Accounting For Chapter

Inventories
(2)
Sheet (5)

Prepared by Dr. Magdy Kamel

‫مكتبة الباشمحاسب‬ ‫ مركز سيجما – شارع دمحم عىل‬:‫العنوان‬

‫شارع المكتبات‬ ‫مكارم امام مطعم سلطانه‬
00042042110/‫ت‬
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Example:
Houston electronics Company uses the perpetual inventory system to account for
inventories. Information related to Company inventory at October 31 is given below:
Balance
Date Explanation Units Unit Cost Total Cost ending units
1/1 Beginning inventory 100 $10 $ 1,000 100
15/4 Purchase 200 $11 2,200 300
24/8 Purchase 300 $12 3,600 600
10/9 Sales 550 50
27/11 Purchase 400 $13 5,200 450
$12,000
Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending
Inventory under FIFO and Average cost.
Solution
Under using First in first Out (FIFO)
Purchase Cost of Goods Sold Balance
1/1 100 10 1,000
15/4 200 11 2,200 100 10 1,000
200 11 2,200
300 3,200
24/8 300 12 3,600 100 10 1,000
200 11 2,200
300 12 3,600
600 6,800
10/9 100 10 1,000
200 11 2,200 50 12 600
250 12 3,600
550 6,200
27/11 400 13 5,200 50 12 600
400 13 5,200
450 5,800
 Cost of goods sold = 6,200
 Ending inventory = 5,800

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Under using Last in first out ( LIFO)
Purchase Cost of Goods Sold Balance
1/1 100 10 1,000
15/4 200 11 2,200 100 10 1,000
200 11 2,200
300 3,200
24/8 300 12 3,600 100 10 1,000
200 11 2,200
300 12 3,600
600 6,800
10/9 300 12 3,600
200 11 2,200 50 10 500
50 10 500
550 6,300
27/11 400 13 5,200 50 10 500
400 13 5,200
450 5,700
 Cost of goods sold = 6,300
 Ending inventory = 5,700

Under using (moving average cost)

Purchase Cost of Goods Sold Balance
1/1 100 10 1,000
15/4 200 11 2,200 100 10 1,000
200 11 2,200
300 10.667 3,200
24/8 300 12 3,600 300 10.667 3,200
300 12 3,600
600 11.333 6,800
10/9 550 11.333 6,233 50 11.333 567
27/11 400 13 5,200 50 11.333 567
400 13 5,200
450 12.816 5,767
 Cost of goods sold = 6,233
 Ending inventory = 5,767

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Using Cost Flow Methods Consistently ‫استخدام طرق التكاليف بشكل متناسق‬
 Method should be used consistently, enhances comparability.
 Although consistency is preferred, a company may change its inventory costing method.
‫الشكة من عمل مقارنه ن‬
‫بي القوائم المالية‬ ‫حت تتمكن ر‬
‫ ى‬,‫ استخدام طرق تكاليف متناسقة " متشابهه‬
‫ن‬ ‫الشكة ممكن ان تغي طريقة حساب التكاليف ر‬
‫ر‬
‫بشط توضح السبب ف التقارير المالية‬ 
Lower-of-Cost-or-Net Realizable Value
When the value of inventory is lower than its cost
 Companies can “write down” the inventory to its market value.
 This is done by valuing the inventory at the lower-of-cost-or-market (LCM) in the
period in which the price decline occurs.
 LCM is an example of the accounting concept of conservatism
 Under the LCM basis, market is defined as current replacement cost
‫ن‬ ‫ن‬ ‫ن‬ ‫ن‬
10 ‫ وسعرها ف السوق‬000 ‫بمعت بضاعه مكلفان‬ ‫ماذا يحدث لو قيمة المخزون ف السوق اقل من تكلفة‬ 
‫ى‬ ‫ر‬
‫الشكات تقدر ان تقلل قيمة المخزون للسعر السوف بتاعها‬ 
‫الت حدث فيها‬ ‫وده بيتم عن طريق تقييم البضاعه وذلك بتقليل تكلفة المخزون اىل سعر السوق نف ى‬
‫الفيه ى‬ 
‫ن‬
‫انخفاض ف السعر‬
‫ بتخضع لمبدا الحيطه والحذر‬LCM 
Example: Assume that Ken Tuckie TV has the following lines of merchandise with costs
and market values as indicated.
Cost Market Lower of cost or market (LCM)
A 60,000 55,000 55,000
B 45,000 52,000 45,000
C 48,000 45,000 45,000
D 15,000 14,000 14,000
Total inventory 159,000

Example:
Alou appliance center accumulates the following cost and market data at Dec 31.

Categories Inventory Cost Data Market Data LCM

Cameras $12,000 $12,100 12,000
Camcorders 9,500 9,700 9,500
DVD players 14,000 12,800 12,800
Compute the lower-of-cost-or-market valuation for the company’s total inventory.
Solution
Total inventory = 12,000 + 9,500 + 12,800 = 25,300

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True or false
17. Under the lower-of-cost-or-market basis, market is defined as current replacement cost
30. The lower-of-cost-or-market basis is an example of the accounting concept of
conservatism.

18. Accountants believe that the write down from cost to market should not be made
in the period in which the price decline occurs.

21. Inventory turnover is calculated as cost of goods sold divided by ending inventory.

22. If a company uses the FIFO cost assumption, the cost of goods sold for the period will be
the same under a perpetual or periodic inventory system

111. The consistent application of an inventory costing method is essential for

a. conservatism. b. accuracy.
c. comparability. d. efficiency

112. Which costing method cannot be used to determine the cost of inventory items before
lower-of-cost-or-market is applied?
a. Specific identification b. FIFO
c. LIFO d. All of these methods can be used.

113. Inventory is reported in the financial statements at

a. cost. b. market.
c. the higher-of-cost-or-market. d. the lower-of-cost-or-market.

114. The lower-of-cost-or-market basis of valuing inventories is an example of

a. comparability. b. the cost principle.
c. conservatism. d. consistency.

115. Under the lower-of-cost-or-market basis in valuing inventory, market is defined as

a. current replacment cost. b. selling price.
c. historical cost plus 10%. d. selling price less markup.

116. The lower-of-cost-or-market (LCM) basis may be be used with all of the following
methods except
a. average cost. b. FIFO.
c. LIFO. d. The LCM basis may be used with all of these.

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Inventory errors ‫اخطاء المخزون‬
Common Cause: ‫االسباب الشائعه للخطا هى‬
 Failure to count or price inventory correctly.
 Not properly recognizing the transfer of legal title to goods in transit.
 Errors affect both the income statement and statement of financial position.
,‫ عدم عد او تسعي البضاعه بشكل صحيح‬
‫ى‬
,‫االعياف بنقل الملكية القانونية للبضاعه اثناء الشحن بطريقة صحيحة‬ ‫ عدم‬
I/S & B/S ‫ الخطأ بياثر عىل كل من‬

First: Income Statement Effects

Inventory errors affect the computation of cost of goods sold and net income.

Inventory errors affect the computation of cost of goods sold and net income in two periods.
 An error in ending inventory of the current period will have a reverse effect
on net income of the next accounting period.
 Over the two years, the total net income is correct because the errors offset each other.
 The ending inventory depends entirely on the accuracy of taking and costing the
inventory
‫ن‬
‫محاسبيتي‬ ‫ نف ى‬NI ‫ و‬COGS ‫اخطأ المخزون بتاثر عىل حساب‬
‫في ن‬
‫تي‬
‫ نف ى‬NI ‫للفيه الحالية هيكون له تاثي عكىس عىل‬
‫الفيه الىل بعدها‬ ‫ ى‬Ending inventory ‫اى خطا نف تسجيل ال‬
‫ن‬
‫صاف الرب ح بيكون صحيح ألن االخطاء ن‬ ‫ن‬
‫بتلغ بعضها البعض‬ ‫ اجماىل‬, ‫سنتي‬ ‫عىل مدار‬
‫ى‬
‫المتبق من المخزون بيعتمد بشكل كامل عىل دقة جرد المخزون وتسعيه‬ ‫الجزء‬

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 Income statement
2011 2012
Incorrect Correct Incorrect Correct
Sales $ 80,000 $ 80,000 $ 90,000 $ 90,000
Beginning inventory 20,000 20,000 12,000 15,000
Cost of goods purchased 40,000 40,000 68,000 68,000
Cost of goods available 60,000 60,000 80,000 83,000
Ending inventory 12,000 15,000 23,000 23,000
Cost of good sold 48,000 45,000 57,000 60,000
Gross profit 32,000 35,000 33,000 30,000
Operating expenses 10,000 10,000 20,000 20,000
Net income $ 22,000 $ 25,000 $ 13,000 $ 10,000

($3,000) $3,000
Net Income Net Income
understated overstated
MCQ
Understating ending inventory will overstate:
a. assets. b. cost of goods sold.
c. net income. d. equity.

Second: Statement of Financial Position Effects

 Effect of inventory errors on the statement of financial position is determined by
using the accounting equation:

Assets = Liablilities + owner’s equity

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 Quiz assignment (book)

1. Goods out on consignment should be included in the inventory of the consignor.

2. Under a periodic inventory system, acquisition of inventory is charged to the Purchases

account.

3. Under a periodic inventory system, freight-in on merchandise purchases should be

charged to the Inventory account.

4. Purchase Returns and Allowances and Purchase Discounts are accounts with debit
balances and are subtracted from Purchases to produce net purchases.

5. Freight-in is an account that is subtracted from the Purchases account to arrive at cost of
goods purchased.

6. The specific identification method of costing inventories tracks the actual physical flow of
the goods available for sale.

7. The First-in, First-out (FIFO) inventory method results in an ending inventory valued at the
most recent cost.

8. The specific identification method of inventory valuation is desirable when a company

sells a large number of low-unit cost items.

9. If a company changes its inventory valuation method, the effect of the change
on net income should be disclosed in the financial statements.

10. Under the lower of cost or market basis, market is defined as current replacement cost.
11. An error that overstates the ending inventory will also cause net income for the period
to be overstated.

12. Inventory turnover is calculated as cost of goods sold divided by ending inventory.

13. Net purchases is determined by subtracting purchase returns and allowances and
purchase discounts from purchases.

14. The cost of ending inventory is added to the cost of goods available for sale to
determine cost of goods sold.

15. The lower of cost or market basis is an example of the accounting concept of
conservatism

1. T 2. T 3. F 4. F 5. F 6. T 7. T 8. F
9. T 10. T 11. T 12. F 13. T 14. F 15. T

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MULTI CHOOSE QUESTION
1. Which of the following should not be included in the physical inventory of a company?
a. Goods held on consignment from another company.
b. Goods shipped on consignment to another company.
c. Goods in transit from another company shipped FOB shipping point.
d. None of the above.

2. As a result of a thorough physical inventory, Railway Company determined that it had

inventory worth $180,000 at December 31, 2020. This count did not take into consideration
the following facts. Rogers Consignment store currently has goods worth $35,000 on its sales
floor that belong to Railway but are being sold on consignment by Rogers. The selling price
of these goods is $50,000. Railway purchased $13,000 of goods that were shipped on
December 27, FOB destination, that will be received by Railway on January 3.
Determine the correct amount of inventory that Railway should report.
a. $230,000.
b. $215,000.
c. $228,000.
d. $193,000.

3. Cost of goods available for sale consists of two elements: beginning inventory and:
a. ending inventory. b. cost of goods purchased.
c. cost of goods sold. d. All of the above.

4. Al Hoda Company has the following:

inventory Jan 1 8,000 units $11
Purchase June 19 13,000 units $12
Purchase Nov 8 5,000 units $13
If Al. Hoda has 9,000 units on hand at December 31, the cost of the ending inventory under
FIFO is:
a. $99,000.
b. $108,000.
c. $113,000.
d. $117,000.

5. Using the data in Question 4 above, the cost of the ending inventory under LIFO is:
a. $113,000. b. $108,000.
c. $99,000. d. $100,000.

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6. Davidson Electronics has the following:
inventory Jan 1 5,000 units $8
purchase April 2 15,000 units $10
purchase August 28 20,000 units $12
If Davidson has 7,000 units on hand at December 31, the cost of ending inventory under the
average-cost method is:
a. $84,000. b. $70,000.
c. $56,000. d. $75,250.

7. In periods of rising prices, LIFO will produce:

a. higher net income than FIFO. b. the same net income as FIFO.
c. lower net income than FIFO. d. higher net income than average-cost.

8. Factors that affect the selection of an inventory costing method do not include:
a. tax effects. b. balance sheet effects.
c. income statement effects. d. perpetual vs. periodic inventory system.

9. Royall Company purchased 1,000 widgets and has 200 widgets in its ending inventory at a
cost of $91 each and a current replacement cost of $80 each.
The ending inventory under lower-of-cost-or-market is:
a. $91,000. b. $80,000.
c. $18,200. d. $16,000.

10. Harold Company overstated its inventory by $15,000 at December 31, 2013. It did not
correct the error in 2013 or 2014. As a result, Harold's stockholders' equity was:
a. overstated at December 31, 2013, and understated at December 31, 2014.
b. overstated at December 31, 2013, and properly stated at December 31, 2014.
c. understated at December 31, 2013, and understated at December 31, 2014.
d. overstated at December 31, 2013, and overstated at December 31, 2014.

11. Which of these would cause the inventory turnover ratio to increase the most?
a. Increasing the amount of inventory on hand.
b. Keeping the amount of inventory on hand constant but increasing sales.
c. Keeping the amount of inventory on hand constant but decreasing sales.
d. Decreasing the amount of inventory on hand and increasing sales.

13. Al Nasr Company had beginning inventory of $80,000, ending inventory of $110,000,
cost of goods sold of $285,000, and sales of $475,000. Al Nasr's days in inventory is:
a. 73 days. b. 121.7 days.
c. 102.5 days. d. 84.5 days.

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14. Songbird Company has sales of $150,000 and cost of goods available for sale of
$135,000. If the gross profit rate is 30%, the estimated cost of the ending inventory
under the gross profit method is:
A.$15,000. B.$30,000.
C.$45,000. D.$75,000.

15. in a perpetual inventory system,

A. LIFO cost of goods sold will be the same as in a periodic inventory system.
B. average costs are based entirely on unit cost averages.
C. a new average is computed under the average cost method after each sale.
D. FIFO cost of goods sold will be the same as in a periodic inventory system.

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