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Lecture-3-Inventory-Part-2

The document discusses inventory valuation, highlighting the impact of ending inventory on cost of goods sold (COGS) and gross profit (GP). It explains ownership versus physical possession of inventory and outlines three methods of inventory valuation: FIFO, LIFO, and Weighted Average. Additionally, it provides practice problems with calculations for COGS, GP, and value of ending inventory using each method.

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4 views

Lecture-3-Inventory-Part-2

The document discusses inventory valuation, highlighting the impact of ending inventory on cost of goods sold (COGS) and gross profit (GP). It explains ownership versus physical possession of inventory and outlines three methods of inventory valuation: FIFO, LIFO, and Weighted Average. Additionally, it provides practice problems with calculations for COGS, GP, and value of ending inventory using each method.

Uploaded by

khaledmahruz2009
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 12

ACBA: Lecture-3(2)

Topic: Inventory Valuation

1
Inventory Valuation-Impact

•Beg. Inv.+ Purchase-End. Inv.=COGS


•Net Sales-COGS=GP
•If ending inventory is overstated, COGS is
understated and thereby, profit is overstated.
•If ending inventory is understated, COGS is
overstated and thereby, profit is understated.
•Therefore, impact is in both income statement
and balance sheet.
•Tax impact is also there.
2
Inclusion in inventory: Ownership vs.
Physical Possession
• Goods on transit with credit term FOB
shipping point: Goods belong to importer

• Goods on transit with credit term FOB


destination: Goods belong to exporter.

• Consignment: Goods belong to consigner

3
Methods of Inventory Valuation
• First In First Out (FIFO)/Last In Still There (LIST)

• Last In First Out (LIFO)/First In Still There (FIST)

• Weighted Average Method

4
Practice Problem-1
• Feb-1, 2025: Balance 400 units @ Tk 20 p/u
• Feb-6, 2025: Purchased 1200 units @ Tk 22 p/u
• Feb-23, 2025: Purchase 700 units @ Tk 25 p/u
• During the month total 1800 units were sold @
Tk 30 per unit.
Requirements: Find out the a) COGS; b) Gross Profit
(GP) and c) Value of ending Inventory (VoEI) on
February 28, 2023 using (i) FIFO, (ii) LIFO, and (iii)
Weighted Average Methods.

5
FIFO
• COGS= (400*20)+(1200*22)+(200*25)=39,400

• GP=(Sales-COGS)=(1800*30)-39,400=14,600

• Value of Ending Inventory=(500*25)=12,500


LIFO
• COGS=(700*25)+(1100*22)=41,700

• GP=Sales-COGS

• GP=(1800*30)-41,700=12,300

• VOEI=(100*22)+(400*20)=10,200
Average Method
• Average cost per unit=(Total Cost/Total Units)=
[(400*20)+(1200*22)+ (700*25)]/(400+1200+700)
=22.565

COGS=22.565*1800=40,617

GP=(1800*30)-40,617=13,383

VOEI=500*22.565=11,283
Problem 2 (Self Practice)
• December 01, 2024: Beginning balance of
inventory 300 units @ 12Tk. per unit.
• December 05, 2024: Purchased 700 units @ 14
Tk. per unit.
• December 25, 2024: Purchased 500 units @ 16
Tk. per unit
• During the month total 1200 units were sold @
Tk 20 per unit.
Requirements: Find out COGS and value of ending
inventory on December 31 using three methods.
FIFO
• COGS=(300*12)+(700*14)+(200*16)=16,600

• VOEI=300*16=4,800

• GP=(1200*20)-16,600=7,400
LIFO
• COGS=(500*16)+(700*14)=17,800

• VOEI=300*12=3,600

• GP=(1200*20)-17,800=6,200
Weighted Average Methods
• Average cost per
unit={(300*12)+(700*14)+(500*16)}/(300+700+5
00)=14.267

• COGS=1,200*14.267=17,120

• VOEI=300*14.267=4,280

• GP=(1200*20)-17,120=6,880

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