Chapter 05 – Inventories and Cost of Sales
Chapter Outline
Notes
1. Subtract sales (general ledger amount) from goods available
measured at retail price (retail data in supplementary records)
to get ending inventory at retail.
2. Find cost ratio by dividing total of goods available at cost by
total of goods available at retail.
3. Apply cost ratio to ending inventory at retail to convert to
ending inventory at cost.
Note: The cost ratio is also used to convert a physical inventory
taken using retail price to cost. Shrinkage can be measured by
comparing converted to estimated inventory.
B. Gross Profit Method
The gross profit method estimates the cost of ending inventory
by applying the gross profit ratio to net sales (at retail). This type
of estimate is often used for insurance claims when inventory is
destroyed, lost or stolen. Steps include:
1. Determine the normal gross profit percentage from recent
years.
2. Find the cost of goods percentage (100% less gross profit
percentage).
3. Multiply actual sales by the cost of goods sold percentage to
get estimated cost of goods sold.
4. Subtract estimated cost of goods sold from the actual amount
of cost of goods available for sale to get estimated ending
inventory at cost.
Chapter 05 – Inventories and Cost of Sales
VISUAL #5-1
Schedule of Cost of Goods Available
Units Cost Total
Jan. 1 Beginning Inventory 60 @ $10 = $ 600
Mar. 27 Purchase 90 @ 11 = 990
Aug. 15 Purchase 100 @ 13 = 1,300
Methods of Assigning Cost to Units in Ending Inventory
(1) Specific Identification – requires that each item in an inventory be
a website, in whole or part. 5-12
Chapter 05 – Inventories and Cost of Sales
a website, in whole or part. 5-13
Solution: Chapter 5 – Alternate Demonstration Problem #1
1.
FIFO Perpetual
Date
Purchases
Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $20 = $100
1/5
2 @ $20 = $ 40
3 @ $20 = $ 60
1/11
9 @ 12=$108
3 @ $20 = $ 60
9 @ $12 = 108
$168
1/28
3 @ $20 = $ 60
4 @ $12 = 48
$108
5 @ $12 = $ 60
Ending Inventory
Total CGS
$ 40 + 108 = $148
2.
LIFO Perpetual
Date
Purchases
Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $ 20 = $100
1/5
2 @ $20 = $ 40
3 @ $20 = 60
1/11
9 @ $12=$108
3 @ $20 = $ 60
9 @ $12 = 108
$168
1/18
7 @ $12 = $ 84
3 @ $20 = $ 60
2 @ $12 = 24
$ 84
Ending Inventory
Total CGS
$40 + 84 = $124
Chapter 05 – Inventories and Cost of Sales
Solution: Chapter 5 – Alternate Demonstration Problem #1, continued
3.
Weighted Average Perpetual
Date
Purchases
Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $20 = $100
1/5
2 @ $20 = $ 40
3 @ $20 = $ 60
1/11
9 @ 12=$108
3 @ $20 = $ 60
9 @ $12 = 108
$168
$168/12 = $ 14
CPU
1/18
7 @ $14 = $ 98
5 @ $14 = $ 70
Ending Inventory
Total CGS
$ 40 + 94 = $138
4.
Specific Identification Perpetual
Date
Purchases
Sales at Cost
Inventory
Balance
1/1
Beginning
Inventory
5 @ $ 20 = $100
Z1–Z5
1/5
2 @ $20 = $ 40
Z2, Z5
3 @ $20 = $ 60
Z1, Z3, Z4
1/11
9 @ $12=$108
Z6–Z14
3 @ $20 = $ 60
Z1, Z3, Z4
9 @ $12 = 108
Z6–Z14
$168
1/18
Z1, Z3
2 @ $20 = $ 40
Z6, Z7, Z8, Z9,
Z14
5 @ $12 = $ 60
$ 100
1 @ $20 = $ 20
Z4
4 @ $12 = 48
Z10–13
$ 68
Ending Inventory
Total CGS
$40 + 100 = $140
Chapter 05 – Inventories and Cost of Sales
Chapter 5 – Alternate Demonstration Problem #2
The ABC Company had the following inventory record for the month of
January:
# of
Unit
Date
Description
Items
Price
Item
1/1
Beginning
inventory
5
$20
Z1, Z2, Z3, Z4, Z5
1/5
Sale
2
Z2, Z5
1/11
Purchase
9
12
Z6, Z7, Z8, Z9, Z10, Z11,
Z12, Z13, Z14
1/28
Sale
7
Z1, Z3, Z6, Z7, Z8, Z9, Z14
Required:
Assuming a periodic system is in use, determine the following:
1. Cost of goods available for sale.
2. Cost of goods sold and the ending inventory using each of the
following methods:
a. FIFO
b. LIFO
c. Weighted Average
d. Specific Identification
Chapter 05 – Inventories and Cost of Sales
a website, in whole or part. 5-16
Solution: Chapter 5 – Alternate Demonstration Problem #2
1. Cost of goods available for sale:
Date
Units
Unit Cost
Cost
1/1
Beginning
inventory
5
$20
$100
1/11
Purchase
9
12
108
Total goods available for sale
14
$208
2. a. FIFO Periodic (FIFO under periodic and perpetual yields identical
results).
Total goods available for sale
$208
Ending inventory
1/28
Purchase
5
$12
$60
Cost of goods sold
$148
Total goods available for sale
$208
Ending inventory
1/1
Beginning
inventory
5
$20
$100
Cost of goods sold
$108
c. Weighted Average Periodic:
Units
Unit cost
Total cost
5
$20
$100
9
12
108
14
$208
Total cost of 14units available for sale
$208
Less ending inventory priced on a weighted average cost basis:
5 units at $14.86
74
Cost of goods sold
$134