Mastering Inventory

MASTERING INVENTORY

INSTRUCTOR’S LECTURE OUTLINE

This lecture outline follows the 7 sections of the workbook, Mastering Inventory.

Section 1: Introduction to accounting for inventory

Sections 2 and 3: Inventory recordkeeping using the perpetual method

Inventory recordkeeping using the periodic method

Section 4: Inventory costing: the weighted-average and moving-average methods

Section 5: Inventory costing using the FIFO method

Section 6: Inventory costing using the LIFO method

Section 7: Inventory costing using the lower of cost or market rule

Lecture notes format

The lecture notes for each section of the workbook are divided into four to five parts:

  • Workbook section covered. The section title of the workbook covered.
  • PowerPoint slides.The numbers of the slides used to cover this section of the workbook. Note: Because the PowerPoint presentation includes animation to enhance learning, it is designed to be shown in “Slide Presentation” mode. When shown in Slide Presentation, the numbers on the sides will not appear.
  • Topics covered. An outline of the topics covered in the PowerPoint slide presentation. These can also be used if you choose to print handouts using PowerPoint’s Handout Master. Where appropriate, slide numbers are given for specific topics.
  • Key teaching points.These appear only in those sections where in-class experience has shown the need to emphasize some point.
  • Optional points of emphasis.Topics that generally should be stressed, depending on the makeup of your class.
  • In-class activities.Suggested selections from the Homework Exercises portion of the teaching guide to work through in class. There are enough Homework Exercises for both in-class activities and homework.

Section 1INTRODUCTION TO ACCOUNTING FOR INVENTORY

(Slides 1–9)

Topics covered

  • Merchandise inventory v. manufacturing inventory (Slides 2and 3).
  • This course focuses on merchandise inventory—rules for manufacturing inventory are typically covered in cost (“managerial”) accounting.
  • To engage students, ask one student to name a business, another to describe that business’s inventory as merchandising or manufacturing.
  • FOB (“free on board”) shipping point v. FOB destination(Slides 4–6):

If the terms are FOB shipping point, legal title to the merchandise passes at the shipping point—usually, the warehouse of the company selling the merchandise.

If the terms are FOB destination, legal title to the merchandise does not pass to the purchaser until it reaches its destination—usually the buyer’s warehouse.

How FOB shipping point v. FOB destination impact the timing and amount of inventory costs.

Three FOB examples that each asks students (Slide 7):

Should the item be included in inventory at year end?

How much of the cost should be included in inventory whenever inventory is recorded?

  • How inventory is presented on the financial statements.
  • Inventory is an asset, so it is presented on the balance sheet. However, inventory may make a “guest appearance” on the income statementin the calculation of COGS if the company uses the periodic method (covered in Section 3) (Slides 8 and 9).

In-class activities

  • For FOB shipping point v. FOB destination, Homework Exercises for Section 1, Problems 1–3.
  • For calculating COGS, Homework Exercises for Section 1, Problem4.

Section2INVENTORY RECORDKEEPING USING THE PERPETUAL METHOD

(Slides 10–27)

and

Section 3INVENTORY RECORDKEEPING USING THE PERIODIC METHOD

(Slides 28–32)

Topics covered

  • Introduction to the perpetual v. periodic methods (Slide 10).
  • Journal entries for routine inventory transactions under the perpetual v. periodic methods (Slides 11–15):

Inventory purchases, including handle freight costs (Slide 11)

Perpetual method—purchaser includes freight costs in the Inventory account

Periodic method—purchaser books freight costs in a “Freight-In” account.

  • The journal entryto record the sale is the same for the periodic and perpetual methods (Slide 12 ):

Only the perpetual method calculates and records COGS at the time of the sale.

  • How sales returnsare booked with an example (Slides13 and 14).
  • Purchase returns (Slide 15).
  • Trade discounts (Slide 16)
  • Cash discounts—recording at gross v. net (Slide 17)
  • Journal entries for the gross method (Slides 18–22):

Invoice paid within the discount period

Invoice paidafter the discount period ends

Examples

  • Journal entries for the net method (Slides 2326):

Invoice paid within the discount period

Invoice paid after the discount period ends

Examples

AJE when there has been shrinkage(perpetual method)

  • Perpetual methodJEs based on a physical count (Slide 27):
  • Periodic method JEs (Slides 28–32)

Example

Optional points of emphasis

  • The words “gross” and “net” are helpful in distinguishing between the rules for each method (Slide 17).
  • Does the perpetual or periodic method provide better information about, and control of, inventory?

Does a company’s choice of perpetual v. periodic method relate to the dollar value of inventory items, such as nails and screws v. TVs?

How to check terms such as 2/10, n/30 against an invoice when a company is paying for merchandise within v. outside the discount period

How to convertterms such as 2/10, n/30 into annual interest rates to decide whether your company should take an offered cash discount.

In-class activities

  • For practice using the perpetual method, Workbook Section 2, Quiz 1, Problems II, III, and VI (pages 21 and 22) and Quiz 2, Problems I, II, and V (pages 27 and 28).
  • For practice using the periodic method, Workbook Section 3, Quiz 1, Problems I, III and V (pages 44 and 45) and Quiz 2, Problems I, III, and IV (page 51).
  • To reinforce students’ understanding of cash discounts and the journal entries under the perpetual method, use Homework Exercises for Section 2, Problems 3 and 4.
  • To reinforce students’ understanding of cash discounts and the journal entries under the periodic method, use the Homework Exercises for Section3, Problem4.

Section 4INVENTORY COSTING: THE WEIGHTED-AVG. AND MOVING-AVG. METHODS

(Slides 33–47)

Topics covered

  • Inventory costing—determining the cost of inventory items that are sold: weighted average (periodic) v. moving average (perpetual), FIFO and LIFO (Slides 33 and 34).
  • Formula for weighted-average costing under the periodic method (Slides 35–38):

This calculation is made at year end

Examples of weighted-average costing.

  • Formula for moving-average costing under the perpetual method (Slides 39–47)

Average goods available for sale is used for each sale to determine COGS—hence, the term “moving average”

Examples of moving-average costing.

Key teaching point

  • To describe the weighted-average costing under the periodic method, make sure students understand why a simple average of prices will not produce the correct cost—a point demonstrated on Slides 36and37.

In-class activities

  • For the weighted average method, Homework Exercises for Section 4, Problems 1, 2 and 3; workbook Section 4, Quiz 1, Problems II (page 76) and V (page 78) and Quiz 2, Problems III and IV (pages 88 and 89).
  • For the moving average method, Homework Exercises for Section 4, Problems 4–5; workbook Section 4, Quiz 1, Problems I, III, and IV (pages 77 and 78), Quiz 2, Problems I, II and V (pages 87–89).

Section 5INVENTORY COSTING USING THE FIFO METHOD

(Slides48–56)

Topics covered

  • FIFO costing is not related to the actual costs of the items soldbut rather is based on the assumption the first items purchased were the first ones sold. This allows for consistency in costing (Slide 48).
  • FIFO costing consistently results in the most recent items purchased being the ones left in inventory.

Example ofperiodic FIFO (Slides 49–54)

Example of perpetual FIFO (Slides 55 and 56)

Optional points of emphasis

  • The last items purchased are the ones that remain in inventory for FIFO, so consideradding the acronym LISH (last-in, still here).

In-class activities

  • For periodic FIFO, Homework Exercises for Section 5, Problems 1 and 2.
  • For perpetual FIFO, Homework Exercises for Section 5, Problem 4.
  • For periodic FIFO, workbook Section 4, Quiz 1, Problems I, II and V (pages 114–117) and Quiz 2, Problem V (page 128).
  • For perpetual FIFO, workbook Section 5, Quiz 1, Problems III and IV (pages 115 and 116)and Quiz 2 Problems I (page 122) and IV (pages 126 and127).

Section 6INVENTORY COSTING USING THE LIFO METHOD

(Slides 57–67)

Topics covered

  • LIFO costing is not related to the actual costs of the items soldbut rather is based on the assumption the last items purchased were the first ones sold. Like FIFO, this allows for consistency in costing (Slide 57).
  • The slide also mentions that LIFO is typically used with the periodic method, which is the only method discussed in the book:

LIFO example (Slides 58–62)

  • LIFO layers—how they are built (Slide 63):

Example (Slides 64 and 65).

  • LIFO liquidations—when units sold exceed units purchased during the current year(Slide 66):

Example from Slides 64 and 65 continued (Slide 67).

Optional points of emphasis

  • The acronym FISH (first-in, still here) is introduced.
  • LIFO costing for one year, Homework Exercises for Section 6, Problem 1.
  • Building LIFO layers, workbook Section 6, Quiz I, Problem I (page 153).
  • Multiple-year LIFO layers, workbook Section 6, Quiz 1, Problems II and III (pages153–154) and Homework Exercises for Section 6, Problem 2.
  • LIFO liquidations, workbook Section 6, Quiz 1, Problem V (page 155).
  • For calculating the cost of prior years’ layers, Homework Exercises for Section 6, Problems 3–5.

Section 7INVENTORY COSTING USING THE LOWER OF COST OR MARKET RULE

(Slides 68–83)

Topics covered

  • Introduction to lower of cost or market (LCM) costing (Slide 68).
  • “Cost” and “market value” defined(Slide 69).
  • How ceiling, floor, and replacement cost are used to determine market value (Slide 70):

Example of how to determine market value (Slide 71).

  • Restatement of the requirement to report the lower of the cost or market (Slide 71):

Example of LCM using four items (Slides 73–76).

  • Applying LCM at different levels—by item, group, or total inventory(Slide 77):

Example of LCM applied todifferent levels(Slide 78).

  • Journal entries for LCM(Slides 79–81).
  • Purchase commitments (Slide 82):

Example of purchase comments (Slide 83).

Key teaching points

  • LCM is easier to understand if students remember what it stands for.
  • Ensure that students understand how ceiling and floor work and their role in determining market value and cost.

In-class activities

  • Homework Exercises for Section 7, Problem 1 and workbook Section 7, Quiz 1, Problem I (page 188) and Quiz 2, Problem I (page 193).
  • For computing LCM by item, class, or total inventory, Homework Exercises for Section 7, Problems 3 and 4, or Workbook Section 7, Quiz 1, Problem II, III or IV (pages 188 and 189) or Quiz 2, Problem II, III or IV (pages 193 and 194).

Instructor’s Lecture Outline1