Chapter 8: Valuation of
Inventories: A Cost Basis
Approach
Prepared by
Jep Robertson and Renae Clark
New Mexico State University
Chapter 8: Valuation of
Inventories: A Cost Basis
Approach
After studying this chapter, you should be
able to:
1. Identify major classifications of
inventory.
2. Distinguish between perpetual and
periodic inventory systems.
3. Identify the effects of inventory errors on
the financial statements.
4. Identify the items that should be
included as inventory cost.
Chapter 8: Valuation of
Inventories: A Cost Basis
Approach
5. Describe and compare the flow
assumptions used in accounting for
inventories.
6. Explain the significance and use of a LIFO
reserve.
7. Explain the effect of LIFO liquidations.
8. Explain the dollar-value LIFO method.
9. Identify the major advantages and
disadvantages of LIFO.
10. Identify the reasons why a given inventory
method is selected.
Inventory Classification
Merchandising Operations
Merchandise
Inventory
Purchases C/G/Sold
Cost of goods
sold
$$$
Flow of Costs through
Manufacturing and Merchandising
Companies
Inventory Control
Given Data:
Date Purchases Cost
May 12 100 units $1,000
Aug 14 200 units $2,200
Sep 18 120 units $1,800
420 units $5,000
Steps:
1. Calculate per unit average cost: $5,000/420 = $11.905
2. Apply this per unit average cost to units sold to get COGS:
400 x $11.905 = $4,762
3. Apply the per unit average cost to units remaining in
inventory to determine Ending inventory: 20 x $11.91 = $238
First-In, First-Out (FIFO) Method
Cost of goods
available Cost of goods sold $4,700
Cost of goods
available Cost of goods sold $4,800
Given:
Base layer (Dec 31, 2003): $20,000
Inventory (current prices)
on Dec 31, 2004:
$26,400
Prices increased 20% during 2004.
Dollar value
Net increase LIFO Inventory
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