INTERMEDIATE ACCOUNTING 1

CHAPTER 9 – INVENTORY COST FLOW

COST FORMULAS
PAS 2, paragraph 25, expressly provides that the cost of inventories shall be
determined by using either:

1. FIRST IN, FIRST OUT (FIFO)

Under this method, this assumes that “the goods purchased first are sold
first” and consequently the goods that the remaining in the inventory at the
end of the period are those most recently purchased or produced.

ADVANTAGES OF FIFO
The inventory is thus expressed in terms of recent or new prices while the
cost of goods sold is representative of earlier or old prices.

This method favors the statement of financial position in that the inventory
is stated at current replacement cost.

DISADVANTAGE OF FIFO
There is improper matching of cost against revenue because the goods sold
are stated at earlier or older prices resulting in understatement of cost
of sales.

EFFECT OF FIFO DURING INFLATION PERIOD

This method would result to the highest net income.

EFFECT OF FIFO DURING DEFLATION PERIOD

This method would result to the lowest net income.

EXERCISE

The following data pertain to an inventory item:

UNIT TOTAL SALES
UNITS COST COST (IN UNITS)
Jan. 1 Beg. Bal. 400 100 P 40,000
8 Sale 250
18 Purchase 350 120 P 42,000
22 Sale 400
31 Purchase 250 130 P 32,500

The ending inventory was 350 units.

Required:

1. Under FIFO – PERIODIC Method, compute the cost of the ending inventory.

2. Under FIFO – PERIODIC Method, compute the cost of goods sold.

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 3. Using the FIFO – PERPETUAL, by preparing the stock card below, compute the cost of the ending inventory
and cost of goods sold.

PURCHASES SALES BALANCE

UNIT TOTAL UNIT TOTAL UNIT TOTAL
UNITS COST COST UNITS COST COST UNITS COST COST
Jan. 1
8
18

22

31

2. WEIGHTED AVERAGE

WEIGHTED AVERAGE PERIODIC

Under this method, the average unit cost is computed by using this formula:
Total Cost of Goods Available for Sale / Total Number of Goods Available for Sale

EXERCISE

The following data pertain to an inventory item:

UNIT TOTAL SALES
UNITS COST COST (IN UNITS)
Jan. 1 Beg. Bal. 400 100 P 40,000
8 Sale 250
18 Purchase 350 120 P 42,000
22 Sale 400
31 Purchase 250 130 P 32,500

The ending inventory was 350 units.

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 Required:

1. Compute the Total Goods Available for Sale and Total Number of Units
Available for sale.

2. Compute the weighted average unit cost.

3. Compute the ending inventory cost.

4. Compute the cost of goods sold.

WEIGHTED AVERAGE – PERPETUAL

When this method is used in conjunction with the perpetual system, the weighted
average method is popularly known as the moving average method.

Under this method, a new weighted average unit cost must be computed after every
purchase and purchase return.

This method requires the keeping of inventory stock card in order to monitor
the “moving” unit cost after every purchase.

EXERCISE

Celina Company that used the perpetual system provided the following data
relating to an inventory item.

UNIT
UNITS COST TOTAL COST
Jan. 1 Beg. Bal. 2,500 200 P 500,000
10 Purchase 2,500 250 P 625,000
15 Sale 3,500
16 Sales Return 500
30 Purchase 8,000 150 P 1,200,000
31 Purchase Return 2,500 150 P 375,000

Required:

1. Compute the cost of goods sold.

2. Compute the cost of ending inventory.

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 3. Prepare the moving average inventory table below:

UNITS UNIT COST TOTAL COST

Jan. 1 Beg. Bal.
10 Purchase
Balance
15 Sale
Balance
16 Sale Return
Balance
30 Purchase
Balance
31 Purchase Ret.
Balance

3. LAST IN, FIRST OUT (LIFO)

This method assumes that “the goods purchased last are the goods that are
first sold”.

ADVANTAGES OF LIFO
The inventory is thus expressed in terms of earlier or old prices ad the
cost of goods sold is representative of recent or new prices.

The LIFO favors the income statement because there is matching of current
cost against current revenue, the cost of goods sold being expressed in
terms of current or recent post.

DISADVANTAGE OF LIFO
The inventories are stated at earlier or older prices and therefore there
may be a significant lag between inventory valuation and current replacement
cost.

PERIOD IF RISING PRICES

LIFO method would result to the lowest net income.

PERIOD OF DECLINING PRICES

LIFO method would result to the highest net income.

EXERCISE

The following data pertain to an inventory item:

UNIT TOTAL SALES
UNITS COST COST (IN UNITS)
Jan. 1 Beg. Bal. 400 100 P 40,000
8 Sale 250
18 Purchase 350 120 P 42,000
22 Sale 400
31 Purchase 250 130 P 32,500

The ending inventory was 350 units.

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 Required:

1. Under LIFO – PERIODIC Method, compute the cost of the ending inventory.

2. Under LIFO – PERIODIC Method, compute the cost of goods sold.

3. Using the LIFO – PERPETUAL, by preparing the stock card below, compute the cost of the ending
inventory and cost of goods sold.

PURCHASES SALES BALANCE

UNIT TOTAL UNIT TOTAL UNIT TOTAL
UNITS COST COST UNITS COST COST UNITS COST COST
Jan. 1
8
18

22

31

Source:
Intermediate Accounting Volume 1, Valix, Peralta, Valix

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