8-1

Chapter

McGraw-Hill/Irwin

INVENTORIES AND
THE COST OF GOODS
SOLD

The McGraw-Hill Companies, Inc.

8-2

Inventory
Inventory Defined
Defined

Inventory
Inventory
Goods
Goods owned
owned
and
and held
held for
for sale
sale
to
to customers
customers

McGraw-Hill/Irwin

Current
Current
asset
asset

The McGraw-Hill Companies, Inc.

8-3

The
The Flow
Flow of
of Inventory
Inventory Costs
Costs
BALANCE SHEET
As purchase cost
(or manufacturing
costs) are incurred

Current assets:
Inventory
INCOME STATEMENT
Revenue
Cost of goods sold
Gross profit
Expenses
Net income

McGraw-Hill/Irwin

$
as goods
are sold
$

The McGraw-Hill Companies, Inc.

8-4

The
The Flow
Flow of
of Inventory
Inventory Costs
Costs
In a perpetual inventory system, inventory entries
parallel the flow of costs.
GENERAL JOURNAL
Date

Account Titles and Explanation

P
R Debit

Credit

Entry on Purchase Date

Inventory

$$$$

Accounts Payable

$$$$

Entry on Sale Date

Cost of Goods Sold
Inventory
McGraw-Hill/Irwin

$$$$
$$$$

The McGraw-Hill Companies, Inc.

8-5

Which
Which Unit
Unit Did
Did We
We Sell?
Sell?
When identical units of inventory have
different unit costs, a question naturally
arises as to which of these costs should be
used in recording a sale of inventory.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-6

Inventory
Inventory Subsidiary
Subsidiary Ledger
Ledger
AAseparate
separate subsidiary
subsidiary account
account is
is maintained
maintained for
for
each
each item
item in
in inventory.
inventory.
Item LL002
Description Laser Light
Location Storeroom 2
Purchased

Date
Sept. 5
Sept. 9

Units
100
75

Sept. 10

Unit
Cost
$ 30
50

Total
$ 3,000
3,750

Sold

Units

Unit
Cost

10

Primary supplier Electronic City

Secondary supplier Electric Company
Inventory level: Min: 25 Max: 200
Balance
Cost of
Goods
Unit
Sold
Units
Cost
Total
100
$
30 $ 3,000
100
30
3,000
75
50
3,750
?
?
?
?
?
?
?

How can we determine the unit cost for the Sept. 10 sale?
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-7

Inventory
Inventory Cost
Cost Flows
Flows
We use one of these inventory valuation
methods to determine cost of inventory sold.
Specific
identification

Average
cost

FIFO

LIFO

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Information
Information for
for the
the Following
Following Inventory
Inventory
Examples
Examples

8-8

The Bike Company (TBC)

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-9

Specific
Specific Identification
Identification

When
When aa unit
unit
is
is sold,
sold, the
the
specific
specific cost
cost of
of
the
the unit
unit sold
sold is
is
added
added to
to cost
cost of
of
goods
goods sold.
sold.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-10

Specific
Specific Identification
Identification

On
On August
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Nine
Nine bikes
bikes originally
originally cost
cost $91
$91 and
and 11
11 bikes
bikes
originally
originally cost
cost $106.
$106.
Continue
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-11

Specific
Specific Identification
Identification

The
The Cost
Cost of
of Goods
Goods Sold
Sold for
for the
the August
August 14
14 sale
sale is
is
$1,985,
$1,985, leaving
leaving $515
$515 and
and 55 units
units in
in inventory.
inventory.
Continue
McGraw-Hill/Irwin

Lets look at the entries for

the Aug. 14 sale.

The McGraw-Hill Companies, Inc.

8-12

Specific
Specific Identification
Identification

Retail
Retail
Cost
Cost

A
Asimilar
similar entry
entry is
is
made
made after
after each
each sale.
sale.
McGraw-Hill/Irwin

Continue

The McGraw-Hill Companies, Inc.

8-13

Specific
Specific Identification
Identification

Cost
Cost of
of Goods
Goods
Sold
Sold for
for
August
August 31
31 ==
$2,610
$2,610
Additional
Additionalpurchases
purchaseswere
weremade
madeon
onAugust
August17
17and
and28.
28.
Costs
Costsassociated
associatedwith
withsales
saleson
onAugust
August31
31were
wereas
asfollows:
follows:11@
@$91,
$91,
33@
@$106,
$106,15
15@
@$115,
$115,&&44@
@$119.
$119.

McGraw-Hill/Irwin

Continue

The McGraw-Hill Companies, Inc.

8-14

Specific
Specific Identification
Identification

Income Statement

COGS = $4,595

Balance Sheet

Inventory = $1,395
McGraw-Hill/Irwin

11
55
66

@
@ $$106
106 == $$ 106
106
@
575
@ $$115
115 ==
575
@
714
@ $$119
119 ==
714
End.
$$1,395
End.Inv.
Inv. The
1,395
McGraw-Hill
Companies, Inc.

8-15

Since specific
identification is so
easy, cant we use it
all the time?

McGraw-Hill/Irwin

Not really. Specific

identification is hard to use
when we sell a lot of
inventory that has lots of
different costs.

The McGraw-Hill Companies, Inc.

8-16

Average-Cost
Average-Cost Method
Method
When a unit is sold,
the average cost of each unit
in inventory is assigned to
cost
of goods sold.
Cost of Goods Units on hand
Available for on the date of
Sale
sale

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-17

Average-Cost
Average-Cost Method
Method

The
Theaverage
averagecost
costper
per unit
unit
must
must be
becomputed
computedprior
prior
to
toeach
eachsale.
sale.

$100
$100 == $2,500
$2,500 25
25

On
On August
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Continue
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-18

Average-Cost
Average-Cost Method
Method

The
The average
average cost
cost per
per
unit
unit is
is $100.
$100.

Continue
McGraw-Hill/Irwin

$100
$100 == $2,500
$2,500 25
25

Lets look at the entries

for the Aug.
14
sale.
The McGraw-Hill Companies, Inc.

8-19

Average-Cost
Average-Cost Method
Method

Retail
Retail
Cost
Cost

A
Asimilar
similar entry
entry is
is
made
made after
after each
each sale.
sale.
McGraw-Hill/Irwin

Continue

The McGraw-Hill Companies, Inc.

8-20

Average-Cost
Average-Cost Method
Method

Additional
Additional purchases
purchaseswere
weremade
madeon
onAugust
August 17
17and
and
August
August28.
28.
On
OnAugust
August 31,
31,an
anadditional
additional23
23units
unitswere
weresold.
sold.
Continue
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-21

Average-Cost
Average-Cost Method
Method

$114
$114 == $3,990
$3,990 35
35

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-22

Average-Cost
Average-Cost Method
Method

The
The average
average cost
cost per
per
unit
unit is
is $114.
$114.
McGraw-Hill/Irwin

$114
$114 == $3,990
$3,990 35
35

The McGraw-Hill Companies, Inc.

8-23

Average-Cost
Average-Cost Method
Method

Income Statement

COGS = $4,622

Balance Sheet

Inventory = $1,368

$114
$114 12
12 == $1,368
$1,368
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-24

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)
Oldest
Oldest
Costs
Costs

Costs
Costs of
of
Goods
Goods Sold
Sold

Recent
Recent
Costs
Costs

Ending
Ending
Inventory
Inventory

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-25

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)

The
TheCost
Costof
ofGoods
GoodsSold
Sold for
for the
theAugust
August 14
14 sale
saleis
is$1,970,
$1,970,
leaving
leaving$530
$530and
and55 units
units in
ininventory.
inventory.

On
On August
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Continue
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-26

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)

Retail
Retail
Cost
Cost

A
Asimilar
similar entry
entry is
is
made
made after
after each
each sale.
sale.
McGraw-Hill/Irwin

Continue

The McGraw-Hill Companies, Inc.

8-27

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)

Additional
Additionalpurchases
purchaseswere
weremade
madeon
onAug.
Aug.17
17and
andAug.
Aug.28.
28.
Cost
of
Goods
Sold
for
August
31
=sold.
$2,600
CostOn
of
Goods
Sold
for
August
31
=
$2,600
August
31,
an
additional
23
units
were
On August 31, an additional 23 units were sold.
McGraw-Hill/Irwin

Continue

The McGraw-Hill Companies, Inc.

8-28

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)

Income Statement

COGS = $4,570

Balance Sheet

Inventory = $1,420
McGraw-Hill/Irwin

22 @
@ $$115
115
10
10 @
@ $$119
119
End.
End. Inv.
Inv.

== $$ 230
230
== 1,190
1,190
$$1,420
1,420

The McGraw-Hill Companies, Inc.

8-29

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)
Recent
Recent
Costs
Costs

Costs
Costs of
of
Goods
Goods Sold
Sold

Oldest
Oldest
Costs
Costs

Ending
Ending
Inventory
Inventory

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-30

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)

The
The Cost
Cost of
of Goods
Goods Sold
Sold for
for the
the August
August 14
14 sale
sale is
is
$2,045,
$2,045, leaving
leaving $455
$455 and
and 55 units
units in
in inventory.
inventory.
On
On August
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Continue
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-31

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)

Retail
Retail
Cost
Cost

A
Asimilar
similar entry
entry is
is
made
made after
after each
each sale.
sale.
McGraw-Hill/Irwin

Continue

The McGraw-Hill Companies, Inc.

8-32

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)

Additional
Additionalpurchases
purchaseswere
weremade
madeon
onAug.
Aug.17
17and
andAug.
Aug.28.
28.
On
OnAug.
Aug.31,
31,an
anadditional
additional23
23units
unitswere
weresold.
sold.

McGraw-Hill/Irwin

Continue

The McGraw-Hill Companies, Inc.

8-33

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)

Cost
Cost of
of Goods
Goods Sold
Sold for
for August
August 31
31 == $2,685
$2,685
McGraw-Hill/Irwin

Continue

The McGraw-Hill Companies, Inc.

8-34

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)

Income Statement

COGS = $4,730

Balance Sheet

Inventory = $1,260
McGraw-Hill/Irwin

55 @
@ $$ 91
91
77 @
@ $$115
115
End.
End. Inv.
Inv.

== $$ 455
455
==
805
805
$$1,260
1,260

The McGraw-Hill Companies, Inc.

8-35

The
The Principle
Principle of
of Consistency
Consistency
Once a company has
adopted a particular
accounting method, it
should follow that
method consistently,
rather than switch
methods from one
year to the next.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-36

Periodic
Periodic Inventory
Inventory Systems
Systems
In a periodic inventory system, inventory entries are
as follows.

Note
Note that
that an
an entry
entry is
is not
not
made
made to
to inventory.
inventory.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-37

Periodic
Periodic Inventory
Inventory Systems
Systems
In a periodic inventory system, inventory entries are
as follows.

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-38

Periodic
Periodic Inventory
Inventory Systems
Systems

The inventory on
hand and the
cost of goods
sold for the year
are not
determined until
year-end.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-39

Periodic
Periodic Inventory
Inventory Systems
Systems
We use one of these inventory valuation
methods in a periodic inventory system.
Specific
identification

Average
cost

FIFO

LIFO

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

Information
Information for
for the
the Following
Following Inventory
Inventory
Examples
Examples
Computers, Inc.
Mouse Pad Inventory
Units
$/Unit

Date
Beginning
Inventory
Purchases:
Jan. 3
June 20
Sept. 15
Nov. 29
Goods
Available
for Sale
Ending
Inventory

Cost of
Goods Sold
McGraw-Hill/Irwin

1,000 $
300
150
200
150

8-40

Total

5.25

$ 5,250.00

5.30
5.60
5.80
5.90

1,590.00
840.00
1,160.00
885.00

1,800

$ 9,725.00

1,200

600

The McGraw-Hill Companies, Inc.

8-41

Specific
Specific Identification
Identification
By reviewing actual
purchase invoices,
Computers, Inc. determines
that the 1,200 mouse pads
on hand at year-end have
an actual total cost of
$6,400.
Determine the cost of
goods sold for the year.
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-42

Specific
Specific Identification
Identification
Computers, Inc.
Mouse Pad Inventory
Units
$/Unit

Date
Beginning
Inventory
1,000 $
Purchases:
Jan. 3
300
June 20
150
Sept.
15
200
Cost
of
Goods
Sold
Cost
Nov.
29of Goods Sold
150
$9,725
Goods
$9,725 $6,400
$6,400==$3,325
$3,325
Available
for Sale
1,800

--

Ending
Inventory
Cost of
Goods Sold
McGraw-Hill/Irwin

Total

5.25

$ 5,250.00

5.30
5.60
5.80
5.90

1,590.00
840.00
1,160.00
885.00

$ 9,725.00

1,200

$ 6,400.00

600

$ 3,325.00

The McGraw-Hill Companies, Inc.

8-43

Average-Cost
Average-Cost Method
Method
The
The average
average cost
cost is
is
calculated
calculated at
at yearyearend
end as
as follows:
follows:
Total Cost of
Goods
Available for
Sale

McGraw-Hill/Irwin

Total Number
of Units
Available for
Sale

The McGraw-Hill Companies, Inc.

8-44

Average-Cost
Average-Cost Method
Method
Avg.
Avg.Cost
Cost $9,725
$9,7251,800
1,800==
$5.40278
$5.40278
Ending
EndingInventory
Inventory
Avg.
Avg.Cost
Cost $5.40278
$5.402781,200
1,200==
$6,483
$6,483
Cost
Costof
ofGoods
GoodsSold
Sold
Avg.
Avg.Cost
Cost $5.40278
$5.40278600
600==
$3,242
$3,242

Date
Beginning
Inventory
Purchases:
Jan. 3
June 20
Sept. 15
Nov. 29
Goods
Available
for Sale
Ending
Inventory
Cost of
Goods Sold

McGraw-Hill/Irwin

Computers, Inc.
Mouse Pad Inventory
Units
$/Unit

Total

1,000 $

5.25

$ 5,250.00

300
150
200
150

5.30
5.60
5.80
5.90

1,590.00
840.00
1,160.00
885.00

1,800

$ 9,725.00

1,200
1,200

$ 6,483.00
?

600

$ 3,242.00
?

The McGraw-Hill Companies, Inc.

8-45

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)
Oldest
Oldest
Costs
Costs

Costs
Costs of
of
Goods
Goods Sold
Sold

Recent
Recent
Costs
Costs

Ending
Ending
Inventory
Inventory

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-46

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)
Remember: Start
with the 11/29
purchase and then
add other purchases
until you reach the
number of units in
ending inventory.

Date
Beginning
Inventory
Purchases:
Jan. 3
June 20
Sept. 15
Nov. 29
Goods
Available
for Sale
Ending
Inventory
Cost of
Goods Sold

McGraw-Hill/Irwin

Computers, Inc.
Mouse Pad Inventory
Units
$/Unit

Total

1,000 $

5.25

$ 5,250.00

300
150
200
150

5.30
5.60
5.80
5.90

1,590.00
840.00
1,160.00
885.00

1,800

$ 9,725.00

1,200

600

The McGraw-Hill Companies, Inc.

8-47

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)
Date

Beg. Inv.
Purchases
1,000@$5.25

Jan. 3
June 20
Sept. 15
Nov. 29
Units

300@$5.30
150@$5.60
200@$5.80
150@$5.90

Now, we have allocated

Costs

End. Inv.

Cost of
Goods Sold
600@$5.25

400@$5.25
300@$5.30
150@$5.60
200@$5.80
150@$5.90
1,200
150

600

$6,575

$3,150

Now,
lets complete
complete the
the
the cost to allNow,
1,200 lets
units
table.
endingAvailable
inventory.
table.
Cost in
of Goods
for Sale
$9,725
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-48

First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)
Completing the table
summarizes the
computations just
made.

Date
Beginning
Inventory
Purchases:
Jan. 3
June 20
Sept. 15
Nov. 29
Goods
Available
for Sale
Ending
Inventory
Cost of
Goods Sold

McGraw-Hill/Irwin

Computers, Inc.
Mouse Pad Inventory
Units
$/Unit

Total

1,000 $

5.25

$ 5,250.00

300
150
200
150

5.30
5.60
5.80
5.90

1,590.00
840.00
1,160.00
885.00

1,800

$ 9,725.00

1,200

$ 6,575.00

600

$ 3,150.00

The McGraw-Hill Companies, Inc.

8-49

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)
Recent
Recent
Costs
Costs

Costs
Costs of
of
Goods
Goods Sold
Sold

Oldest
Oldest
Costs
Costs

Ending
Ending
Inventory
Inventory

McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-50

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)
Remember: Start with
beginning inventory
and then add other
purchases until you
reach the number of
units in ending
inventory.

Date
Beginning
Inventory
Purchases:
Jan. 3
June 20
Sept. 15
Nov. 29
Goods
Available
for Sale
Ending
Inventory
Cost of
Goods Sold

McGraw-Hill/Irwin

Computers, Inc.
Mouse Pad Inventory
Units
$/Unit

Total

1,000 $

5.25

$ 5,250.00

300
150
200
150

5.30
5.60
5.80
5.90

1,590.00
840.00
1,160.00
885.00

1,800

$ 9,725.00

1,200

600

The McGraw-Hill Companies, Inc.

8-51

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)
Date
Jan. 3
June 20
Sept. 15
Nov. 29
Units

Beg. Inv.
Purchases End. Inv.
1,000@$5.25
1,000@$5.25
300@$5.30 200@$5.30
150@$5.60
200@$5.80
150@$5.90

Now, we have allocated

Costs

the cost to all 1,200 units

inventory.
Cost in
of ending
Goods Available
for Sale
McGraw-Hill/Irwin

1,000
1,200

Cost of
Goods Sold

100@$5.30
150@$5.60
200@$5.80
150@$5.90
100
600

$6,310
$3,415
Next,
Next,lets
lets

complete
completethe
the
$9,725
table.
table.

The McGraw-Hill Companies, Inc.

8-52

Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)
Completing the table
summarizes the
computations just
made.

Date
Beginning
Inventory
Purchases:
Jan. 3
June 20
Sept. 15
Nov. 29
Goods
Available
for Sale
Ending
Inventory
Cost of
Goods Sold

McGraw-Hill/Irwin

Computers, Inc.
Mouse Pad Inventory
Units
$/Unit

Total

1,000 $

5.25

$ 5,250.00

300
150
200
150

5.30
5.60
5.80
5.90

1,590.00
840.00
1,160.00
885.00

1,800

$ 9,725.00

1,200

$ 6,310.00

600

$ 3,415.00

The McGraw-Hill Companies, Inc.

Importance
Importance of
of an
an Accurate
Accurate Valuation
Valuation of
of
Inventory
Inventory

8-53

Errors in Measuring Inventory

Beginning Inventory

Ending Inventory

Effect on Income Statement Overstated Understated Overstated Understated

Goods Available for Sale
Cost of Goods Sold
Gross Profit
Net Income

+
+
-

+
+

NE

NE

+
+

+
-

NE

NE

+
+

Effect on Balance Sheet

Ending Inventory
Retained Earnings

An
Anerror
errorin
inending
endinginventory
inventoryin
inaayear
yearwill
will result
result in
in the
the
same
sameerror
error in
in the
thebeginning
beginninginventory
inventoryof
of the
thenext
next year.
year.
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8-54

For interim fi
nancial
statements, w
e may need
to estimate e
nding
inventory an
d cost of
goods sold.

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The McGraw-Hill Companies, Inc.

8-55

The
The Gross
Gross Profit
Profit Method
Method

Determine
Determine cost
cost of
of goods
goods
available
available for
for sale.
sale.

Estimate
Estimate cost
cost of
of goods
goods
sold
sold by
by multiplying
multiplying the
the net
net
sales
sales by
by the
the cost
cost ratio.
ratio.

Deduct
Deduct cost
cost of
of goods
goods sold
sold
from
from cost
cost of
of goods
goods
available
available for
for sale
sale to
to
determine
determine ending
ending
inventory.
inventory.
McGraw-Hill/Irwin

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8-56

The
The Gross
Gross Profit
Profit Method
Method
In
In March
March of
of 2005,
2005, ChemCos
ChemCos inventory
inventory was
was destroyed
destroyed
by
by fire.
fire. ChemCos
ChemCos normal
normal gross
gross profit
profit ratio
ratio isis 30%
30% of
of
net
net sales.
sales. At
At the
the time
time of
of the
the fire,
fire, ChemCo
ChemCo showed
showed
the
the following
following balances:
balances:

Sales
$$ 31,500
Sales
31,500
Sales
1,500
Salesreturns
returns
1,500
Beginning
12,000
Beginning Inventory
Inventory
12,000
Net
20,500
Net cost
cost of
of goods
goodspurchased
purchased
20,500
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The McGraw-Hill Companies, Inc.

8-57

The
The Gross
Gross Profit
Profit Method
Method
Estimating Inventory
The Gross Profit Method
Goods Available for Sale:
Beginning Inventory
$ 12,000
Net cost of goods purchased
20,500
Goods available for sale
$ 32,500
Less estimated cost of goods sold:
Sales
$ 31,500
70%
Less sales returns
(1,500)
Net sales
$ 30,000
Estimated cost of goods sold
(21,000)
$ 11,500
Estimated March inventory loss
McGraw-Hill/Irwin

The McGraw-Hill Companies, Inc.

8-58

The
The Retail
Retail Method
Method
The
The retail
retail method
method of
of estimating
estimating inventory
inventory requires
requires
that
that management
management determine
determine the
the value
value of
of ending
ending
inventory
inventory at
at retail
retail prices.
prices.
In
In March
March of
of 2005,
2005, ChemCos
ChemCos inventory
inventory was
was destroyed
destroyed
by
by fire.
fire.At
At the
the time
time of
of the
the fire,
fire, ChemCos
ChemCos
management
management collected
collected the
the following
following information:
information:
Information for ChemCo
The Retail Method
Goods available for sale at cost
Goods available for sale at retail
Physical count of ending inventory priced at retail
McGraw-Hill/Irwin

$ 32,500
50,000
22,000

The McGraw-Hill Companies, Inc.

8-59

The
The Retail
Retail Method
Method
ChemCo would follow the steps below to
estimate their ending inventory using the retail
method.
Estimating Inventory
The Retail Method
a
b
c
d
e

Goods available for sale at cost

Goods available for sale at retail
Cost ratio [a b]
Physical count of ending inventory priced at retail
Estimated ending inventory at cost [ c d]

McGraw-Hill/Irwin

$ 32,500
50,000
65%
22,000
$ 14,300

The McGraw-Hill Companies, Inc.

8-60

End
End of
of Chapter
Chapter 88

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The McGraw-Hill Companies, Inc.