1
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventories:
Measurement
8
8-2
Inventory
Those assets that a company:
2. Has in production (work in
process) for future sale.
1. Intends to sell in the normal
course of business.
3. Uses currently in the production
of goods to be sold (raw materials).
8-3
Types of Inventories
Merchandise
Inventory
Goods acquired for
resale
Manufacturing
Inventory
•Raw Materials
•Work-in-Process
•Finished Goods
Types of InventoryTypes of Inventory
2
8-4
Inventory Cost Flows
Raw
Materials

(1) $XX
$XX (4)
Work in
Process
Finished
Goods
Cost of Good
Sold
Direct
Labor
Manufacturing
Overhead
$XX $XX (7)
$XX $XX (8)
$XX
(2) $XX $XX (5)
(3) $XX $XX (6)
(1) Raw materials purchased
(2) Direct labor incurred
(3) Manufacturing overhead incurred
(4) Raw materials used
(5) Direct labor applied
(6) Manufacturing overhead applied
(7) Work in process transferred to finished goods
(8) Finished goods sold
8-5
Learning Objective
Explain the difference between a
perpetual inventory system and a
periodic inventory system.

8-6
Inventory Methods
Perpetual
Inventory System
The inventory
account is
continuously
updated as
purchases and
sales are made.
Periodic Inventory
System
The inventory The inventory
account is account is
adjusted at the end adjusted at the end
of a reporting of a reporting
cycle.cycle.
Two accounting systems are used to record
transactions involving inventory:
3
8-7
Perpetual Inventory System
Matrix, Inc. purchases on account $600,000
of merchandise for resale to customers.
GENERAL JOURNAL
Date Description Debit Credit
Inventory
600,000
Accounts Payable 600,000
2006

Returns of inventory are credited to the inventory account.
Discounts on inventory purchases can be recorded using the
gross or net method.
8-8
Perpetual Inventory System
Matrix, Inc. sold, on account, inventory with a
retail price of $820,000 and a cost basis
of $540,000, to a customer.
GENERAL JOURNAL
Date Description Debit Credit
Accounts Receivable 820,000
Sales
Cost of Goods Sold 540,000
Inventory
820,000
540,000
2006
8-9
Periodic Cost of Goods Sold Equation
Beginning Inventory
+ Net Purchases
Cost of Goods
Available for Sale
-
Ending Inventory
= Cost of Goods Sold
4
8-10
Periodic Inventory System
Matrix, Inc. purchases on account $600,000

of merchandise for resale to customers.
GENERAL JOURNAL
Date Description Debit Credit
Purchases
600,000
Accounts Payable 600,000
2006
Returns of inventory are credited to the Purchase Returns and Purchase Returns and
AllowancesAllowances account.
Discounts on inventory purchases can be recorded using the
gross or net method.
8-11
Periodic Inventory System
Matrix, Inc. sold on account, inventory with a
retail price of $820,000 and a cost basis
of $540,000, to a customer.
GENERAL JOURNAL
Date Description Debit Credit
Accounts Receivable 820,000
Sales
820,000
2006
No entry is made to record Cost of Good Sold. Assuming Beginning
Inventory of $120,000. A physical count of Ending Inventory shows
a balance of $180,000. Let’s calculate Cost of Goods Sold at
the end of the accounting period.
8-12
Periodic Inventory System
Beginning inventory 120,000$
Plus: Purchases 600,000

Cost of goods available for sale 720,000
Less: Ending inventory (180,000)
Cost of goods sold 540,000$
Calculation of Cost of Goods Sold
Date Description Debit Credit
12/31/06 Cost of goods sold 540,000
Inventory (ending) 180,000
Inventory (beginning) 120,000
Purchases 600,000
Adjusting entry to determine Cost of Goods Sold
5
8-13
Comparison of Inventory Systems
Transaction or
Event
Periodic
Inventory
Perpetual
Inventory
Routine purchases of
various inventory items
Costs debited to
purchases account
Costs debited to
inventory account
Sale of inventory
No accounting
entries made
Debit Cost of goods
sold and credit

inventory
End-of-period
accounting entries and
related activities
Physical count of
inventory to
determine cost of
good sold
No separate
determination of cost
of goods sold
necessary
8-14
Learning Objective
Explain which physical quantities of goods
should be included in inventory.
8-15
What is Included in Inventory?
General Rule
All goods owned by the company on the inventory All goods owned by the company on the inventory
date, regardless of their location.date, regardless of their location.
Goods in Transit Goods on
Consignment
Depends on FOB
shipping terms.
6
8-16
Learning Objective
Determine the expenditures that should
be included in the cost of inventory.

8-17
Expenditures Included in Inventory
Invoice
Price
Freight
in
Purchases
Freight-in
on
Purchases
+
Purchase
Returns
Purchase
Discounts
8-18
Purchase Discounts
Date Description Debit Credit
10/5/06 Purchases 20,000
Accounts payable 20,000
10/14/06 Accounts payable 14,000
Purchase discounts 280
Cash 13,720
11/4/06 Accounts payable 6,000
Cash 6,000
10/5/06 Purchases 19,600
Accounts payable 19,600
10/14/06 Accounts payable 13,720
Cash 13,720
11/4/06 Accounts payable 5,880

Interest expense 120
Cash 6,000
Net Method
Gross Method
Discount terms
are 2/10, n/30.
$14,000
x 0.02
$ 280
Partial payment not
made within the
discount period
7
8-19
Net Method Using Perpetual and Periodic
Matrix, Inc. purchased on account $6,000 of
merchandise for resale to customers. The merchandise
was purchased subject to a cash discount of 2/10, n/30.
The company incurred $160 in freight-in on the
merchandise. Upon inspection, the company found that
$200 of merchandise was damaged and the seller
agreed to accept the merchandise return and credit the
account of the company. The inventory was sold for
$8,300 on account. Let’s look at the journal entries
under both the perpetual and periodic accounting
system assuming Matrix uses the net method to record
merchandise purchases.
8-20
Net Method Using Perpetual and Periodic
Description Debit Credit

Inventory 5,880
Accounts payable 5,880
Inventory 160
Cash 160
Accounts payable 200
Inventory 200
Accounts receivable 8,300
Sales revenue 8,300
Cost of goods sold 5,840
Inventory 5,840
Purchases 5,880
Accounts payable 5,880
Freight-in 160
Cash 160
Accounts payable 200
Purchase returns 200
Accounts receivable 8,300
Sales revenue 8,300
Periodic Inventory Method
Perpetual Inventory Method
Beginning inventory -$
Purchases 5,880$
Less: Returns (200)
Plus: Freight-in 160
Net purchases 5,840
Cost of goods available for sale 5,840
Less: Ending inventory -
Cost of goods sold 5,840$
8-21
Learning Objective

Differentiate between the specific identification,
FIFO, LIFO, and average cost methods used
to determine the cost of ending inventory and
cost of goods sold.
8
8-22
Inventory Cost Flow Methods
p
Specific cost identification
p
Average cost
p
First-in, first-out (FIFO)
p
Last-in, first-out (LIFO)
8-23
p
The specific cost of
each inventory item
must be known.
p
By selecting specific
items from inventory
at the time of sale,
income can be
manipulated.
Specific Cost Identification
p
Items are added to
inventory at cost when

they are purchased.
p
COGS for each sale is
based on the specific
cost of the item sold.
8-24
Average Cost Method
Weighted-
average
unit cost
=
Cost of
goods
available for
sale
÷
Quantity
available for
sale
Periodic average cost uses a
weighted-average unit cost:
Perpetual average cost uses a moving
average unit cost that is recomputed
each time a new purchase is made.
9
8-25
Weighted-Average Periodic System
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30

shows 600 frames in ending inventory.
Use theUse the periodic weightedweighted average method to average method to
determine:determine:
((11) Ending inventory cost.) Ending inventory cost.
((22) Cost of goods sold.) Cost of goods sold.
8-26
Weighted-Average Periodic System
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600 ?
Cost of Goods Sold 1,350 ?
8-27
Weighted-Average Periodic System
Now, we have to assign costs to ending
inventory and cost of goods sold.
Beginning Inventory
Beginning Inventory
(800 units)
Purchases
(1,150 units)
Available
for Sale

(1,950 units)
Ending Inventory
(600 units)
Goods Sold
(1,350)
$47,650 ÷ 1,950 = $24.4359 weighted-
average per unit cost
10
8-28
Weighted-Average Periodic System
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600 24.4359 14,661.54
Cost of Goods Sold 1,350 24.4359 32,988.46$
8-29
Moving-Average Perpetual System
The following schedule shows the Frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 frames in ending inventory.
Use theUse the perpetual weightedweighted average method to average method to
determine:determine:

((11) Ending inventory cost.) Ending inventory cost.
((22) Cost of goods sold.) Cost of goods sold.
8-30
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950
Ending Inventory 600
Cost of Goods Sold 1,350
Moving-Average Perpetual System
Date Sales Units
9/1 600
9/10 300
9/30 450
11
8-31
Moving-Average Perpetual System
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.000 = 13,200.00 4,400.00
Purchased Sold
8-32
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$

1-Sep 600 x 22.000 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep 300 x 23.200 = 6,960.00 4,640.00
Purchased Sold
Moving-Average Perpetual System
$11,600.00 ÷(800-600+300) = $23.200
8-33
Moving-Average Perpetual System
$27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.000 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep 300 x 23.200 = 6,960.00 4,640.00
15-Sep 250 x 25.00 = 6,250 10,890.00
21-Sep 200 x 27.00 = 5,400 16,290.00
29-Sep 400 x 28.00 = 11,200 27,490.00
30-Sep 450 x 26.181 = 11,781.45 15,708.55
Purchased Sold
12
8-34
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.000 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep 300 x 23.200 = 6,960.00 4,640.00
15-Sep 250 x 25.00 = 6,250 10,890.00
21-Sep 200 x 27.00 = 5,400 16,290.00
29-Sep 400 x 28.00 = 11,200 27,490.00
30-Sep 450 x 26.181 = 11,781.45 15,708.55

Purchased Sold
Moving-Average Perpetual System
Cost of Goods Sold in September
Sale Date Units Cost/Unit Total
9/1 600 22.000 13,200.00$
9/10 300 23.200 6,960.00
9/30 450 26.181 11,781.45
Total 1,350 31,941.45
Sum
8-35
First-In, First-Out
when goods are sold.
p
The cost of the oldest
inventory items are
charged to COGS
when goods are sold.
p
The cost of the
newest inventory
items remain in
ending inventory.
The FIFO
method
assumes that
items are sold
in the
chronological
order of their
acquisition.

8-36
First-In, First-Out
Even though the periodic
and the perpetual
approaches differ in the
timing of adjustments to
inventory . . .
. . . COGS and Ending
Inventory Cost are the
same under both
approaches.
13
8-37
FIFO - Periodic System
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 frames in ending inventory.
Use theUse the periodic FIFO method to determine:FIFO method to determine:
((11) Ending inventory cost.) Ending inventory cost.
((22) Cost of goods sold.) Cost of goods sold.
8-38
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00

Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600
Cost of Goods Sold 1,350
FIFO - Periodic System
These are the 600
most recently
acquired units.
8-39
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600
Cost of Goods Sold 1,350
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for

Sale 1,950 47,650.00$
Ending Inventory 600 16,600.00
Cost of Goods Sold 1,350
FIFO - Periodic System
14
8-40
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600 16,600.00
Cost of Goods Sold 1,350
FIFO - Periodic System
These are the first
1,350 units
acquired.
8-41
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00

9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600 16,600.00
Cost of Goods Sold 1,350
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600 16,600.00
Cost of Goods Sold 1,350 31,050.00$
FIFO - Periodic System
8-42
FIFO - Perpetual System
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 frames in ending inventory.
Use theUse the perpetual FIFO method to determine:FIFO method to determine:
((11) Ending inventory cost.) Ending inventory cost.
((22) Cost of goods sold.) Cost of goods sold.
15
8-43
FIFO - Perpetual System

Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950
Ending Inventory 600
Cost of Goods Sold 1,350
Date Sales Units
9/1 600
9/10 300
9/30 450
8-44
FIFO - Perpetual System
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
Purchased Sold
200
The ending inventory on The ending inventory on 99//1 1 consists of:consists of:
200 200 units from beginning inventory @ $units from beginning inventory @ $2222 0000
8-45
FIFO - Perpetual System
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00

3-Sep 300 x 24.00 = 7,200 11,600.00
Purchased Sold
200
The ending inventory on The ending inventory on 99//3 3 consists of:consists of:
200 200 units from beginning inventory @ $units from beginning inventory @ $2222 0000
300 300 units from the units from the 99//3 3 purchase @ $purchase @ $2424 0000
16
8-46
FIFO - Perpetual System
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (remaining from Beg. Inv) 200 x 22.00 = 4,400.00 7,200.00
(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00
Purchased Sold
200
The ending inventory on The ending inventory on 99//10 10 consists of:consists of:
200 200 units from the units from the 99//3 3 purchase @ $purchase @ $2424 0000
8-47
FIFO - Perpetual System
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (remaining from Beg. Inv) 200 x 22.00 = 4,400.00 7,200.00
(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00
15-Sep 250 x 25.00 = 6,250 11,050.00
Purchased Sold
The ending inventory on The ending inventory on 99//15 15 consists of:consists of:

200 200 units from the units from the 99//3 3 purchase @ $purchase @ $2424 0000
250 250 units from the units from the 99//15 15 purchase @ $purchase @ $2525 0000
200
8-48
FIFO - Perpetual System
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (remaining from Beg. Inv) 200 x 22.00 = 4,400.00 7,200.00
(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00
15-Sep 250 x 25.00 = 6,250 11,050.00
21-Sep 200 x 27.00 = 5,400 16,450.00
Purchased Sold
The ending inventory on The ending inventory on 99//21 21 consists of:consists of:
200 200 units from the units from the 99//3 3 purchase @ $purchase @ $2424 0000
250 250 units from the units from the 99//15 15 purchase @ $purchase @ $2525 0000
200 200 units from the units from the 99//21 21 purchase @ $purchase @ $2727 0000
200
17
8-49
FIFO - Perpetual System
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (remaining from Beg. Inv) 200 x 22.00 = 4,400.00 7,200.00
(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00
15-Sep 250 x 25.00 = 6,250 11,050.00
21-Sep 200 x 27.00 = 5,400 16,450.00

29-Sep 400 x 28.00 = 11,200 27,650.00
Purchased Sold
The ending inventory on The ending inventory on 99//29 29 consists of:consists of:
200 200 units from the units from the 99//3 3 purchase @ $purchase @ $2424 0000
250 250 units from the units from the 99//15 15 purchase @ $purchase @ $2525 0000
200 200 units from the units from the 99//21 21 purchase @ $purchase @ $2727 0000
400 400 units from the units from the 99//29 29 purchase @ $purchase @ $2828 0000
200
8-50
FIFO - Perpetual System
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (remaining from Beg. Inv) 200 x 22.00 = 4,400.00 7,200.00
(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00
15-Sep 250 x 25.00 = 6,250 11,050.00
21-Sep 200 x 27.00 = 5,400 16,450.00
29-Sep 400 x 28.00 = 11,200 27,650.00
30-Sep (remaining from 9/3 layer) 200 x 24.00 = 4,800.00 22,850.00
(from the 9/15 layer) 250 x 25.00 = 6,250.00 16,600.00
31,050.00
Purchased Sold
Cost of Goods Sold =
The ending inventory on The ending inventory on 99//30 30 consists of:consists of:
200 200 units from the units from the 99//21 21 purchase @ $purchase @ $2727 0000
400 400 units from the units from the 99//29 29 purchase @ $purchase @ $2828 0000
8-51
FIFO - Perpetual System
Date Balance

Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (remaining from Beg. Inv) 200 x 22.00 = 4,400.00 7,200.00
(from the 9/3 layer) 100 x 24.00 = 2,400.00 4,800.00
15-Sep 250 x 25.00 = 6,250 11,050.00
21-Sep 200 x 27.00 = 5,400 16,450.00
29-Sep 400 x 28.00 = 11,200 27,650.00
30-Sep (remaining from 9/3 layer) 200 x 24.00 = 4,800.00 22,850.00
(from the 9/15 layer) 250 x 25.00 = 6,250.00 16,600.00
31,050.00
Purchased Sold
Cost of Goods Sold =
Note that this is the same COGS
computed using the Periodic
approach.
18
8-52
Last-In, First-Out
Any questions
before we run into
LIFO?
8-53
Last-In, First-Out
p
The cost of the
newest inventory
items are charged to
COGS when goods
are sold.

p
The cost of the oldest
inventory items
remain in inventory.
The LIFO
method
assumes that
the newest
items are sold
first, leaving the
older units in
inventory.
8-54
Last-In, First-Out
Unlike FIFO, using
the LIFO method
may result in COGS
and Ending
Inventory Cost that
differ under the
periodic and
perpetual
approaches.
19
8-55
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 frames in ending inventory.
Use theUse the periodic LIFO method to determine:LIFO method to determine:

((11) Ending inventory cost.) Ending inventory cost.
((22) Cost of goods sold.) Cost of goods sold.
LIFO - Periodic System
8-56
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600
Cost of Goods Sold 1,350
LIFO - Periodic System
These are the 600
oldest units in
inventory.
8-57
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for

Sale 1,950 47,650.00$
Ending Inventory 600 13,200.00
Cost of Goods Sold 1,350
LIFO - Periodic System
200
600 x $22.00
20
8-58
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600 13,200.00
Cost of Goods Sold 1,350
LIFO - Periodic System
600 x $22.00
These are the
most recently
acquired 1,350
units.
200
8-59
Yore Frame, Inc.
Frame Inventory

Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00
9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950 47,650.00$
Ending Inventory 600 13,200.00
Cost of Goods Sold 1,350 34,450.00$
LIFO - Periodic System
$$44,,400400+ $30,050
200
8-60
LIFO - Perpetual System
The following schedule shows the frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 frames in ending inventory.
Use theUse the perpetual LIFO method to determine:LIFO method to determine:
((11) Ending inventory cost.) Ending inventory cost.
((22) Cost of goods sold.) Cost of goods sold.
21
8-61
LIFO - Perpetual System
Yore Frame, Inc.
Frame Inventory
Date Units $/Unit Total
Beg. Inventory 800 22.00$ 17,600.00$
9/3 300 24.00 7,200.00

9/15 250 25.00 6,250.00
9/21 200 27.00 5,400.00
9/29 400 28.00 11,200.00
Goods Available for
Sale 1,950
Ending Inventory 600
Cost of Goods Sold 1,350
Date Sales Units
9/1 600
9/10 300
9/30 450
8-62
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
Purchased Sold
LIFO - Perpetual System
In LIFO, we assume that we sell the
newest units in inventory first.
In this case, the 600 “newest” units
come from beginning inventory,
leaving 200 units in the beginning
inventory layer.
200
8-63
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
Purchased Sold

LIFO - Perpetual System
The ending inventory on 9/3 consists of:
200 units from beginning inventory @ $22.00
300 units from the 9/3 purchase @ $24.00
200
22
8-64
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (from the 9/3 purchase) 300 x 24.00 = 7,200.00 4,400.00
Purchased Sold
LIFO - Perpetual System
For the 9/10 sale, we must identify the 300 newest
units. They all come from the September 3
purchase.
Note that all of the Note that all of the 99//3 3 units have been “sold” and units have been “sold” and
only only 200 200 of the beginning inventory units remain.of the beginning inventory units remain.
200
8-65
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (from the 9/3 purchase) 300 x 24.00 = 7,200.00 4,400.00
15-Sep 250 x 25.00 = 6,250 10,650.00
20,400.00
Purchased Sold
Cost of Goods Sold =

LIFO - Perpetual System
The ending inventory on 9/15 consists of:
200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00
200
8-66
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (from the 9/3 purchase) 300 x 24.00 = 7,200.00 4,400.00
15-Sep 250 x 25.00 = 6,250 10,650.00
21-Sep 200 x 27.00 = 5,400 16,050.00
20,400.00
Purchased Sold
Cost of Goods Sold =
LIFO - Perpetual System
The ending inventory on 9/21 consists of:
200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00
200 units from the 9/21 purchase @ $27.00
200
23
8-67
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (from the 9/3 purchase) 300 x 24.00 = 7,200.00 4,400.00
15-Sep 250 x 25.00 = 6,250 10,650.00

21-Sep 200 x 27.00 = 5,400 16,050.00
29-Sep 400 x 28.00 = 11,200 27,250.00
20,400.00
Purchased Sold
Cost of Goods Sold =
LIFO - Perpetual System
The ending inventory on 9/29 consists of:
200 units from beginning inventory @ $22.00
250 units from the 9/15 purchase @ $25.00
200 units from the 9/21 purchase @ $27.00
400 units from the 9/29 purchase @ $28.00.
200
8-68
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (from the 9/3 purchase) 300 x 24.00 = 7,200.00 4,400.00
15-Sep 250 x 25.00 = 6,250 10,650.00
21-Sep 200 x 27.00 = 5,400 16,050.00
29-Sep 400 x 28.00 = 11,200 27,250.00
30-Sep (from the 9/29 purchase) 400 x 28.00 = 11,200.00 16,050.00
(from the 9/21 purchase) 50 x 27.00 = 1,350.00 14,700.00
32,950.00
Purchased Sold
Cost of Goods Sold =
LIFO - Perpetual System
150
For the For the 99//30 30 sale, we must identify the sale, we must identify the 450 450 newest newest
units. units. 400 400 of them come from the of them come from the 99//29 29 purchase. purchase.

The other The other 50 50 come from the come from the 99//21 21 purchase. purchase.
200
8-69
Date Balance
Beg. Inv. 800 x 22.00 = 17,600 17,600.00$
1-Sep 600 x 22.00 = 13,200.00 4,400.00
3-Sep 300 x 24.00 = 7,200 11,600.00
10-Sep (from the 9/3 purchase) 300 x 24.00 = 7,200.00 4,400.00
15-Sep 250 x 25.00 = 6,250 10,650.00
21-Sep 200 x 27.00 = 5,400 16,050.00
29-Sep 400 x 28.00 = 11,200 27,250.00
30-Sep (from the 9/29 purchase) 400 x 28.00 = 11,200.00 16,050.00
(from the 9/21 purchase) 50 x 27.00 = 1,350.00 14,700.00
32,950.00
Purchased Sold
Cost of Goods Sold =
LIFO - Perpetual System
150
200
The ending inventory on The ending inventory on 99//30 30 consists of:consists of:
200 200 units from beginning inventory @ $units from beginning inventory @ $2222 0000
250 250 units from the units from the 99//15 15 purchase @ $purchase @ $2525 0000
150 150 units from the units from the 99//21 21 purchase @ $purchase @ $2727 0000
24
8-70
When Prices Are Rising . . .
LIFO
p Matches high (newer)
costs with current (higher)
sales.

p Inventory is valued based
on low (older) cost basis.
p Results in lower taxable
income.
p
Is not officially endorsed
by the IASC.
FIFO
p
Matches low (older) costs
with current (higher)
sales.
p
Inventory is valued at
approximate replacement
cost.
p
Results in higher taxable
income.
8-71
Comparison of Cost Flow Methods
Average
Cost FIFO LIFO
Cost of goods sold 31,941$ 31,050$ 32,950$
Ending inventory 15,709 16,600 14,700
Total
47,650
$

47,650

$

47,650
$

Perpetual Inventory System
8-72
Comparison of Cost Flow Methods
# of
Companies
% of
Companies
# of
Companies
% of
Companies
FIFO 384 46% 394 43%
LIFO 251 30% 150 16%
Average 167 20% 235 25%
Other 31 4% 148 16%
Total 833 100% 927 100%
Inventory Method Used by Major Companies
2003 1973
25
8-73
Learning Objective
Discuss the factors affecting a company’s
choice of inventory method.
8-74
Decision Makers’ Perspective

What factors motivate companies to
select one inventory method over another?
How accurate is the
timing of reported
income
and income taxes?
How closely do
reported
costs reflect actual
flow of inventory?
How well are costs
matched against
related revenues?
8-75
Learning Objective
Understand supplemental LIFO disclosures
and the effect of LIFO liquidations on net
income.