Lecture on Inventory Accounting

Presenter

• Roy Rumble, Accounting Professor, University of North Texas
• Lecture for Intermediate Accounting Class (Accounting 3110)

Overview

• Focus on inventory accounting methods: FIFO, LIFO, and Average Cost Method
• Cover both perpetual and periodic systems
• Solve a dollar-value LIFO problem
• Emphasis on practice to master the concepts

Key Topics

Inventory Flow Methods

1. FIFO (First-In, First-Out)

   • Assumes oldest inventory items are sold first
   • Ending inventory consists of the most recently purchased items
   • Results in lower cost of goods sold and higher inventory value during periods of rising prices

2. LIFO (Last-In, First-Out)

   • Assumes newest inventory items are sold first
   • Ending inventory consists of the oldest items
   • Results in higher cost of goods sold and lower inventory value during periods of rising prices
   • Preferred for tax purposes due to higher expense deductions
   • LIFO conformity rule: If used for tax, must be used for financial reporting

3. Average Cost Method

   • Uses weighted average cost for inventory valuation
   • Results typically fall between FIFO and LIFO
   • Simple calculation: Total cost of goods available divided by total units available

Inventory Systems

Periodic System

• Inventory updates at the end of an accounting period
• Cost of goods sold calculated by subtracting ending inventory from goods available for sale

Perpetual System

• Inventory records updated continuously
• Suitable for high-volume transactions
• Requires recalculation of weighted average cost after each purchase

Practical Examples

Problem-Solving Approach

• Work through different problems to understand calculations
• Important Calculations: FIFO, LIFO, Average Cost
  • Calculate available for sale
  • Determine ending inventory
  • Calculate cost of goods sold
• Practice helps in mastering the calculations

Dollar-Value LIFO Problem

• Simplified method aimed at reflecting what LIFO would be if tracking every unit
• Utilizes inflation indexes and base year costs
• Adjusts inventory values annually using layers
  • New layers calculated based on inflation-adjusted costs

Practice and Application

• Emphasizes practice and working through problems multiple times
• Encourages using the textbook as a resource for clarity and further understanding

Conclusion

• Practice makes perfect; the more problems you work through, the more adept you become
• Understand the importance of assumptions in accounting and maintaining consistency
• Encourages students to pause, practice, and review materials for exam readiness