.

Wit
hap erpetualsyst
em wecanfindoutthecostofme r
chandi
seonh andat
anyti
meb ylookingatthebal
anceoftheinvent
oryaccount
.Wec anal
sofind
outthecurr
e ntbalanceofcostofg oodssolda nyt
imeduri
ngap eri
odb y
l
ookingi
ntheCos tofGoodsSoldaccount
.

Underap er
pe t
ualsyst
em,thecostofeachi t
emisd ebi
tedtot heMer
cha ndise
I
n v
e nt
orya ccountwhenp ur
chased.Atthet i
meofs ale,t
hec ostofeachit
e m
i
st r
a nsf
e r
redf r
om theMe r
chandi
s einvent
oryaccounttot heCostofGood s
soldac count.Thus,theCostofGood sSolda ccountata l
ltimesequalst he
costofme rchandi
ses ol
dd ur
ingt heperi
od,andt heMe rchandi
seinventory
accounta tal
l t
imesequal
sthec ostofmerchandi
seonh an d.

MERCHANDI
ZEI
NVENTORYQUANTI
TIESANDCOSTS
2.
1Det
ermi
ningI
nvent
oryQuant
it
ies
I
n orde rtopreparefinanci
alstateme nt
,itisn ecessar
yt od et
ermi
net h e
numb erofuni
tsofinvent
oryown edb yt
hec ompanyatthes t
atementdat
e. For
ma nycomp ani
es,det
ermininginventor
yqu ant
it
iesconsist
soft wosteps;(1)
taki
ngap hysicali
nventory ofg oods on hand,and( 2)d eter
mini
ngt h e
own er
shipofgoods.

2.
1.1Taki
ngaPhysi
calI
nvent
ory
Taki
ngaphysi
cali
nvent
oryi
nvol
vesact
ual
lycount
ing,wei
ghi
ng,ormeasur
ing
eachki
ndofi
nvent
oryonhand.

Tomi ni
mi zeerrorsi ntakingthei nvent
ory,ac omp anys houlda dher
et ot he
fol
l
owingI nt
ernalCon t
rolPri
nc i
plesbya dopti
ngc er
tai
np rocedures:
1.Thec ou nt
ings h oul
db edon eb ye mp l
oyeeswh od on oth avec ustodi
al
responsibi
li
tyfort heinvent
ory.(Segregati
onofDu ti
es )
2.Eachc ountersh oulde st
ablishthea uthent
ici
ty/
accu racyofe achinven t
ory
it
em, e.g.
,eachb oxd oescon t
aina2 5-i
ncht el
evi
sions etande achs torage
tankdoe scon t
aing asoli
ne.( Es t
abli
shme ntofRes ponsibi
li
ty)
3.Thereshou l
db eas econdc ountbya notheremp l
oyee. (
IndependentI
n ter
nal
Veri
ficat
ion)
4.Prenumb eredin ventorytagss houldbeu sed,anda l
linventorytagss hould
bea ccountedfor. (
Doc umen t
ati
onPr ocedures)

2
 2.
1.2Deter
mi ni
ngOwn er
shipofGoods
Bef
orewec anb egint
oc al
culat
ethecostofi
nvent
ory,
wen eedtocon si
derthe
owner
shipofg oods:speci
fi
call
y,weneedtobesurethatweh avenoti
ncluded
i
ntheinvent
orya nygoodsthatdonotbel
ongtothecomp any.

 GoodsI nTr ansi

t
Goodsarec onsi
deredtob eintransi
twh entheyareinthehandsofap ubl
ic
car
ri
er,suchasar ail
road,t
rucki
ng,orair
li
nec ompanyatthestat
eme ntdat
e.
Goodsintransi
tshouldbeincl
ud edintheinvent
oryofthepar
tythathasl
egal
t
it
letothegoods.

 Legal
tit
lei
sdet
ermi
nedbyt
het
ermsofsal
e,asshownbel
ow:
1.Wh ent
het er
msa r
eF OB( FreeOnBoa rd)shi
ppingpoi
nt,ownershi
poft he
goodspa ssestotheb uyerwh enthepubl
iccar
ri
eraccept
st hegoodsfrom
thesel
ler.
2.Wh ent
het er
msa r
eF OBDe sti
nati
on,l
egalt
it
letothegoodsr emainswith
thesel
lerunti
lthegoodsre achthebuyer
.

Signi
fi
canter
rorsmayoccuri
nd et
ermi
ningi
nvent
oryquant
it
iesi
fgoodsi
n
tr
ansitatt
hestat
ementdat
ear
eignor
ed.
Assume,forexampl e,thatHargroveCompanyhas20, 000uni tsofinventory
onhandonDec ember31andt hefoll
owinggoodsintrans i
t:
(1)Sal
esof1 ,500u ni
tsshippedDe cember31FOBd es t
inati
on,and
(2)Pur
c hasesof2 ,
500u ni
tss hi
ppedF OBs hi
ppi
ngp ointbythes el
leron
Decemb er31.
 Ha rgroveh aslegaltit
letob oththeun i
tss olda ndtheu n i
ts
pur
c hased. Con sequent
ly,invent
ory qu a nt
it
ies wou l
d b e
understat
edb y4,000u ni
ts(1,
500+2 ,
500 )ifunit
sintransi
ta re
i
gnore d.

 Con signedGoods
I
ns ome l i
ne s ofb usi
n ess,itisc ustoma ryt oa cquir
e me r
ch andi
se on
consignme nt.Un derac onsi
gnme ntarrangeme nt,theh ol
deroft heg oods
(
c al
ledth econ si
gnee)d oesn otownth eg oods.Own ershipremainswitht he
shipperoftheg oods(ca l
ledtheconsignor)un t
ilt
heg oodsa r
ea ct
uall
ys oldto
ac ust
ome r
.Be causecon signedgoodsa ren otown edb ytheconsignee, t
hey
shouldnotb eincludedint heconsi
gnee’
sp h y
s i
calinvent
orycount.Conversely,
t
h econ si
gnors houldincl
u deme r
chandi
s eh el
db ythec onsi
gneea spartofi t
s
i
nventory.

2.
2Invent
oryCost
ing
Wit
har eli
abl
ep hysi
calcountoft
heinvent
ory(consi
der
ingbot
hg oodsin
t
ransi
tandc onsi
gnedg oods)
,we ar
en ow readytoa ssi
gncost
st othe
i
nvent
ory
.

3
 2.
2.1Deter
miningInventori
ableCost
Al
lexpendi
tur
esn ecessarytoa cqui
reth egood sandtoma ket
hemr
eadyfor
sal
eareincl
udeda sinventor
iabl
ec osts.Invent
ori
ablecost
smayber
egarded
asapoolofcoststhatconsissoft
t woe le ments:
(1)Thecostoftheb egi
nninginventory
,and
(2)Thecostofgood spurchaseddu ri
ngthey ear
.

Thesum ofthesetwoe l
ement
sequ al
sthecostofgoodsavai
labl
eforsal
e.
Thei
ndi
vi
d uali
temsincl
udedi
ncostofgoodspur
chasedar
eshownb el
ow

It
e m Ac cou ntTi t
le EffectonI n vent
or i
ableCos t
I
nv oicePrice Pur chases Incr
ease
FreightChar gesPai dbyPur chaser Freight -
in I
ncrease
PurchaseDi scountsTakenbyPur chaserPur chaseDi scount s Decrease
PurchaseRet urnsandAl l
owances Pur chaseRet urns&
AllowanceGr anted Decr ease
byt heSel l
er
2.2.2Allocat i
ngInv entoriableCost s
 Toi l
lustr
ate,assumet hatGener alSuppl iersInc.hasacostofgoodsav ai
lablefor
saleofBr 120,000,basedonabegi nni ngi nvent oryofBr20,000andcostofgoods
pur chasedofBr 100,000.Thephy sicali nventoryi ndi
catest hat5,000uni t
sar eon
hand.Thecost sappl i
cabl etot heuni t
sar eBr 3.00peruni t.Theal l
ocati
onoft he
poolofcost si sshownbel ow.Asshown,t heBr 120,000ofgoodsav ai
labl
ef orsale
isal l
ocatedBr 15,000t oendi nginv entor yandBr 105,000tocostofgoodssol d.
Poolofcost s
CostofGoodsAv ail
ableForSal e
BeginningI nventory Br 20, 000
CostofgoodsPur chased 100,000
CostofGoodsAv ail
abl eForSal e Br 120, 000

St
ep1 St
ep2
Endi
ngInv
ent
ory CostofGoodssold
CostofGoodsavai
labl
efor
Unit Tot
al sal
e Br120,
000
Uni
ts Cost Cost Less:Endi
ngInv
entor
y 15,
000
5,
000 Br3.
00 Br
15,
000 CostofGoodssold Br105,
000

Assi
gni
ngCost
sofI
nvent
ory
I
nvent
oryCost
ingMet
hodsunderaPer
iodi
cinvent
orySy
s t
em
Usi
ngActualPhysi
calFl
owCos ti
ng–Spe cif
icIdent
if
icati
on
Thi
sme thodtrackstheact
u alphysi
calfl
ow oft hegood s.Eachitem of
i
nvent
oryi
sma rked,t
agged,orcodedwithit
s“specif
ic’uni
tcost
. I
temss t
il
l

4
 i
ninventorya tthee ndoft hey earar
es pecifi
cal
lyc ostedtoa rr
ivea tt
he
t
otalcostofthee ndi
ngin v
e nt
ory.
 Assume ,fore xample,thatSou t
hlandMu sicComp anyp ur
chase sthr
ee
46-
inchtelevisi
ons et
sa tcos t
sofBr 700,Br750,andBr 800,respect
ivel
y.
Duringthey ear
,twos etsares ol
da tBr1,200e ach.AtDe cemb er31,t
he
comp anyd et
e r
minest hattheBr750s eti
ss ti
llonh and.Accordi
n gl
y,t
he
endinginventor
yisBr7 50andt hecostofg oodssoldisBr 1,500(Br700+
Br800).

Specifi
cidentif
icat
ionisp ossibl
ewh enac omp anys el
lsali
mitedva r
iet
yof
hi
g h-
un i
tcostitemst hatc anbec l
earl
yidenti
fiedfr
om theti
meofp urchase
thr
oug ht het i
me ofs ale.Examp l
es ofs uchc omp ani
esarea utomob i
le
dealershi
ps( car
s,trucks,andv ans)
,mu si
cs tores(pi
anosandorgan s)
,a nd
anti
qu eshops( t
ablesan dc abi
nets)
.Underthi
sme t
hod ,t
heendi
ngin v
e nt
ory
i
sr eport
eda tactualcostandthea ct
ualcostofgoodss ol
dismatcheda gai
nst
sal
esr evenue.

3.1.2Us i
ngAs sume dCos tFlowMe t
hods
Be causes peci
ficidenti
ficati
oni softenimp r
acti
cal,otherc ostflow methods
area l
lowe d.Thesed i
fferfrom specif
icident
ifi
cati
oninth attheyas sumeflows
ofc oststhatma yb eu nrelat
e dtothep hysi
calfl
owofg ood s.Fort hi
sreason
wec allthema ssume dc ostflowme t
hodsorc ostfl
owa ssu mp t
ions.Theya r
e:
1.Fi
rst-i
n,fi
rst-
out( FI
FO).
2.Last-i
n,f
irst
-out( LI
FO).
3.Averagec ost.
 Toi ll
ustrat
et hesethreein vent
orycos tf
lowme t
h ods,wewi llassumet hat
RIF T Vall
eyEl ectr
on i
csu sesap er
iodi
ci nventorysy stem a ndh asthe
informa t
ionsh ownb el
owf orit
sZ2 02Astorcond enser
.
RI
FTVALLEYELECTRONICS
Z202Astr
oCondenser
s

Date Explanat
ion Uni
ts Uni
tCost TotalCost
1/1 Beginni
nginvent
ory 100 Br
10 Br1,
000
4/15 Purchase 200 11 2,
200
8/24 Purchase 300 12 3,
600
11/27 Purchase 400 13 5,
200
Total 1,
000 Br12,000
Dur
ingt
hey
ear
,550uni
tswer
esol
dand450uni
tsar
eonhandatDecember
31.
 F ir
st-I
n,Fir
st-Out(FIFO)
TheF I
FOMe t
h oda ssume sthatthee arl
iestgoodsp ur
c hasedareth efi
rstto
besold.FIFOof t
enp aral
lel
sth eactual physi
calfl
owofme rchandi
seb ecause
i
tge ner
all
yisg oodb usi
nessp ract
icet oselltheoldestunit
sf i
rst
.Un derthe
FI
FOme thod,t
h er
e f
ore,thecos t
soft hee arl
iestgoodp ur
chaseda rethefir
st
tober ecognizedc ostofg ood ss ol
d .Thea ll
ocati
onoft hecostofg ood s
avai
labl
eforsalea tRIFTVa l
l
e yElectr
on i
csu nderFI
FOiss hownb el
ow:

5
 Poolofcost
s
Cost of Goods
Avai
labl
eforSal
e
Uni
t Total
Dat
e Explanati
on Uni
ts Cost Cost
Beginning
1/1 Inventory 100 Br10 Br1,
000
4/15 Purchase 200 11 2,
200
8/24 Purchase 300 12 3,
600
11/27 Purchase 400 13 5,
200
Total 1,
000 Br12,
000
Step1 St
ep2
EndingInvent
ory CostofGoodssol
d
Unit Tot
al
Unit
Dat
e s Cost Cost
CostofGoodsAv ail
abl
eFor
11/27 400 Br13 Br5,200 Sale Br12,
000
8/24 50 12 600 Less: EndingInventory 5,
800
Total 450 Br5,800 CostofGoodsSol d Br6,200
Not etha ttheen din gin ventoryisb as edont h el ate stun i
tsp urch ased.Thatis,
thec ostoft hee nd ingi nventoryisob t
aine db yt a kingt heu nitcos tofthemos t
recentp ur
chas ea n dwor ki
n gb a ckwa r
du ntila llu nitsofi nve ntoryhaveb ee n
cos t
ed .
Wec anv er
if
yt hea ccu r
a cyoft h ec ostofg ood ss oldb yrec ogn i
zingthatth e
fi
rstu nitsacquireda reth efirstu ni
tss old.Th ec omp ut
a t
ionsf ort he550u nits
solda res hownb elow:
Date Uni t
s Uni
tCost Tot alCost
1/1 100 x Br10 = Br1,000
4/15 200 x 11 = 2,200
8/24 250 x 12 = 3,000
Total 550 = Br 6, 200
 Not ethate n dingi n v
e ntoryofBr 5,80 0a n dt h ec ostofg oodss oldof
Br6,200e qua lsc ostofg ood sa vailablef ors a leBr.12 ,000
 L as t
-In,Fi
rst-Ou t(LIF O)
TheL I
FOme t
hoda ssume st ha tthel at
e stg ood sp u r
c haseda r
et hefir
s ttob e
sold.L I
F Os el
dom c oin cideswi thth ea ctua lp hy sicalflow ofi nv ent
ory.Un der
theL IFOme thod ,thec ostsoft hela t
e stg ood sp u rchase da ret hefir
sttob e
recog ni
z edasc os tofg ood ss old.Th ea l
loca ti
onofg oodsa v ai
la bl
efors al
ea t
RIFTVa ll
eyElectron icsu nde rLIFOi ss hownb e low:
PoolofCosts
CostofGoods
Avail
ableForSal
e
Uni
t Total
Dat
e Expl
anat
ion Uni
ts Cos Cost

6
 t
Begi
nni
ng
1/1 I
nvent
ory 100 Br10 Br 1,
000
4/15 Purchase 200 11 2,
200
8/24 Purchase 300 12 3,
600
11/27 Purchase 400 13 5,
200
Tot
al 1,
000 Br 12,
000

Step1 St
ep2
Ending
I
nv ent
ory CostofGoodssol
d
Unit Total
Dat
e Uni
ts Cost Cost
CostofGoodsav
ail
abl
efor
1/
1 100 Br10 Br 1,
000 sal
e Br12,
000
4/
15 200 11 2,
200 Less:Endi
ngI
nvent
ory 5,000
8/
24 150 12 1,
800 CostofGoodssol
d Br7,000
Tot
al450 5,
000

UndertheLIFOme t
hod,t
hec ostoftheendinginvent
oryisobtai
nedbytaki
ng
theunitcostoftheear
li
estgood savai
labl
ef orsal
ea ndworki
ngforwar
du nt
il
al
l uni
tsofi
n vent
oryar
ec ost
e d.Asaresult
,thefi
rstcost
sa ssi
gnedtoendi
ng
i
nven t
oryar
ec ostsoft
heb egi
nningi
nventory.

 Pr
oofoft
hecost
sal
l
ocat
edt
ocostofgoodssol
disshowni
nbel
ow:
Dat e Unit
s Uni
tCost Tot
al Cost
11/ 27 400 x Br13 = Br5,200
8/24 150 x 12 = 1,
800
Total 550 = Br7,000

Notethatthecostofthelastgoodsini sthef
ir
sttobeassi
gnedt ocostof
goodssold.Underap er
iodici
nventor
ys yst
em,whichweareu si
nghere,al
l
goodspurchasedduri
ngt heper
ioda r
ea ssumedtobeavai
labl
eforthefir
st
sal
eregardl
essofthedat
eofp ur
c hase.

 Av erageCos t
Thea veragecostme t
hod assumesthatt hegoodsa v
a i
l
a bl
efors aleare
homog eneous.Underthis met
hod,thea ll
ocat
ion ofthec ostofg oods
avai
labl
ef orsal
eisma deont heb asi
soft hewe i
ght
eda verageu ni
tcost
i
ncurred.Theformul
aa ndsamplecomp ut
ati
onofthewe ight
eda ver
ageu ni
t
costi
s:

7
=
 The weight
eda ver
ageu ni
tc ostisthena ppli
edt ot heu ni
tson handt o
det
erminethecostoft
hee ndi
nginvent
ory.Theall
ocationofthecostofgoods
avai
labl
eforsal
eatRIFTVall
eyElect
roni
csu si
nga v
e r
ag ecosti
sshownb el
ow.

PoolofCost
s
CostofGoodsAv
ail
abl
eForSal
e

Uni
t Total
Dat
e Explanati
on Uni
ts Cost Cost
Beginning
1/1 I
nvent ory 100 Br10 Br1,
000
4/15 Pur chase 200 11 2,
200
8/24 Pur chase 300 12 3,
600
11/27 Purchase 400 13 5,
200
Total 1,
000 Br12,
000

St
ep1 St
ep2
Endi
ng
I
nventor
y CostofGoodssol
d
Br
12,
00 Br
12.
0 CostofGoodsAv
ail
abl
eFor
0 ÷ 1,
000 = 0 Sal
e Br12,
000

Uni
t- Total
- Less:Endi
ngI
nvent
ory 5,
400
Uni
ts Cost Cost CostofGoodsSol
d Br6,
600
Br5,
40
450 XBr12.00 = 0
Wec anver
if
yt h ecostofgoodss ol
du nderthi
smethodbymu l
ti
ply
ingt
he
uni
tssol
dbyth ewe i
ght
edaver
a geuni
tcost(550xBr
12=Br6,600)
.
I
NVENTORYCOSTI NGMETHODSUNDERPERPETUAL
I
NVENTORYSYSTEM

Toil
lust
ratetheappl
i
c at
ionofthethr
eeas sumedcostf
low method(
FIFO)
,
aver
agec ost
,andLIFO),wewi l
luset hedateshownbelow f
ormoduleX
268l
4Ec onoRadi
osintheGlor
iousCompany

Dat
e Purchases Sal
e Balanceinuni
ts
Apr
il3 4,000@$8.00 4,000
Apr
il10 12,000@$8.80 16,000
Apr
il26 8,
000uni
ts 8,000
Apr
il29 4,000@$8.30 12,000

 Spe ci
fi
cat
ionIdent
if
icat
ionMe t
hod:
Theamountofcostsassi
gn edt
oinvent
oryandcostofgoodsol
dist
hesame
8
underper
petualandperi
odicsyst
e m whenusi
ngspeci
fi
cident
if
icat
ion.Thi
sis
becauses peci
fi
cati
on i
d ent
if
icat
ion pr
eci
selydef
ines whi
chu ni
tsa r
ei n
i
nventor
yandwh icharesol
d .

 Usi
ngCostFl
owAssumpt
ion:

F i
rst-
In,Fi
rst
-Ou t(FI
FO)
UnderFIFO,thecos tofearl
iestgoodsonh andpri
ort
oe achsal
eischangedto
costofgoods old.Therefor
e,thec ostofgoodsol
donAp ri
l26consi
stsofthe
i
temsp urchasedonAp ri
l3a ndAp ri
l10.Theinvent
oryonaF IFO method
Per
p et
ualSystemi ss hownbelow:

Dat
e Pur
chases Sal
es Bal
ance

Apr
il3 (
4,000@ $8.
00)$32,
000 (
4,000@8.
00) $32,
000
Apr
il10 (
12,
000@ $8.
80)$105,
600 (4,
000@ 8.
00)
(
12,000@$8.
80) $137,
600
Apr
il26 (
4,000@ $8.
00)
(
4,000@ $8.
80)=67,
200 (8,000@ $8.
80) $70,400
Apr
il29 (
4,000@ $8.
30)$33,
200 (
8,000@ $8.80)
(
4,000@ $8.
30) $103,
600

 Theendi
nginvent
oryint
hissi
tuat
ionis$103,
600andt
hecostofgood
sol
dis$67,
200[(
4 ,
000@$8.80)
+(4,000@$8.
00)
].

Fort
h i
spa r
ti
cul
arexample,t
her esul
tsund erFI
FOinap er
pet
ualsy
stema r
e
t
h esamea sinaperi
odi
cs ystem.Re gar
dlessofthesy
stem,t
hefi
rstcosti
n
aret
hefir
stassi
gnedtocostofgoodss ol
d .

L as tI
n,Fi
rstOu t(
LIFO)
UndertheLIFOMe thodu si
ngaPe r
pet
ualSystem,thecostoft
hemostrecent
pur
chasep r
iort
os alesi
sa l
locat
edtot
heu ni
tssol
d.
Ther
efore,t
hecos tofthegoodsonApril26consi
stent
irel
yofgoodsf
rom t
he
Apr
il10Pu r
chase.
TheEndi
ngI
nvent
oryonaLI
FOmet
hodi
scomput
edi
nthenexti
ll
ust
rat
ion.
Dat
e Pur
chase Sal
es Bal
ance
Apr
il3 (
4,000@ $8.
00)$32,
000 (
4,000@8.
00) $32,
000

(
4,[email protected])
Apr
il10 (
12,
000@ $8.
80)$105,
600 (12,
000@ $8.
80)$137,
600

Apr
il26 8,000@ $8.
80
($70,400) (
4,000@ $8.
00)

9
 (
4,000@ $8.
80) $67,
200

Apr
il29(
4,000@ $8.
30)$33,
200 (
4,000@ $8.00)
(
4,000@ $8.80) $100,
400
(
4,000@ $8.30)

Theu seofL I
FOi nPerpet
ua lSy
stem wil
lusual
lypr
oduc ecostal
locat
ionsthat
di
fferfrom usingL I
FOinap eri
odicsyst
em.InaPe r
p et
ualSystem,thelast
unit
si ncur
redp ri
ort oe achs al
ea r
ea ll
ocat
e dtoc ostofg oodss old.I
n
contr
ast,inap e r
iodi
cs yst
em,t helastuni
tsincur
redd uri
ngthep eri
oda r
e
al
locatedtocostofg oodssold.

 Av
e r
ageCost
Thea ver
agec ostme t
hodinp er
petu alinventorysystemi scal
ledthemov i
ng
aver
ageme thod.Un dert
hisme thodan ewa v
e r
agei scomp ut
eda ftereach
pur
cha se.Thea veragecos tisc omp ut
e db yd iv
idingthec ostofg oods
avai
labl
efors al
eb ytheunitsonh and. Thea veragecostisthenappliedto:(
1 )
Theun i
tssold,t
od et
ermi
net hecos tofg oods old,and(2)theremaini
n gunit
s
onh and,tod et
e r
mi nethee ndi
ngi nve nt
orya mou nt.Thea ppl
icat
ionoft he
aver
agec ostme t
h odforGlori
ousComp anyisshownb el
ow:

Dat
e Pur
chases Sal
es Bal
ance
Apr
il3 (4,000@ $8.00) $32,000 (4,000@ $8.00) $32,000
Apr
il
;10 (12,000@ $8.80)$105,
600 (16,000@ $8.60)$137,600
Apr
il26 (8,000@ $8.
60) (
8,000@ 8.60) $68, 800
(
$68,800)
Apr
il29 (
4,000@ $8.30) $33, 200 (
12,
000@ $8.
50)$102,
000

Asindicatedab ove,an ewaveragei sc omp utedea chti

meap ur
c haseisma de.
OnAp r
il10 ,after1 2,
000u ni
tsa r
ep urchasedf or$ 105,
600,at otalunitof
16,
0 00for$1 3 7,600isonh and.Th ea v
e r
ag eunitcostis$137,60 0divi
dedb y
16,
0 00,or$8 .
60 .Accordi
ngly,t
heu nitcostoft he8 ,
0 00uni
tss ol
donAp r
il26
i
ss howna t$8 .
60,an dthetotalc ostofg oodss oldis$68,800.OnAp ri
l29,
fol
lowingth epu rchaseof4 ,
000u nit
sf or$ 33,200,therear
e1 2 ,
00 0u ni
tesin
handc osti
n g$ 1 02,
000( $68,
800 +$ 33,200).Then ewa ver
agec ostis$ 8.50
($102,
00 0÷1 2,
0 00)

Fi
nanci
alSt
atementEf
fect
sofCostFl
owMet
hods

IncomeSt atementEff
ects
Tou nderst
andwh ycomp aniesmi ghtchoos eap ar
ti
c ul
arcostfl
ow me t
hod,
l
et’
se xaminethee f
fectsoft hediff
erentflow assump t
ionsonthef i
nanci
al
st
ateme nt
sofRI FTVa l
l
e yElect
roni
cs .Thec ondensedincomes t
atementsin
i
ll
ustr
a t
ionbell
owa ssumet hatRIFTVa l
leys ol
dit
s5 50u ni
tsforBr11,
500,i
ts
operat
ingexpenseswereBr2,000,anditsi
n cometaxrateis30%.

RIFTVALLEYELECTRONI
CS
CondensedI
ncomeStat
ement
s
10
 Aver
age
FI
FO LI
FO cost
Br Br Br
Sal
es 11,
500 11,
500 11,
500
Beginni
ngInv
ent
ory 1,
000 1,
000 1,
000
Purchases 11,
000 11,
000 11,
000
CostofGoodsAvai
labl
eforSal
e 12,
000 12,
000 12,
000
Endi
ngI
nvent
ory 5,
800 5,
000 5,
400
CostofGoodsSol d 6,
200 7,
000 6,
600
GrossProf
it 5,
300 4,
500 4,
900
Operat
ingExpenses 2,
000 2,
000 2,
000
I
ncomeBef oreIncomeTaxes 3,
300 2,
500 2,
900
I
ncomeTaxExpense( 30%) 990 750 870
Br Br Br
NetI
ncome 2,
310 1,
750 2,
030

I
nap eri
od ofrisi
ngp ri
ces(infl
ati
on )
,F I
FOr eport
st heh i
ghestnet
i
ncome( &2,
310)andL I
FOt hel
owe st(Br1,
750);aver
ag ecostf
all
sint
he
middl
e(Br2,
030).
I
fpri
cesa r
efal
ling,FI
FOwi l
lrepor
tthel owestnetincomea ndLIFOt
he
hi
ghest.

Ba l
an ceSh eetEffects
Ama jora dvantageoftheF IFOme thodisthati
nap eriodofin f
lat
ion,t
h ecosts
al
locatedtoe nd i
nginventorywillapprox
imatethei
rc urr
entc ost
.Con versel
y,a
ma j
orsh ort
comi ngoft heLIFOme thodisthatinaperiodofin f
lat
ion,t
h ecosts
al
locatedt oe ndinginve nt
oryma yb esigni
fi
cantl
yu nde r
statedint ermsof
curr
entc ost.
Theu nderstat
e mentb ecome sgreateroverpr
olongedp er
iodsofin f
lat
ionifthe
i
nventoryincludesg oodsp ur
c hasedinoneormor epri
ora ccounti
n gperiods.

TaxEff ect
s
Weh aves eenthatbothi
nven t
oryonthebalancesheetandnetincomeont he
i
ncomes t
ateme ntarehi
g herwhenF I
FOisu sedinap eri
odofi nfl
ati
on .Yet,
manyc omp ani
esh aveusedL I
FO.ThereasonisthatLI
FOresult
sinth elowe st
i
ncomet axed(becauseofl owern eti
ncome )
.F orexample,atRIF T Va l
l
e y
El
ectr
on i
cs,incomet axesa r
eBr 750underL I
FO,c ompar
edt oBr 990u nder
FI
FO.Th et axs avi
ngofBr 2 40ma kesmor ec ashavai
labl
ef orus eint he
busi
ness.

11