Page 288 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

Beginning Inventory and Purchases Sales
Unit Total
Date Units Cost Cost Date Units Price Total
Beginning 10 $8.00 $ 80 March 10 10 $12.00 $120
inventory
March 2 10 8.50 85 July 14 20 12.00 240
May 28 20 8.40 168 September 7 10 14.00 140
August 12 10 9.00 90 November 22 20 14.00 280
October 12 20 8.80 176
December 21 10 9.10 91
80 $690 60 $780
Ending inventory = 20 units, determined By taking a physical inventory.
Exhibit 49: Beginning inventory, purchases and sales

An accounting perspective:

Business insight

When you buy a box of breakfast cereal at the supermarket, the cashier scans the bar code on the
box. The name of the item and the price appear on a video display that you can see. The
information is also printed on the sales slip so that you can later compare the items paid for with

the items received. But this is not the end of the story. The information is also fed to the store's
computer to update the inventory records. The information is included with other information and
is used to order more merchandise from the warehouse so the items can be replenished in the
store. At a certain point, the company also uses the reduced inventory levels to order more
merchandise from suppliers, such as wholesalers that supply the region with breakfast cereals and
other goods. The paperwork for the purchase and payment are often handled electronically
through a process called electronic data interchange (EDI) and electronic funds transfer (EFT).

Using the data for purchases, sales, and beginning inventory in Exhibit 49, next we explain the four inventory

costing methods. Except for the specific identification method, we first present all of the methods using periodic
inventory procedure and then present all of the methods using perpetual inventory procedure. Total goods available
for sale consist of 80 units with a total cost of USD 690. A physical inventory determined that 20 units are on hand
at the end of the period. Sales revenue for the 60 units sold was USD 780. The questions to be answered are: What
is the cost of the 20 units in inventory? What is the cost of the 60 units sold?
Specific identification The specific identification method of inventory costing attaches the actual cost to
an identifiable unit of product. Firms find this method easy to apply when purchasing and selling large inventory
items such as autos. Under the specific identification method, the firm must identify each unit in inventory, unless
it is unique, with a serial number or identification tag.

To illustrate, assume that the company in Exhibit 49 can identify the 20 units on hand at year-end as 10 units
from the August 12 purchase and 10 units from the December 21 purchase. The company computes the ending
inventory as shown in Exhibit 50; it subtracts the USD 181 ending inventory cost from the USD 690 cost of goods

Accounting Principles: A Business Perspective 289 A Global Text