Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 6 Inventories 285

Stewart Co.’s beginning inventory and purchases during the year ended December 31, 2008,

were as follows:

Unit Total

Units Cost Cost

January 1 Inventory 1,000 $50.00 $ 50,000

March 10 Purchase 1,200 52.50 63,000

June 25 Sold 800 units

August 30 Purchase 800 55.00 44,000

October 5 Sold 1,500 units

November 26 Purchase 2,000 56.00 112,000

December 31 Sold 1,000 units

Total 5,000 $269,000

Instructions

1. Determine the cost of inventory on December 31, 2008, using the perpetual inventory sys-
   tem and each of the following inventory costing methods:
   a. first-in, first-out
   b. last-in, first-out


2. Determine the cost of inventory on December 31, 2008, using the periodic inventory system
   and each of the following inventory costing methods:
   a. first-in, first-out
   b. last-in, first-out
   c. average cost


3. Assume that the cost of merchandise sold was $173,800 for 2008 and the inventory valua-
   tion is as determined in (1a). Determine the:
   a. inventory turnover ratio
   b. number of days’ sales in inventory ratio

Solution

1. a. First-in, first-out method: $95,200

ILLUSTRATIVE ACCOUNTING APPLICATION PROBLEM

Lifo conformity ruleA financial reporting rule requiring a
firm that elects to use lifo inventory valuation for tax pur-
poses to also use lifo for external financial reporting.

Lifo reserveA required disclosure for lifo firms, showing
the difference between inventory valued under fifo and in-
ventory valued under lifo.

Lower-of-cost-or-market (LCM) methodA method of
valuing inventory that reports the inventory at the lower of
its cost or current market value (replacement cost).

Materials inventoryThe cost of materials that have not yet
entered into the manufacturing process.

Merchandise inventoryMerchandise on hand and avail-
able for sale to customers.

Net realizable valueThe estimated selling price of an item
of inventory less any direct costs of disposal, such as sales
commissions.

Number of days’ sales in inventoryA measure of the

length of time it takes to acquire, sell, and replace the

inventory.

Physical inventoryThe detailed listing of merchandise on

hand.

Quick responseA method for optimizing inventory levels

in the value chain by electronically sharing common fore-

cast, inventory, sales, and payment information between

manufacturers and merchandisers, using the Internet or other

electronic means.

Work-in-process inventoryThe direct materials costs, the

direct labor costs, and the factory overhead costs that have

entered into the manufacturing process, but are associated

with product that has not been finished.