Abnormal costs expensed in current period instead of being included in inventory:
Beginning inventory
Periodic | Perpetual | |
Buy merchandise | Purchases | Inventory |
Accounts payable |
Accounts payable |
|
Sell merchandise | Accounts receivable | Accounts receivable |
Sales |
Sales |
|
COGS sold (COGS) | ||
Inventory |
||
Record COGS | Ending inventory (count) | |
COGS (plug) | ||
Purchases (net amount) |
||
Beginning inventory (balance) |
First in, first out (FIFO)—Same under either method
Last in, first out (LIFO)—Different amounts for periodic and perpetual
Average—Different amounts for periodic and perpetual
The earliest purchased goods are assumed to be sold first
Cost of sales and ending inventory values are identical under perpetual and periodic methods
Example: Beginning inventory = 0; Ending Inventory = 15,000
Calculate the value of ending inventory and cost of sales:
Ending inventory = 15,000 units (given) = November 13,500 units × $6.50 + July 1,500 units × $6.00 = $96,750 (ending inventory consists of the latest purchased units).
Cost of sales: Total available – Ending inventory = $293,750 − 96,750 = $197,000
The earliest purchased goods are assumed to be sold last
Cost of sales and ending inventory values are different under perpetual and periodic methods
Example of periodic method: Beginning inventory = 0; Ending Inventory = 15,000
Calculate the value of ending inventory and cost of sales:
Ending inventory = 15,000 units (given) = January 10,000 units × $5.00 + April 1,500 units × $5.50 = $58,250 (ending inventory consists of earliest purchased units)
Cost of sales: Total available – Ending inventory = $293,750 − 58,250 = $235,500
For each layer:
Inventory quantity × Price per unit = Inventory value
Less cumbersome than LIFO for inventory consisting of many items
Combines inventory into pools
Increases in some items within a pool offset decreases in others
For each layer:
Simplified LIFO—Company uses a published index
Use when:
Reporting profit
Balance sheet amount
Contract price | xxx | |
Total estimated cost | ||
Cost incurred to date (1) |
xxx | |
Estimated cost to complete |
+ xxx | |
Total estimated cost (2) |
− xxx | |
Total estimated profit (3) | = xxx |
Costs incurred to date (1) ÷ Total estimated cost (2) = % of completion (4)
% of completion (4) × Total estimated profit (3) = Estimated profit to date (5)
Estimated profit to date (5) – Profit previously recognized = Current period’s profit
When loss expected:
Estimated loss |
xxx |
+ Profit recognized to date | xxx |
= Amount of loss to recognize | xxx |
Income statement amount
Balance sheet amount
3.12.162.37