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CHAPTER 8
INVENTORIES: MEASUREMENT
Overview
The next two chapters continue our study of assets by investigating the measurement and reporting
issues involving inventories and the related expense—cost of goods sold. Inventory refers to the
assets a company (1) intends to sell in the normal course of business, (2) has in production for future
sale, or (3) uses currently in the production of goods to be sold.
Learning Objectives
1.
2.
3.
4.
Explain the difference between a perpetual inventory system and a periodic inventory system.
Explain which physical quantities of goods should be included in inventory.
Determine the expenditures that should be included in the cost of inventory.
Differentiate between the specific identification, FIFO, LIFO, and average cost methods used to
determine the cost of ending inventory and cost of goods sold.
5. Discuss the factors affecting a company’s choice of inventory method.
Lecture Outline
Part A: Recording and Measuring Inventory
I.
Types of Inventory
A. Inventory for a wholesale or retail company consists of goods purchased in finished form
for resale. Inventory for a manufacturing company includes raw materials, work in
process, and finished goods. (T8-1)
B. For a manufacturing company, the costs of raw materials, direct labor, and manufacturing
overhead flow into work in process, then to finished goods when the manufacturing
process is completed, and finally to cost of goods sold when goods are sold. (T8-2)
II. Perpetual Inventory System (T8-3)
A. A perpetual inventory system continuously tracks both changes in inventory quantity and
inventory cost.
B. Inventory is debited when merchandise is purchased or returned by a customer, and
credited when merchandise is sold or returned to a supplier.
C. An important control feature of a perpetual system is that it is designed to track inventory
quantities from their acquisition to their sale.
III. Periodic Inventory System (T8-4)
A. A periodic inventory system adjusts inventory and records cost of goods sold only at the
end of each reporting period.
B. Merchandise purchases, purchase returns, purchase discounts, and freight-in are recorded
in temporary accounts.
C. Purchases plus freight-in less returns and discounts equals net purchases.
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D. The period's cost of goods sold is determined at the end of the period by combining the
temporary accounts with the inventory account:
Beginning inventory + Net purchases - Ending inventory = Cost of goods sold
IV. A Comparison of the Perpetual and Periodic Inventory Systems
A. The impact on the financial statements of choosing one system over the other generally is
not significant.
B. The perpetual system provides more timely information but is more costly to implement.
C. The periodic inventory system is less costly to implement during the period but usually
requires a physical count before ending inventory and cost of goods sold can be
determined.
V. What Is Included in Inventory?
A. Generally, physical quantities included in inventory consist of items in the possession of
the company. (T8-5)
1. For goods in transit, ownership depends on whether the merchandise is shipped f.o.b.
shipping point, or f.o.b. destination.
2. Goods held on consignment are included in the inventory of the consignor until sold by
the consignee.
3. A company includes in inventory the cost of merchandise it anticipates will be
returned.
B. Expenditures necessary to bring inventory to its condition and location for sale (or use for
raw materials) are included in inventory cost. (T8-6)
1. Freight-in paid by the purchaser is included in inventory cost.
2. Purchase returns represent reductions in net purchases.
3. Purchase discounts represent reductions in the amount to be paid if remittance is made
within a designated period of time. The purchaser can record purchase discounts using
either the gross method or the net method (T8-7)
C. Comprehensive example comparing perpetual and periodic systems. (T8-8)
© The McGraw-Hill Companies, Inc. 2004
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Intermediate Accounting, 3/e
VI. Inventory Cost Flow Assumptions
A. Regardless of the system used, it's necessary to assign dollar amounts to physical quantities
of goods sold and goods remaining in ending inventory. (T8-9)
1. The specific identification method matches each unit sold or each unit on hand at the
end of the period with its actual cost. The method is not feasible for most inventories.
2. Most companies use cost flow assumptions to determine cost of goods sold and ending
inventory. (T8-10)
a. The average cost method assumes that items sold and items in ending inventory
come from a mixture of all the goods available for sale.
(T8-11)
b. The first-in, first-out (FIFO) method assumes that items sold are those that were
acquired first. Ending inventory consists of the most recently acquired items. (T812)
c. The last-in, first-out (LIFO) method assumes that items sold are those that were
most recently acquired. Ending inventory consists of the items acquired first. (T813)
B. The financial statement effect of using the different methods depends on the direction of
any change in the unit cost of goods. (T8-14)
C. There are a number of factors that motivate company management to choose one method
over another.
1. A company is not required to choose an inventory method that approximates actual
physical flow.
2. Proponents of LIFO argue that it results in a better match of revenues and expenses.
a. However, the use of LIFO could result in an unrealistic ending inventory balance.
b. A decline in inventory quantity results in LIFO liquidation profit in periods of
rising costs. (T8-15)
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Decision Makers’ Perspective—Financial Analysis
A. A company should maintain sufficient inventory quantities to meet customer demand
while at the same time minimizing inventory ordering and carrying costs.
B. Analysts should make adjustments when evaluating companies that use different inventory
methods. Supplemental LIFO disclosures can be used to convert LIFO inventory and cost
of goods sold amounts. (T8-16)
C. Two important ratios used by analysts in assessing profitability are: (T8-17)
1. The gross profit or gross margin ratio, computed by dividing gross profit (sales less
cost of goods sold) by net sales, indicates the percentage of each sales dollar available
to cover other expenses and provide a profit.
2. The inventory turnover ratio, computed by dividing cost of goods sold by average
inventory, is designed to evaluate a company's effectiveness in managing its
investment in inventory.
Teaching Transparency Masters
The following can be reproduced on transparency film as they appear here, or
you can use the disk version of this manual and first modify them to suit your
particular needs or preferences.
© The McGraw-Hill Companies, Inc. 2004
8-4
Intermediate Accounting, 3/e
TYPES OF INVENTORY

Merchandising Companies


Merchandise inventory — Goods purchased in finished
form for resale.
Manufacturing Companies

Raw materials — The cost of components purchased
from other manufacturers that will become part of the
finished product.

Work in process — The products that are not yet
complete. It includes the cost of raw materials, the cost
of labor that can be directly traced to the goods in
process, and an allocated portion of other manufacturing
costs, called manufacturing overhead.

Finished goods — Once the manufacturing process is
complete, the costs accumulated in work in process are
transferred to finished goods.
T8-1
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8-5
INVENTORY COST FLOW FOR A
MANUFACTURING COMPANY
Raw
Materials
Work in
Process
Finished
Goods
-------------------------
-----------------------
----------------------
(1) $XX
$XX (4) 
$XX

$XX (7) 
$XX
$XX (8) 
Cost of
Goods Sold
-----------------------
$XX
Direct Labor
-------------------------
(2) $XX
$XX (5) 

Manufacturing
Overhead
-------------------------
(3) $XX
$XX (6) 

(1) Raw materials purchased
(2) Direct labor incurred
(3) Manufacturing overhead incurred
(4) Raw materials used
(5) Direct labor applied
(6) Manufacturing overhead applied
(7) Work in process transferred to finished goods
(8) Finished goods sold
T8-2
© The McGraw-Hill Companies, Inc. 2004
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Intermediate Accounting, 3/e
PERPETUAL INVENTORY SYSTEM

A perpetual inventory system continuously records both
changes in inventory quantity and inventory cost.
The Lothridge Wholesale Beverage Company purchases soft
drinks from producers and then sells them to retailers. The
company begins 2003 with merchandise inventory of $120,000
on hand. During 2003 additional merchandise is purchased on
account at a cost of $600,000. Sales for the year, all on account,
totaled $820,000. The cost of the soft drinks sold is $540,000.
Lothridge uses the perpetual inventory system to keep track of
both inventory quantities and inventory costs.
The following summary journal entries record the inventory
transactions for the Lothridge Company:
2003
Inventory .......................................................... 600,000
Accounts payable ........................................
600,000
To record the purchase of merchandise inventory.
2003
Accounts receivable ......................................... 820,000
Sales revenue ..............................................
820,000
To record sales on account.
Cost of goods sold .......................................... 540,000
Inventory .....................................................
540,000
To record the cost of sales.
T8-3
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8-7
PERIODIC INVENTORY SYSTEM

A periodic inventory system adjusts inventory and records
cost of goods sold only at the end of each period.
Cost of goods sold equation:
Beginning inventory + Net purchases - Ending inventory = Cost of goods sold
The Lothridge Wholesale Beverage Company purchases soft drinks from
producers and then sells them to retailers. The company begins 2003 with
merchandise inventory of $120,000 on hand. During 2003 additional
merchandise was purchased on account at a cost of $600,000. Sales for the
year, all on account, totaled $820,000. The cost of the soft drinks sold is
$540,000. Lothridge uses the periodic inventory system. A physical count
determined the cost of inventory at the end of the year to be $180,000.
The following journal entries summarize the inventory transactions for 2003.
Of course, each individual transaction would actually be recorded as incurred:
2003
Purchases .......................................................... 600,000
Accounts payable.........................................
600,000
To record the purchase of merchandise inventory.
2003
Accounts receivable ......................................... 820,000
Sales revenue ...............................................
820,000
To record sales on account.
NO ENTRY IS RECORDED FOR THE COST OF INVENTORY SOLD
T8-4
© The McGraw-Hill Companies, Inc. 2004
8-8
Intermediate Accounting, 3/e
PERIODIC INVENTORY SYSTEM
(continued)
Cost of goods sold for 2003 is determined and recorded as
follows:
Beginning inventory
Plus: Purchases
Cost of goods available for sale
Less: Ending inventory (per physical count)
Cost of goods sold
$120,000
600,000
720,000
(180,000)
$540,000
The following journal entry combines the components of cost of
goods sold into a single expense account and updates the balance
in the inventory account:
December 31, 2003
Cost of goods sold ............................................... 540,000
Inventory (ending) ................................................ 180,000
Inventory (beginning) ........................................
120,000
Purchases..........................................................
600,000
This entry adjusts the inventory account to the correct period-end
amount, closes the temporary purchases account, and records the
residual as cost of goods sold.
T8-4 (continued)
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8-9
PHYSICAL QUANTITIES INCLUDED IN INVENTORY



Generally, physical quantities included in inventory consist of
items in the possession of the company.
Goods in transit

If the goods are shipped f.o.b. (free on board) shipping
point, then legal title to the goods changes hands at the
point of shipment when the seller delivers the goods to
the common carrier.

If the goods are shipped f.o.b. destination, the seller is
responsible for shipping and legal title does not pass
until the goods arrive at the customer's location.
Goods on consignment


Goods on consignment should be included in inventory
of the consignor even though not in the company's
physical possession. The consignor records a sale only
when the consignee sells the goods.
Sales Returns

A company includes in inventory the cost of
merchandise it anticipates will be returned.
T8-5
© The McGraw-Hill Companies, Inc. 2004
8-10
Intermediate Accounting, 3/e
EXPENDITURES INCLUDED IN INVENTORY


The cost of inventory includes all expenditures necessary to
bring inventory to its desired condition and location for sale.
This includes:

The purchase price of goods.

Freight charges on incoming goods borne by the
purchaser.

Insurance costs while the goods are in transit.

The costs of unloading, unpacking, and preparing
merchandise for sale.
Cost is reduced by purchase returns and purchase discounts.
T8-6
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8-11
PURCHASE DISCOUNTS
On October 5, 2003, the Lothridge Wholesale Beverage Company purchased
merchandise at a price of $20,000. The repayment terms are stated as 2/10, n/30.
Lothridge paid $13,720 ($14,000 less the 2% cash discount) on October 14 and the
remaining balance of $6,000 on November 4. Lothridge employs a periodic
inventory system.
The gross and net methods of recording the purchase and cash payment are
compared as follows:
Gross Method
October 5, 2003
Purchases*
Accounts payable
Net Method
20,000
20,000
October 14, 2003
Accounts payable
14,000
Purchase discounts*
280
Cash
13,720
November 4, 2003
Accounts payable
Cash
6,000
6,000
Purchases*
Accounts payable
19,600
Accounts payable
Cash
13,720
Accounts payable
Interest expense
Cash
5,880
120
19,600
13,720
6,000
* The inventory account is used in a perpetual system

The gross method views discounts not taken as part of inventory cost.

The net method views discounts not taken as interest expense.
T8-7
© The McGraw-Hill Companies, Inc. 2004
8-12
Intermediate Accounting, 3/e
INVENTORY TRANSACTIONS —
PERPETUAL AND PERIODIC SYSTEMS
The Lothridge Wholesale Beverage Company purchases soft
drinks from producers and then sells them to retailers. The
company began 2003 with merchandise inventory of $120,000 on
hand. During 2003 additional merchandise is purchased on
account at a cost of $600,000.
Lothridge’s suppliers offer credit terms of 2/10, n/30. All
discounts were taken. Lothridge uses the net method to record
purchase discounts. All purchases are made f.o.b. shipping point.
Freight charges paid by Lothridge totaled $16,000. Merchandise
costing $20,000 (net of discounts) was returned to suppliers for
credit.
Sales for the year, all on account, totaled $830,000. The cost of
the soft drinks sold is $550,000. $154,000 of inventory remained
on hand at the end of 2003.
T8-8
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8-13
INVENTORY TRANSACTIONS —
PERPETUAL AND PERIODIC SYSTEMS
(continued)
Perpetual System
Inventory ($600 x 98%)
Accounts payable
Inventory
Cash
Accounts payable
Inventory
($ in 000s)
588
16
20
Accounts receivable
Sales revenue
830
Cost of goods sold
Inventory
550
No entry
Periodic System
Purchases
Purchases ($600 x 98%)
588
Accounts payable
588
588
Freight
Freight-in
16
Cash
16
Returns
Accounts payable
20
Purchase returns
20
830
Sales
Accounts receivable
Sales revenue
16
20
830
830
No entry
550
End of period
Cost of goods sold (below)
Inventory (ending)
Purchase returns
Inventory (beginning)
Purchases
Freight-in
550 <----------154
|
20
|
120
|
588
|
16
|
|
Supporting schedule:
Cost of goods sold:
Beginning inventory
Purchases
Less: Returns
Plus: Freight-in
Net purchases
Cost of goods available
Less: Ending inventory
Cost of goods sold
|
|
$120
|
$588
|
(20)
|
16
|
584
|
704
|
(154) |
$550 <---
T8-8 (continued)
© The McGraw-Hill Companies, Inc. 2004
8-14
Intermediate Accounting, 3/e
COST FLOW ASSUMPTIONS
The Browning Company began 2003 with $22,000 of inventory. The cost of
beginning inventory (BI) is composed of 4,000 units purchased for $5.50 each.
Merchandise transactions during 2003 were as follows:
Purchases
Date of
Purchase
Jan. 17
Mar. 22
Oct. 15
Totals
Units
1,000
3,000
3,000
7,000
Unit Cost*
$6.00
7.00
7.50
Total Cost
$ 6,000
21,000
22,500
$49,500
* includes purchase price and cost of freight.
Sales
Date of Sale
Units
Jan. 10
2,000
Apr. 15
1,500
Nov. 20
3,000
Total
6,500
Beginning inventory
($22,000)
+
Purchases
($49,500)
\
Cost of goods
available
($71,500)
Cost of inventory
on hand at end of period
/
?
\
Cost of goods sold
during the period
/
?
Total ending inventory plus
cost of goods sold = $71,500
T8-9
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© The McGraw-Hill Companies, Inc. 2004
8-15
COST FLOW ASSUMPTIONS

The average cost method assumes that items sold and items
in ending inventory come from a mixture of all the goods
available for sale.

The first-in, first-out (FIFO) method assumes that items
sold are those that were acquired first. Ending inventory
consists of the most recently acquired items.

The last-in, first-out (LIFO) method assumes that items sold
are those that were most recently acquired. Ending inventory
consists of the items acquired first.

In a periodic system, ending inventory and cost of goods
sold are determined using one of the three cost flow
assumptions compared on the next slide:
T8-10
© The McGraw-Hill Companies, Inc. 2004
8-16
Intermediate Accounting, 3/e
COST FLOW ASSUMPTIONS
(continued)
AVERAGE COST
Cost of goods available for sale (11,000 units)
Less: Ending inventory (determined below)
Cost of goods sold (difference)
Cost of ending inventory:
$71,500
Weighted-average unit cost =
11,000 units
4,500 units x $6.50 = $29,250
$71,500
(29,250)
$42,250
=
$6.50
FIFO
Cost of goods available for sale (11,000 units)
Less: Ending inventory (determined below)
Cost of goods sold (difference)
Cost of ending inventory:
Date of
Purchase
Units
Unit Cost Total Cost
Oct. 15
3,000
$7.50
$22,500
Mar. 22
1,500
7.00
10,500
Total
4,500
$33,000
$71,500
(33,000)
$38,500
LIFO
Cost of goods available for sale (11,000 units)
Less: Ending inventory (determined below)
Cost of goods sold (difference)
Cost of ending inventory:
Date of
Purchase
Units Unit Cost Total Cost
Beg. inventory 4,000
$5.50
$22,000
January 17
500
6.00
3,000
Total
4,500
$25,000
$71,500
(25,000)
$46,500
T8-10 (continued)
Instructors Resource Manual
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8-17
AVERAGE COST — PERPETUAL INVENTORY SYSTEM
Date
Purchased
Beginning
inventory
4,000 @$5.50 = $22,000
Jan. 10
Jan. 17
Sold
2,000 @$5.50 = $11,000
1,000 @ $6.00 = $6,000
Balance
4,000 @ $5.50
$22,000
2,000 @ $5.50
$11,000
$11,000+$6,000 =
$17,000
2,000+ 1,000 = 3,000 units
$17,000
= $5.667/unit
3,000 units
Mar. 22
3,000 @ $7.00 = $21,000
$17,000+$21,000 = $38,000
3,000+ 3,000 = 6,000 units
$38,000
= $6.333/unit
6,000 units
Apr. 15
Oct. 15
1,500 @$6.333 = $9,500
3,000 @ $7.50 = $22,500
4,500 @ $6.333 = $28,500
$28,500+$22,500 = $51,000
4,500+ 3,000 = 7,500 units
$51,000
= $6.80/unit
7,500 units
Nov. 20
3,000 @$6.80 = $20,400
Total cost of goods sold
4,500 @ $6.80
=
$30,600
= $40,900
T8-11
© The McGraw-Hill Companies, Inc. 2004
8-18
Intermediate Accounting, 3/e
FIFO — PERPETUAL INVENTORY SYSTEM

The same ending inventory and cost of goods sold amounts
are always produced in a perpetual system as in a periodic
system when FIFO is used.
Date
Purchased
Sold
Beginning 4,000 @ $5.50 = $22,000
inventory
Jan. 10
Jan. 17
Mar. 22
2,000 @ $5.50 = $11,000
1,000 @ $6.00 = $6,000
3,000 @ $7.00 = $21,000
Apr. 15
Oct. 15
1,500 @ $5.50 = $8,250
3,000 @ $7.50 = $22,500
Nov. 20
4,000 @ $5.50
$22,000
2,000 @ $5.50
$11,000
2,000 @ $5.50
1,000 @ $6.00
$17,000
2,000 @ $5.50
1,000 @ $6.00
3,000 @ $7.00
$38,000
500 @ $5.50
1,000 @ $6.00
3,000 @ $7.00
$29,750
500 @ $5.50
1,000 @ $6.00
3,000 @ $7.00
3,000 @ $7.50
500 @ $5.50 +
1,000 @ $6.00 +
1,500 @ $7.00 = $19,250
Total cost of goods sold
Balance
1,500 @ $7.00
3,000 @ $7.50
$52,250
$33,000
= $38,500
T8-12
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8-19
LIFO — PERPETUAL INVENTORY SYSTEM
Date
Purchased
Sold
Beginning 4,000 @ $5.50 = $22,000
inventory
Jan. 10
Jan. 17
Mar. 22
2,000 @ $5.50 = $11,000
1,000 @ $6.00 = $6,000
3,000 @ $7.00 = $21,000
Apr. 15
Oct. 15
1,500 @ $7.00 = $10,500
3,000 @ $7.50 = $22,500
Nov. 20
4,000 @ $5.50
$22,000
2,000 @ $5.50
$11,000
2,000 @ $5.50
1,000 @ $6.00
$17,000
2,000 @ $5.50
1,000 @ $6.00
3,000 @ $7.00
$38,000
2,000 @ $5.50
1,000 @ $6.00
1,500 @ $7.00
$27,500
2,000 @ $5.50
1,000 @ $6.00
1,500 @ $7.00
3,000 @ $7.50
3,000 @ $7.50 = $22,500
Total cost of goods sold
Balance
2,000 @ $5.50
1,000 @ $6.00
1,500 @ $7.00
$50,000
$27,500
= $44,000
T8-13
© The McGraw-Hill Companies, Inc. 2004
8-20
Intermediate Accounting, 3/e
COMPARISON OF COST FLOW METHODS
The three cost flow methods are compared below assuming a
periodic inventory system.
AVERAGE
FIFO
LIFO
Cost of goods sold
$42,250
$38,500
$46,500
Ending inventory
29,250
33,000
25,000
$71,500
$71,500
$71,500
Total

During periods of generally rising costs FIFO cost of goods
sold results in a lower cost of goods sold than LIFO.

LIFO cost of goods sold will include the more recent higher
unit cost purchases.

FIFO ending inventory includes the most recent higher cost
purchases which results in a higher ending inventory than
LIFO.
T8-14
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© The McGraw-Hill Companies, Inc. 2004
8-21
LIFO LIQUIDATION PROFIT

A decline in inventory quantity results in LIFO liquidation
profit in periods of rising costs.
National Distributors, Inc., uses the LIFO inventory method. The
company began 2003 with inventory of 10,000 units that cost $20
per unit. During 2003 30,000 units were purchased for $25 each
and 35,000 units were sold.
National’s LIFO cost of goods sold for 2003 consists of:
30,000 units @ $25 per unit =
5,000 units @ $20 per unit =
35,000
$750,000
100,000
$850,000

Included in cost of goods sold are 5,000 units from beginning inventory
purchased at $20 that have now been liquidated.

If the company had purchased at least 35,000 units, no liquidation would
have occurred. Then cost of goods sold would have been $875,000 (35,000
units x $25 per unit) instead of $850,000. The difference between these two
cost of goods sold figures of $25,000 ($875,000 - 850,000) is the before tax
LIFO liquidation profit.

Assuming a 40% income tax rate, the net effect of the liquidation is to
increase net income by $15,000 [$25,000 x (1 - .40)].

A material effect on net income of LIFO layer liquidation must be disclosed
in a note.
T8-15
© The McGraw-Hill Companies, Inc. 2004
8-22
Intermediate Accounting, 3/e
DECISION MAKERS’ PERSPECTIVE —
SUPPLEMENTAL LIFO DISCLOSURES

Supplemental LIFO disclosures can be used to convert LIFO
inventory and cost of goods sold amounts.
(dollars in millions)
Sara Lee Corporation
Balance sheet:
Inventories
Income statement:
Net sales
Cost of goods sold

2000
$2,582
$2,951
2001
2000
$1,911
$965
2001
2001
$17,747
$10,751
10,264
9,661
Sara Lee uses a combination of LIFO and FIFO to value its inventory. Tyson
Foods uses only FIFO. We can convert Sara Lee's inventory and cost of goods
sold to a 100% FIFO basis before comparing the two companies by using the
information provided in Graphic 8-6 (Slide T8-15).
Inventories (as reported)
Add: Conversion to FIFO
Inventories (100% FIFO)

2001
Tyson Foods, Inc.
2001
$2,582
7
$2,589
2000
$2,951
12
$2,963
Cost of goods sold for 2001 would have been $5 million higher had Sara Lee
used FIFO instead of LIFO. While beginning inventory would have been $12
million higher, ending inventory also would have been higher by $7 million.
An increase in beginning inventory causes an increase in cost of goods sold,
but an increase in ending inventory causes a decrease in cost of goods sold.
T8-16
Instructors Resource Manual
© The McGraw-Hill Companies, Inc. 2004
8-23
DECISION MAKERS’ PERSPECTIVE —
FINANCIAL ANALYSIS

The gross profit ratio indicates the percentage of each sales
dollar available to cover other expenses and provide a profit.

The inventory turnover ratio helps to evaluate a company's
effectiveness in managing its investment in inventory.
Gross profit ratio
=
Gross profit
Net sales
Inventory turnover ratio
=
Cost of goods sold
Average Inventory
T8-17
© The McGraw-Hill Companies, Inc. 2004
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Intermediate Accounting, 3/e
Suggestions for Class Activities
1.
Internet Activity
Costco (formerly Price/Costco) operates membership warehouses in 24 states, nine Canadian
provinces, the United Kingdom, Korea and Taiwan. It offers very low prices on a limited selection
of nationally branded and selected private label products in a wide range of merchandise categories
in no-frills, self-service warehouse facilities. Wal Mart Stores, the largest retailer in the U.S., is
engaged in the operation of mass merchandising stores located in all 50 states and a number of other
countries. Have students, individually or in groups:
A. Access Wal Mart's most recent annual report using Edgarscan on the web.
1. Determine the company's primary products and activities.
2. Using the data provided in the income statement and balance sheet,
determine what the company' cost of goods sold (cost of sales) for the
most recent year would have been if the company had used FIFO instead of
LIFO to value its inventories.
B. Access Costco's most recent annual report using Edgarscan on the web.
1. Determine the company's primary products and activities.
2. Predict which company, Wal Mart or Costco, has the higher gross profit
ratio and the higher inventory turnover ratio.
3. Using the data provided in the income statements and balance sheets for the
most recent fiscal year, confirm their predictions in 2 above.
Points to note:
Students should predict a higher gross profit ratio and lower turnover ratio for Wal Mart. For the
2001 fiscal year:
Gross profit ratio
Inventory turnover ratio
Instructors Resource Manual
Wal Mart
21%
9.8
Costco
10%
11.7
© The McGraw-Hill Companies, Inc. 2004
8-25
2.
Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis and judgment skills.
Communication Skills. In addition to Communication Case 8-3, Communication Case 8-4 can be
adapted to ask students to write a memo to the "intern," and Financial Analysis Case 8-11 can
be adapted to ask students to write a memo to the "chief financial officer." Ethics Case 8-6 does
well as a group assignment. Judgment Case 8-1 and Real World Case 8-7 create good class
discussions. Real World Case 8-7, Research Case 8-9, and Financial Analysis Case 8-11 are
suitable for student presentation(s).
Research Skills. In their careers, our graduates will be required to locate and extract relevant
information from available resource material to determine the correct accounting practice,
perhaps identifying the appropriate authoritative literature to support a decision. Real World
Case 8-7 can be adapted to require students to research the authoritative literature on the
presentation of supplemental LIFO disclosures.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret data to provide options for making
business and investment decisions. In addition to Financial Analysis Cases 8-10 and 8-11;
Exercises 8-17, and 8-18; and Judgment Case 8-1 also provide opportunities to develop and
sharpen analytical skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that require
students to critically analyze issues to apply concepts learned to business situations in order to
evaluate options for decision-making and provide an appropriate conclusion. In addition to
Judgment Cases 8-1, 8-2, and 8-5, Ethics Case 8-6 also requires students to exercise judgment.
© The McGraw-Hill Companies, Inc. 2004
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Intermediate Accounting, 3/e
Assignment Chart
Questions
8-1
8-2
8-3
8-4
8-5
8-6
8-7
8-8
8-9
8-10
Learning
Objective(s)
3
1
1
2
2
3
1,3
4
4,5
5
Topic
Types of inventory for a manufacturer
Perpetual versus period inventory systems
Perpetual versus period inventory systems
F.O.B. shipping point versus F.O.B. destination
Consignment arrangement
Purchase discounts; gross versus net methods
Periodic inventory system
Inventory costing methods
LIFO versus FIFO
LIFO
Exercises
8-1
Learning
Objective(s)
1
Topic
Perpetual inventory system; journal entries
8-2
1
8-3
1
8-4
1
8-5
1
8-6
3
8-7
3
8-8
3
8-9
2
8-10
2
8-11
1,4
8-12
1,4
8-13
1,4
8-14
1,4
8-15
1,4
8-16
1,2,4
8-17
4,5
Instructors Resource Manual
Est. time
(min.)
5
5
5
5
5
5
5
5
5
5
Est. time
(min.)
1
0
Periodic inventory system; journal entries
1
0
Determining cost of goods sold; periodic inventory system 1
5
Perpetual and periodic inventory systems compared
1
5
Periodic inventory system; missing data
2
5
Purchase discounts; the gross method
1
5
Purchase discounts; the net method
1
5
Trade and purchase discounts; the gross method and the net
2
method compared
0
Goods in transit
1
0
Goods in transit; consignment
1
0
Inventory cost flow methods; periodic system
2
0
Inventory cost flow methods; perpetual system
2
5
Comparison of FIFO and LIFO; periodic system
2
0
Average cost method; periodic and perpetual systems
2
0
FIFO, LIFO, and average cost methods
2
0
Multiple choice, inventory measurement
2
0
LIFO liquidation
1
0
© The McGraw-Hill Companies, Inc. 2004
8-27
8-18
—
Ratio analysis
8-19
1-5
Concepts; terminology
© The McGraw-Hill Companies, Inc. 2004
8-28
1
5
2
0
Intermediate Accounting, 3/e
Problems
8-1
Learning
Objective(s)
1,2,3
8-2
2
8-3
2,3
8-4
1,2,3,4
8-5
1,4
8-6
1,4
8-7
1,4
8-8
1,4
Cases
Judgment Case 8-1
Learning
Objective(s)
—
Judgment Case 8-2
3,4
Communication Case 8-3
4,5
Communication Case 8-4
4,5
Judgment Case 8-5
2
Ethics Case 8-6
4
Real World Case 8-7
4,5
Internet Case 8-8
4,5
Research Case 8-9
3,4
Financial Analysis Case 8-10
—
Financial Analysis Case 8-11
4
Instructors Resource Manual
Est. time
(min.)
4
5
Items to be included in inventory
2
0
Costs included in inventory
2
5
Various inventory transactions; determining inventory and
2
cost of goods sold
5
Various inventory costing methods
5
0
Various inventory costing methods;
4
0
Various inventory costing methods
4
0
Various inventory costing methods
3
0
Topic
Various inventory transactions; journal entries
Est. time
(min.)
2
5
The specific identification inventory method; inventoriable
3
costs
0
LIFO versus FIFO
4
5
LIFO versus FIFO
1
5
Goods in transit
1
5
Profit manipulation
3
0
Effects of inventory valuation methods: LIFO and FIFO
2
5
Effects of inventory valuation methods
4
5
Comparison of inventory valuation in Denmark and the
1
Canada
5
Compare inventory management using ratios
6
0
Reporting of inventories
2
0
Topic
Riding the Merry-Go-Round
© The McGraw-Hill Companies, Inc. 2004
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