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PRDV201: Accounting Principles I

Unit 5: Inventory Reporting   In this unit, you will learn about inventory reporting for merchandisers and manufacturing firms, and the conventions used in reporting inventory purchases and sales.  Managing inventory levels is essential when determining the appropriate amount of each product to carry in-store or in raw materials to produce finished products.  Large retailers such as Wal-Mart use “just-in-time” inventory systems that track store inventory levels as customers purchase items.  You will learn about how this method of recording inventory can help a company better regulate its profitability.

As you complete this unit, focus on the differences in inventory recording for merchandising and manufacturing firms, the cost conventions for reporting inventory, and how companies handle a decrease in the value of its current inventory.

Unit 5 Time Advisory
This unit should take approximately 3 hours to complete.

☐    Subunit 5.1: 1.5 hours

☐    Subunit 5.2: 0.25 hours

☐    Subunit 5.3: 0.25 hours

☐    Subunit 5.4: 0.5 hours

☐    Subunit 5.5: 0.5 hours

Unit5 Learning Outcomes
Upon successful completion of this unit, the student will be able to: - Identify the components used in the inventory equations for merchandising and manufacturing firms. - Compare and contrast merchandising and manufacturing firms. - Identify common inventory-reporting methods for merchandising firms. - Compare and contrast FIFO and LIFO cost flow assumptions. - Calculate the LIFO liquidation profit and reserve when given inventory data. - Explain how to convert LIFO inventory numbers to FIFO inventory numbers.

5.1 The Inventory Equation   - Lecture: Dr. Larry Walther’s Principles of Accounting: “Components to Include in Inventory” Link: Dr. Larry Walther’s Principles of Accounting: “Components to Include in Inventory” (YouTube)

 Instructions: Please click on the link above and watch the lecture.
 As you watch the lecture, pay close attention to how inventory
balances are calculated during an accounting period.  By the end of
this lecture, you should be able to clearly identify the steps to
calculate beginning and ending inventory values.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Lecture: Dr. Larry Walther’s Principles of Accounting: “Basic Concepts of Inventory Costing Methods” Link: Dr. Larry Walther’s Principles of Accounting: “Basic Concepts of Inventory Costing Methods” (YouTube)

    Instructions: Please click on the link above and watch the lecture.  As you watch the lecture, listen to the distinctions between the two inventory costing methods that merchandising firms use.  By the end of this lecture, you should be able to define the differences between inventory costing methods.

    Watching this lecture and taking notes should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Activity: Dr. Larry Walther’s Principles of Accounting: “Chapter 8: Inventory: Inventory Categories Worksheet” Link: Dr. Larry Walther’s Principles of Accounting: “Chapter 8: Inventory: Inventory Categories Worksheet” (PDF)

    Instructions: Please click on the link above and carefully read the directions before completing the worksheet.  Identify the different inventory methods that are appropriate for each scenario.  If you have difficulty completing the worksheet, refer back to the lectures assigned in this subunit.

    Reviewing your previous readings and completing this worksheet should take approximately 20 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

5.1.1 Merchandising Firms   - Lecture: Dr. Larry Walther’s Principles of Accounting: “The Merchandising Business and Related Sales Recognition Issues” Link: Dr. Larry Walther’s Principles of Accounting: “The Merchandising Business and Related Sales Recognition Issues” (YouTube)

 Instructions: Please click on the link above and watch the lecture.
 As you watch the lecture, pay close attention to the unique
challenges that merchandising firms are faced with.  By the end of
this lecture, you should be able to identify the characteristics of
a merchandising firm and what types of businesses this definition
may include.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of used
displayed on the webpage above.
  • Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 6: Merchandising Transactions” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 6: Merchandising Transactions” (PDF)

    Instructions: If you have not already saved this document to your desktop, please click on the link above to download the PDF.   Begin the reading on page 251 with the section “A career as CEO.”  Read through page 253; you do NOT need to read the “Sales Revenues” section.  Upon completion of this reading, you should be able to distinguish between merchandising and manufacturing firms based on how sales are recorded.

    Reading this chapter and taking notes should take approximately 5 minutes.

    Terms of Use: The book above is released under a Creative Commons Attribution-Non-Commercial-Share-Alike License 3.0.  It is attributed to James Don Edwards and Roger H. Hermanson, and the original version can be found here.

5.1.2 Manufacturing Firms   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 18: Managerial Accounting Concepts/Job Costing” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 18: Managerial Accounting Concepts/Job Costing” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled “Merchandiser and Manufacturing Accounting” on
pages 780–787.  As you read, identify the characteristics of
manufacturing firms and how this differs from merchandising firms.
 By the end of this reading, you should be able to recount the
different costing affects that occur with merchandising and
manufacturing firms.  

 Reading this chapter and taking notes should take approximately 30
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

5.2 FIFO (First In, First Out)   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 7: Measuring and Reporting Inventories” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 7: Measuring and Reporting Inventories” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled “FIFO (First In, First Out)” on pages 309 and
310.  As you read, pay careful attention to how this inventory
costing method is determined.  

 Reading this chapter and taking notes should take approximately 5
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

5.3 LIFO (Last In, Last Out)   - Reading: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 7: Measuring and Reporting Inventories” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 7: Measuring and Reporting Inventories” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled “LIFO (Last In, First Out)” on pages 310 and
311.  As you read, pay careful attention to how this inventory
costing method is determined.  

 Reading this chapter and taking notes should take approximately 5
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).

5.3.1 LIFO Liquidation & LIFO Reserve   - Lecture: YouTube: Ken Boyd’s “Financial Accounting 7A: Inventory – LIFO Reserve, LIFO Liquidation” Link: YouTube: Ken Boyd’s “Financial Accounting 7A: Inventory – LIFO Reserve, LIFO Liquidation” (YouTube)

 Instructions: Please click on the link above and watch the entire
lecture.  As you watch the lecture, pay close attention to how LIFO
reserves are calculated and what they indicate.  By the completion
of this lecture, you should be able to clearly define how to convert
from LIFO to FIFO inventory costing methods.  This lecture also
covers the topic outlined in sub-subunit 5.3.2.  

 Watching this lecture and taking notes should take approximately 15
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.

5.3.2 Converting LIFO to FIFO   Note: This topic is covered in the lecture assigned in 5.3.1.  As you review this lecture, be sure to pay close attention to how LIFO can be converted to FIFO in the example outlined in the lecture.

5.4 Weighted Average Cost   - Reading: Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 7: Measuring and Reporting Inventories” Link: Global Text Project: James Don Edwards and Roger H. Hermanson’s Accounting Principles: A Business Perspective, First Global Text Edition, Volume 1: Financial Accounting: “Chapter 7: Measuring and Reporting Inventories” (PDF)

 Instructions: If you have not already saved this document to your
desktop, please click on the link above to download the PDF.  Read
the section titled “Weighted Average Cost” on pages 311 and 312.  As
you read, pay careful attention to how this inventory costing method
is determined.  

 Reading this chapter and taking notes should take approximately 5
minutes.  

 Terms of Use: The book above is released under a [Creative Commons
Attribution-Non-Commercial-Share-Alike License
3.0](http://creativecommons.org/licenses/by-nc-sa/3.0/).  It is
attributed to James Don Edwards and Roger H. Hermanson, and the
original version can be found
[here](http://dl.dropbox.com/u/31779972/Accounting%20Principles%20Vol.%201.pdf).
  • Lecture: Dr. Larry Walther’s Principles of Accounting: “Comparison of Inventory Costing Methods” Link: Dr. Larry Walther’s Principles of Accounting: “Comparison of Inventory Costing Methods” (YouTube)

    Instructions: Please click on the link above and watch the entire lecture.  As you watch the lecture, pay close attention to how the inventory is calculated using the three different inventory costing methods you just studied.  Be sure to take notes throughout the lecture to ensure that you can also reproduce the same calculations and conclusions.

    Watching this lecture and taking notes should take approximately 10 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

  • Activity: Dr. Larry Walther’s Principles of Accounting: “Chapter 8: Inventory: FIFO, LIFO, Weighted Average Practice Worksheet” Link: Dr. Larry Walther’s Principles of Accounting: “Chapter 8: Inventory: FIFO, LIFO, Weighted Average Practice Worksheet” (PDF)

    Instructions: Please click on the link above and carefully read the directions before completing the worksheet.  Calculate the inventory cost for each of the three methods you just reviewed.  If you have difficulty completing the worksheet, refer back to the lectures assigned in this subunit.

    Reviewing your previous readings and completing this worksheet should take approximately 15 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.

5.5 Lower of Cost or Market   - Lecture: Dr. Larry Walther’s Principles of Accounting: “Lower of Cost or Market” Link: Dr. Larry Walther’s Principles of Accounting: “Lower of Cost or Market” (YouTube)

 Instructions: Please click on the link above and watch the lecture.
 As you watch the lecture, take notes on what lower of cost or
market means and how this is used to determine inventory values.  

 Watching this lecture and taking notes should take approximately 10
minutes.  

 Terms of Use: Please respect the copyright and terms of use
displayed on the webpage above.
  • Activity: Dr. Larry Walther’s Principles of Accounting: “Chapter 8: Inventory: Lower of Cost or Market Worksheet” Link: Dr. Larry Walther’s Principles of Accounting“Chapter 8: Inventory: Lower of Cost or Market Worksheet” (PDF)

    Instructions: Please click on the link above and carefully read the directions before completing the worksheet.  Calculate the lower of cost or market for the given scenario.  If you have difficulty completing the worksheet, refer back to the lectures assigned in this subunit.

    Reviewing your previous readings and completing this worksheet should take approximately 20 minutes.

    Terms of Use: Please respect the copyright and terms of use displayed on the webpage above.