Vũ Quốc Thông (PhD.)

10/10/2020

Chapter 8

Inventories
Vũ Quốc Thông (PhD.)

Objectives
Compute the cost of inventory under the
periodic and perpetual inventory system,
using the FIFO,LIFO and Weighted
average cost methods
Compare and contrast the use of the three
inventory costing methods

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Vũ Quốc Thông (PhD.)

10/10/2020

Contents
Inventory cost flow assumptions
Periodic and perpetual inventory system
Inventory costing methods under the
periodic inventory system

Inventory costing methods under the
perpetual inventory system
Effect on P/L and B/S
Which costing method to choose from?

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Inventory cost flow assumptions
Business may buys identical units of
goods at different unit costs
 Cost flow must be assumed.
 First in, first out (FIFO)
 Last in, first out (LIFO)
 Weighted Average

E.g?

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10/10/2020

First in, first out

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Last in, first out

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10/10/2020

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Weighted Average

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Vũ Quốc Thông (PhD.)

10/10/2020

Periodic and perpetual inventory
systems
 Perpetual inventory system: Each
purchase and sale of goods is recorded in
an Inventory account.
 Periodic inventory system: Inventory is

accounted for at the end of the period.
(what types of business using…?)

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Periodic and perpetual inventory
systems
Remember !
Perpetual
inventory
system

Closing Balance = Opening
Balance + Purchase - Sale

Periodic
inventory
system

COGS = Opening Balance +
Purchase – Closing Balance

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Vũ Quốc Thông (PhD.)

10/10/2020


Inventory Costing Methods under
the perpetual inventory system
 Using one of the following cost flow
assumptions:
 FIFO;
 LIFO;
 and Weighted Average Cost method

 Also, stock card or inventory subsidiary
ledger account are used in determining the
inventory’s ending balance and value.
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Inventory Costing Methods under
the perpetual inventory system
FIFO
Example
Date

Units

1st Jan

Beginning Bal 300

2nd Jan

Sale


200

4th

Purchase

900

5th Jan

Sale

500

8th

Sale

300

Purchase

400

Jan

Jan

30th Jan


Cost per Unit
$10

$12

$14

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Vũ Quốc Thông (PhD.)

10/10/2020

Inventory Costing Methods under
the perpetual inventory system
FIFO
Ending Inventory?
 Quantity =
 Value = $

Units

COGS = $

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Inventory Costing Methods under

the perpetual inventory system
LIFO
Example
Date

Units

1st Jan

Beginning Bal 300

2nd Jan

Sale

200

4th

Purchase

900

5th Jan

Sale

500

8th


Sale

300

Purchase

400

Jan

Jan

30th Jan

Cost per Unit
$10

$12

$14

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Vũ Quốc Thông (PhD.)

10/10/2020


Inventory Costing Methods under
the perpetual inventory system
LIFO
Ending Inventory?
 Quantity =
 Value = $

Units

COGS = $

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Inventory Costing Methods under
the perpetual inventory system
Weighted Average cost method
Example
Date

Units

1st Jan

Beginning Bal 300

2nd Jan

Sale


200

4th

Purchase

900

5th Jan

Sale

500

8th

Sale

300

Purchase

400

Jan

Jan

30th Jan


Cost per Unit
$10

$12

$14

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Vũ Quốc Thông (PhD.)

10/10/2020

Inventory Costing Methods under
the perpetual inventory system
Weighted Average cost method
Ending Inventory?
 Quantity =
 Value = $

Units

COGS = $

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Inventory costing methods under

the periodic inventory system
Using one of the following cost flow
assumptions:
 FIFO;
 LIFO;
 and Weighted Average Cost method

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Vũ Quốc Thông (PhD.)

10/10/2020

Inventory Costing Methods under
the periodic inventory system
FIFO
Example:
Date

Units

Cost per Unit

1st Jan

Beginning Bal 300


$10

2nd Jan

Purchase

400

$12

5th

Purchase

600

$14

20th Jan

Purchase

200

$10

31st

Closing Bal


400

Unknown

Jan

Jan

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Inventory Costing Methods under
the periodic inventory system
Under FIFO method, the goods purchased
first are sold first. Therefore:
 Ending inventory: 400 units would comprise:
200 units
purchased on
20th Jan (@$10
per unit)

200 units
purchased on
5th Jan (@$14
per unit)
Inventory Closing
Balance = $4,800
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Vũ Quốc Thông (PhD.)

10/10/2020

Inventory Costing Methods under
the periodic inventory system
LIFO
Example:
Date

Units

Cost per Unit

1st Jan

Beginning Bal 300

$10

2nd Jan

Purchase

400

$12

5th


Purchase

600

$14

20th Jan

Purchase

200

$10

31st

Closing Bal

400

Unknown

Jan

Jan

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Inventory Costing Methods under

the periodic inventory system
Under LIFO method, the goods purchased
last are sold first. Therefore:
 Ending inventory: 400 units would comprise:
300 units of
Beginning Bal
1st Jan (@$10
per unit)

100 units
purchased on
2nd Jan (@$12
per unit)
Inventory Closing
Balance = $4,200
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Vũ Quốc Thông (PhD.)

10/10/2020

Inventory Costing Methods under
the periodic inventory system
Weighted Average cost method
Example:
Date


Units

Cost per Unit

1st Jan

Beginning Bal 300

$10

2nd Jan

Purchase

400

$12

5th

Purchase

600

$14

20th Jan

Purchase


200

$10

31st

Closing Bal

400

Unkown

Jan

Jan

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Inventory Costing Methods under
the periodic inventory system
Weighted Average unit cost =

= (3,000 + 4,800 + 8,400 + 2,000)/
(300 + 400 + 600 +200)
= $12.13
Ending inventory= 400 * 12.13 = $4,852
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Vũ Quốc Thông (PhD.)

10/10/2020

Effect on P/L and B/S
Whatever the cost method apply, it will affect
both P/L and B/S results as it impacts on:
 COGS
 Inventory ending balance

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Which costing method to choose
from?
It depends on company’s policy
LIFO is not permitted in a number of
countries
This is an accounting policy, therefore, it
requires a consistency

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Vũ Quốc Thông (PhD.)

10/10/2020


Which costing method to choose
from?
During a period of inflation or rising price,
applying FIFO would give a higher gross
profit and higher ending inventory balance
as compared with the other two methods.

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Homework for Ch.8
Problem (p.353 – 354)
Matching (p. 355, exclude: E. & F.)
Multiple choice (p. 355)
 Refer:
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