Chapter 16
Inventory
Student Performance Objectives:
Section I Inventory Valuation
16-1 Pricing Inventory by Using the First-In, First-Out (FIFO) Method
Section II Inventory Estimation
16-5 Estimating the Value of Ending Inventory by Using the Retail Method
Section III Inventory Turnover and Targets
16-7 Calculating Inventory Turnover Rate at Retail
Chapter Notes, Teaching Tips and Lecture Launchers
• Spotlight: This is a good time to remind students that the business math course is designed
not only to teach mathematical procedures but also the underlying “business sense” of the
various topics.
• They should keep in mind they are not just learning math, but being trained to
• Lecture Launcher: Ask students, “If you worked in a shoe store and were instructed by the
manager to ‘take inventory,’ what exactly would you do?” Most will answer, “Count all the
boxes.”
• Point out that today, more and more companies use computers to keep track of
merchandise inventory on a continuous or perpetual basis. This is known as a
• Spotlight: The Collaborative Learning Activity at the end of the chapter, “The
Counting Game!,” will give students a chance to speak with accounting and
Section I Inventory Valuation
• Be sure students realize that the method used to put a dollar value on inventory is
mainly for accounting and income tax purposes and does not necessarily coincide
with the actual way in which the inventory is sold.
disclosed in the company’s financial reports.
• Collaborative Learning Activity: To reinforce learning of the inventory valuation
methods, have students work Try-It Exercises 1, 2, and 3 in teams of two’s.
• Homework Assignment: Ask students to devise methods of keeping inventory
records of their assets such as DVDs, music CDs, electronic equipment, photographs,
or other collectible items.
• Ask students to list items that lend themselves to the “specific identification” method
of valuation.
• Typical responses should include expensive items, such as cars, motorcycles,
and boats.
• Spotlight: Be sure students can differentiate between FIFO and LIFO, and know
• Ask students to define the word average. This is a good opener for a discussion on
the average cost method.
• Classroom Activity: When covering the Lower of Cost or Market method, ask
students to list categories of goods whose current market value might be lower than
Section II Inventory Estimation
• Spotlight: Have students keep in mind that inventory estimation methods can be
calculated without actual “physical counts” of the merchandise.
• Spotlight: It should be emphasized, for estimation to be accurate, the markup rate for
all items in that inventory must be the same. If they are not, the estimates should be
• Point out that the retail method of inventory estimation is used by retail stores and the
gross profit method is commonly used by manufacturers and wholesale businesses.
• Be sure students understand that the cost ratio compares the goods available for sale
at cost and retail. It represents the “cost” of each dollar of retail sales.
Section III Inventory Turnover and Targets
• Spotlight: Remind students that inventory turnover was one of the financial ratios
discussed in Chapter 15. It is an important business indicator, particularly when
compared with the turnover rate from previous operating periods and with published
• Spotlight: Target inventories, a concept unique to Contemporary Mathematics for
Business and Consumers, is important for merchandise managers to apply when their
company’s turnover rate is below average compared with firms of similar size in their
industry.
• Remind students:
• Collaborative Learning Activity: In groups of two, have students go to the library to
research the inventory turnover rates for various types of businesses. This
Questions Students Always Ask
“Why would a business choose FIFO over LIFO, or vice versa?”
• When prices are rising, the FIFO method of inventory valuation more
accurately reflects the value of a company’s inventory, whereas the LIFO
“What kind of business could use the weighted average cost method?”
• A business whose products are similar in cost where costs fluctuate little over
“How can I compare a company that uses FIFO with one that uses LIFO?”
• Companies that use the LIFO method of valuing inventories must state in a