Blueprint Problem: LIFO inventory - perpetual

Inventory and Cost of Merchandise Sold

Asset valuation and income measurement are two of the most fundamental accounting concepts. For any company that sells goods, inventory is a main focus. This problem concentrates on perpetual LIFO inventory valuation.

When a company records a sale, it is displayed on the Select balance sheet, income statement, statement of cash flows, statement of retained earnings, Correct 1 of Item 1 as Selecta liabilityan assetan expense revenue Correct 2 of Item 1. The amount at which sold inventory is expensed depends on the Selectinventory valuation methodpurchase pricereplacement costselling priceCorrect 3 of Item 1. The inventory remaining must be properly valued so that it can be reported on the Selectbalance sheetincome statementCorrect 4 of Item 1 in the Selectcurrent assetscurrent liabilitiesfixed assetsexpensesCorrect 5 of Item 1 section.

Why isn't an expense recorded for inventory when it is purchased instead of when it is sold? SelectBecause of the matching principleBecause of the revenue recognition principleBecause the cash basis of accounting disallows itBecause of the chosen method for inventory valuationCorrect 6 of Item 1

In order to determine the amounts to be reported on the balance sheet and income statement, you must first understand the relationship between the cost of merchandise sold and ending inventory. This relationship is expressed in the cost of merchandise sold model. Use the selection lists to build the cost of merchandise sold model.

1.	SelectBeginning inventoryCost of merchandise available for salePurchasesCorrect 7 of Item 1
2.	Select+ Purchases- Ending inventory+ Ending inventoryCorrect 8 of Item 1
3.	Cost of merchandise available for sale
4.	- Ending Inventory
5.	SelectCost of merchandise soldBeginning inventoryPurchasesCorrect 9 of Item 1

Based on the cost of merchandise sold formula, the ending inventory can be computed by subtracting the Select cost of merchandise available for salecost of merchandise sold beginning inventoryCorrect 10 of Item 1 from the Select cost of merchandise available for sale.cost of merchandise sold. beginning inventoryCorrect 11 of Item 1

Inventory Systems and Costing Methods

There are two concepts that must be understood for inventory valuation and measurement: inventory systems and inventory costing methods. The two basic systems of accounting for merchandise inventory are the perpetual inventory system and the periodic inventory system. Under the SelectperiodicperpetualCorrect 1 of Item 2 inventory system, continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold. Under the SelectperiodicperpetualCorrect 2 of Item 2 inventory system, the inventory not yet sold, or on hand, is counted periodically. This physical count is usually taken at the end of the accounting period.

Although it is more expensive to maintain, the SelectPeriodicPerpetualCorrect 3 of Item 2 system is far more accurate and up-to-date than other inventory tracking systems.

"Goods Flow" versus "Cost Flow"

The term "goods flow" refers to the PHYSICAL MOVEMENT of inventory through the operations of the business. In most business, we try to sell our oldest merchandise first. The term "cost flow" refers to the COST associated with the assumed flow of merchandise (i.e. how much of the cost is allocated to to the items sold and how much is allocated to the unsold ending inventory). It is important to note that the "cost flow" method Select mustdoes not have toCorrect 4 of Item 2 be the same as the physical "goods flow". An accounting issue arises when identical units of merchandise are acquired at different unit costs during a period. In such cases, when an item is sold, it is necessary to determine its cost using a cost flow assumption and related inventory costing method. An inventory costing method Select must be consistent with the physical flow of goods. determines how costs are allocated to cost of merchandise sold and ending inventory. determines when cost of merchandise sold is calculated.Correct 5 of Item 2

LIFO (Last-in, First-out) Costing

There are four costing methods: specific identification; first-in, first-out (FIFO); last-in, first-out (LIFO); and average cost. This example will focus on LIFO. Under the last-in, first-out (LIFO) inventory cost flow method, the last units purchased are assumed to be sold and the ending inventory is made up of the earlier purchases.

To better understand the LIFO method, imagine that beginning inventory and each purchase is a separate layer. These layers determine the cost of goods available for sale. For each sale, start with the latest purchase and work backwards until you have accounted for the units sold. Using LIFO, we assume the costs of the SelectfirstlastCorrect 1 of Item 3 items we purchased are assigned to the first items we sell. Therefore, the most recent costs are assigned to the Selectending inventorycost of merchandise soldCorrect 2 of Item 3 while the Selectending inventorycost of merchandise soldCorrect 3 of Item 3 will consists of costs the beginning inventory and earlier purchases.

APPLY THE CONCEPTS: LIFO inventory calculation

Click here to review an illustrated example of the LIFO calculation. The steps illustrated in the example are recapped below.

1. Start with beginning inventory.

2. Add inventory layers as purchases are made.

3. Compute the cost of merchandise sold as sales occur. Use only the cost of merchandise available for sale as of the sales date.

4. Update the inventory balance after each transaction. (Be sure you do not use an amount more than once.)

5. Determine the ending inventory for the period.

Below is the data for the month of January, 2011.

1/1 Beg. Inv.	130 Units @ $8
1/8 Purchase	140 Units @ $12
1/14 Sale	98 Units
1/22 Purchase	150 Units @ $10
1/25 Sale	178 Units

Compute the LIFO layers amounts for the cost of merchandise available for sale after each purchase and sale. After 1/8 Purchase

Layer 1 units $ price per unit $ value of the layer

Layer 2 units $ price per unit $ value of the layer

After 1/14 Sale

Layer 1 units $ price per unit $ value of the layer

Layer 2 units $ price per unit $ value of the layer

After 1/22 Purchase

Layer 1 units $ price per unit $ value of the layer

Layer 2 units $ price per unit $ value of the layer

Layer 3 units $ price per unit $ value of the layer

After 1/25 Sale

Layer 1 units $ price per unit $ value of the layer

Layer 2 units $ price per unit $ value of the layer

Based on your answers above, complete the worksheet below.

LIFO Inventory Worksheet
Transaction		Purchases		Cost of Merchandise Sold	Inventory balance
1/1 Beg. Inv.	130 Units @ $8				$1,040
1/8 Purchase	140 Units @ $12	$			$
1/14 Sale	98 Units			$	$
1/22 Purchase	150 Units @ $10	$			$
1/25 Sale	178 Units			$	$
Total		$		$	$

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APPLY THE CONCEPTS: Recording changes in inventory under LIFO valuation

Under the perpetual system, two journal entries are are required to record sales; one to record the sale and one to record the cost of merchandise sold. Click on the links below to review the journal entries for purchases and sales transactions.

Purchase

Sales

After a purchase or sale occurs, the transaction must be recorded or journalized. In the following journal, record the purchases and sales for the month, assuming that all inventory purchases were made with cash and all sales were made on account at a fixed unit price of $22 per unit. Several facts to remember: (1) All inventory purchasesare made with cash and cash only; (2) All sales are made on account and on account only; and (3) when recording sales, Schiphol wants you to record the revenue portion of the transaction first.

If an amount box does not require an entry leave it blank.

Not sure about the account title? Click here to view the chart of accounts.

+ Assets

+ Liabilities

+ Equity

+ Revenues/Gains

+ Expenses/Losses

GENERAL JOURNAL

page

DATE

DESCRIPTION

DOC. NO.

POST. REF.

DEBIT

CREDIT

1

Jan. 08

1

2

2

3

3

4

Jan. 14 Record sale

4

5

5

6

6

7

Jan. 14 Record cost

7

8

8

9

9

10

Jan. 22

10

11

11

12

12

13

Jan. 25 Record sale

13

14

14

15

15

16

Jan. 25 Record cost

16

17

17

18

18