Perpetual and Periodic inventory valuation methods are discussed in this presentation. The systems are explained using the different valuations methods (FIFO, LIFO and AVG).

1. Universidad Cuauhtémoc
Campus Aguascalientes
Inventories
Análisis de Costos
Maestría en Administración

2. Contents
Inventory Control Importance
Effects of Inventory in Financial Statements
Inventory Costing Methods
1. FIFO Perpetual (First In First Out)
2. LIFO Perpetual (Last In First Out)
3. FIFO Periodic
4. LIFO Periodic
5. Average Periodic
Inventory Turn Over

3. Why is Inventory Control Important?
 Inventory is a significant asset and for many
companies the largest asset.
 Inventory is central to the main activity of
merchandising and manufacturing
companies.
 Mistakes in determining inventory cost can
cause critical errors in financial statements.
 Inventory must be protected from external
risks ( such as fire and theft) and internal
fraud by employees.

4. Receiving
report
Purchase
order
Invoice
AGREE
JOURNAL
Description
Nov. 9
Post.
Ref.
Date
Inventory 1 222 00
Accounts Payable—XYZ Co. 1 222 00
Purchased merchandise on
account.

5. LIABILITIES
STOCK-
HOLDERS’
EQUITY
REVENUES
ASSETS
COSTS &
EXPENSES
Effect of Inventory Errors on
Financial Statements
Merchandise
Inventory
Cost of
Merchandise Sold
If merchandise inventory is . . . . . . .
Cost of merchandise sold is . . . . . .
Gross profit and net income are . . .
Total stockholders’ equity is . . . . .
overstated
understated
overstated
overstated
Net Income

6. If merchandise inventory is . . . . . . .
Cost of merchandise sold is . . . . . .
Gross profit and net income are . . .
Ending owner’s equity is . . . . . . . . .
understated
overstated
understated
understated
Effect of Inventory Errors on
Financial Statements

7. Purchased
goods
Sold
goods
Inventory Cost Flow Assumptions

8. Purchased
goods
Sold
goods
Inventory Cost Flow Assumptions

9. Purchased
goods
Sold
goods
Inventory Cost Flow Assumptions

10. Purchased
goods
Sold
goods
Inventory Cost Flow Assumptions

11. Inventory Costing Methods
40%
30%
20%
10%
0%
43%
34%
19%
4%
Fifo Lifo Average Other

12. Perpetual Inventory Costs
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

14. Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
The firm begins the year with 10
units of Item 127B on hand at a
total cost of $200.

15. Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
FIFO Perpetual Inventory Account
On January 4, 7 units of Item
127B are sold at $30 each.

16. Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
The sale of 7 units leaves a
balance of 3 units.
Jan. 1 10 20 200
4 7 20 140 3 20 60
Jan. 1 10 20 200
On January 4, 7 units of Item
127B are sold at $30 each.

17. Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
FIFO Perpetual Inventory Account
On January 10, the firm purchased
eight units at $21 each.

18. Item 127B
FIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 10, the firm
purchased eight units at $21 each.
Because the purchase price of $21 is
different than the cost of the previous 3
units on hand, the inventory balance of
11 units is accounted for separately.

19. Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22
FIFO Perpetual Inventory Account
On January 22, the firm sold
four units for $31 each.

20. Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
FIFO Perpetual Inventory Account
22 3 20 60
1 21 21 7 21 147
Of the four units sold, three are
from the first units in (fifo) at a
cost of $20.
On January 22, the
firm sold four units
for $31 each.

21. FIFO Perpetual Inventory Account
On January 28, the firm
sold two units at $32.
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

22. Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
FIFO Perpetual Inventory Account
22 3 20 60
1 21 21 7 21 147
28 2 21 42 5 21 105
On January 28, the firm
sold two units at $32.

23. FIFO Perpetual Inventory Account
On January 30, purchased ten additional
units of Item 127B at $22 each.
Inventory cost data to demonstrate
FIFO and LIFO Perpetual Systems
Cost of
Mdse. Sold
Item 127B Units Cost Price
Jan. 1 Inventory 10 $20
4 Sale 7 $30
10 Purchase 8 21
22 Sale 4 31
28 Sale 2 32
30 Purchase 10 22

24. Item 127B
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
FIFO Perpetual Inventory Account
22 3 20 60
1 21 21 7 21 147
28 2 21 42 5 21 105
30 10 22 220 5 21 105
10 22 220
Totals 18 $388 13 $263 15 $325
On January 30, purchased
ten additional units of Item
127B at $22 each.

26. Item 127B
LIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
The firm begins the year with
10 units of Item 127B on
hand at a total cost of $200.

27. Item 127B
LIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
On January 4, the firm sold
7 units at $30 each.

28. Item 127B
LIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 10, the
firm purchased eight
units at $21 each.
Note that a new
layer is formed.

29. Item 127B
LIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 22, the
firm sells four
units at $31 each.
22 4 21 84 3 20 60
4 21 84
Of the 4 units sold, all come
from the most recent purchase
at a cost of $21 each.

30. Item 127B
LIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 28, sold
two units at $32 each.
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42

31. Item 127B
LIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
On January 30, purchase
10 units at $22 each.
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
30 10 22 220 3 20 60
2 21 42
10 22 220

32. Item 127B
LIFO Perpetual Inventory Account
Purchases Cost of Mdse. Sold Inventory Balance
Unit Total Unit Total Unit Total
Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
30 10 22 220 3 20 60
2 21 42
10 22 220
Totals 18 $388 13 $266 15 $322

33. Fifo
Periodic

34. Jan. 1 Beginning
Inventory
200 units @ $9
Mar. 10 Purchase300 units @ $10
400 units @ $11 Sept. 21 Purchase
100 units @ $12 Nov. 18 Purchase
1,000 units available
for sale during
year
Fifo Periodic

35. Fifo Periodic
200 units @ $9
300 units @ $10
400 units @ $11
100 units @ $12
1,000 units available
for sale during
year
$10,400
= $1,800 Jan. 1
= 3,000 Mar. 10
= 4,400 Sept. 21
= 1,200 Nov. 18
Cost of merchandise
available for sale

36. Fifo Periodic
A physical count on
December 31 reveals that
700 of the 1,000 units
have been sold.
Using fifo, the first units
purchased are theoretically the
first units sold. We begin the
count with January 1.

37. Fifo Periodic
200 units @ $9
300 units @ $10
400 units @ $11
100 units @ $12
1,000 units available
for sale during
year
$10,400
= $1,800 Jan. 1
= 3,000 Mar. 10
= 4,400 Sept. 21
= 1,200 Nov. 18
Sold these 200
Sold these 300
Sold 200 of these200 units @ $11
= $ 0 Jan. 1
= 0 Mar. 10
= 2,200 Sept. 21
$ 3,400
Ending inventory

38. Cost of merchandise available for sale $10,400
Less ending inventory 3,400
Cost of merchandise sold $ 7,000
Fifo Periodic

39. Jan. 1
200 units at $9
Summary of Fifo Periodic
Mar. 10
300 units at $10
Sep. 21
400 units at $11
Nov. 18
100 units at $12
$1,800
$3,000
$4,400
$1,200
Purchases
Merchandise
Available
for Sale
$1,800
$3,000
$2,200
Cost of
Merchandise
Sold
200 units at $9
$10,400
$2,200
$1,200
$7,000
Merchandise
Inventory
$3,400
300 units at $10
200 units at $11
200 units at $11
100 units at $12
1,000 units
700 units
300 units

40. Lifo
Periodic

41. Jan. 1 Beginning
Inventory
200 units @ $9
Mar. 10 Purchase300 units @ $10
400 units @ $11 Sept. 21 Purchase
100 units @ $12 Nov. 18 Purchase
1,000 units available
for sale during
year
Lifo Periodic
Using lifo, the most recent batch
purchased is considered the first
batch of merchandise sold.

42. Jan. 1 Beginning
Inventory
200 units @ $9
Mar. 10 Purchase300 units @ $10
400 units @ $11 Sept. 21 Purchase
100 units @ $12 Nov. 18 Purchase
1,000 units available
for sale during
year
Lifo Periodic
Assume again that
700 units were sold
during the year.

43. 200 units @ $9
300 units @ $10
400 units @ $11
100 units @ $12
1,000 units available
for sale during
year
Lifo Periodic
Sold these 100
Sold these 400
Sold 200 of these100 units @ $10
= $1,800 Jan. 1
= 3,000 Mar. 10
= 4,400 Sept. 21
= 1,200 Nov. 18
$10,400
0
0
1,000
Ending Inventory
$2,800

44. Cost of merchandise available for sale $10,400
Less ending inventory 2,800
Cost of merchandise sold $ 7,600
Lifo Periodic

45. Jan. 1
200 units at $9
Summary of Lifo Periodic
Mar. 10
300 units at $10
Sep. 21
400 units at $11
Nov. 18
100 units at $12
$1,800
$3,000
$4,400
$1,200
$1,800
$1,000
Cost of
Merchandise
Sold
200 units at $9
$10,400
$4,400
$1,200
$2,800
$7,600
100 units at $10
200 units at $10
400 units at $11
100 units at $12
$2,000
700 units
1,000 units
300 units
Purchases
Merchandise
Available
for Sale
$1,800
Merchandise
Inventory

46. Average
Periodic

47. Jan. 1 Beginning
Inventory
200 units @ $9
Mar. 10 Purchase300 units @ $10
400 units @ $11 Sept. 21 Purchase
100 units @ $12 Nov. 18 Purchase
1,000 units available
for sale during
year
The average cost
periodic method is based
on the average cost of
identical units.
Average Cost Periodic

48. Average Cost Periodic
200 units @ $9 = $ 1,800
1,000 units available
for sale during
year
300 units @ $10 = $ 3,000
400 units @ $11 = $ 4,400
100 units @ $11 = $ 1,200
$10,400 Cost of
merchandise
available for
sale

49. Cost of Merchandise
Available for Sale
Units Available for Sale
During Year
= Average Unit Cost
$10,400
1,000 Units
= $10.40 per Unit
Average Cost Periodic

50. Cost of merchandise available for sale $10,400
Less ending inventory ($10.40 x 300) 3,120
Cost of merchandise sold $ 7,280
To verify this
amount, multiply
700 units sold
times $10.40 to get
the same $7,280.
Average Cost Periodic

51. Inventory
Turnover

52. Inventory Turnover
SUPERVALU Zale
Cost of merchandise sold $15,620,127,000 $ 737,188,000
Inventories:
Beginning of year $1,115,529,000 $478,467,000
End of year 1,067,837,000 571,669,000
Total $2,183,366,000 $1,050,136,000
Average $1,091,683,000 $525,068,000
Inventory turnover 14.3 times 1.4 times
Use: Inventory turnover measures the relationship
between the volume of goods sold and the
amount of inventory carried during the period.

53. Average daily cost of
merchandise sold:
$15,620,127,000/365 $42,794,868
$737,188,000/365 $2,019,693
Ending inventory $1,067,837,000 $571,669,000
Number of Days’ Sales in Inventory
SUPERVALU Zale
Average selling period 25 days 283 days
Use: To assess the efficiency in the
management of inventory

54. Universidad Cuauhtémoc
Campus Aguascalientes
Questions?
Maestría en Administración