Page 300 - Accounting Principles (A Business Perspective)

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Specific Weighted
-
Identification FIFO LIFO Average
Sales $780.00 $780.00 $780.00 $780.00
Cost of goods sold:
Beginning inventory $ 80.00 $ 80.00 $ 80.00 $ 80.00
Purchases 610.00 610.00 610.00 610.00
Cost of goods available for sale $690.00 $690.00 $690.00 $690.00
Ending inventory 181.00 179.00 171.00 178.58
Cost of goods sold $509.00 $511.00 $519.00 $511.42
Gross Margin $271.00 $269.00 $261.00 $268.58
Exhibit 60: Effects of different inventory costing methods using perpetual inventory procedure
Specific Weighted-
Identification FIFO LIFO Average
Sales $780.00 $780.00 $780.00 $780.00
Cost of goods sold:
Beginning inventory $ 80.00 $ 80.00 $ 80.00 $ 80.00
Purchases 610.00 610.00 610.00 610.00
Cost of goods available for sale $690.00 $690.00 $690.00 $690.00
Ending inventory 181.00 179.00 165.00 172.50
Cost of goods sold $509.00 $511.00 $525.00 $517.50
Gross Margin $271.00 $269.00 $255.00 $262.50
Exhibit 61: Effects of different inventory costing methods using periodic inventory procedure

An accounting perspective:

Business insight

Sometimes, companies change inventory methods in spite of the principle of consistency.
Improved financial reporting is the only justification for a change in inventory method. A company

that changes its inventory method must make a full disclosure of the change. Usually, the company
makes a full disclosure in a footnote to the financial statements. The footnote consists of a
complete description of the change, the reasons why the change was made, and, if possible, the
effect of the change on net income.
J. M. Tull Industries, Inc., sells a diverse range of metals (aluminum, brass, copper, steel, stainless
steel, and nickel alloys) for severe corrosion conditions and high-temperature applications. For
example, when J. M. Tull changed from lower of average cost or market to LIFO, the following
footnote appeared in its annual report:
Note B. Change in accounting method for inventory

The company changed its method of determining inventory cost from the lower of average cost
or market method to the last-in, first-out (LIFO) method for substantially all inventory. This
change was made because management believes LIFO more clearly reflects income by providing
a closer matching of current cost against current revenue.

Now we illustrate in more detail the journal entries made when using perpetual inventory procedure. Data from
Exhibit 56 serves as the basis for some of the entries.
You would debit the Merchandise Inventory account to record the increases in the asset due to purchase costs
and transportation-in costs. You would credit Merchandise Inventory to record the decreases in the asset brought

about by purchase returns and allowances, purchase discounts, and cost of goods sold to customers. The balance in

Accounting Principles: A Business Perspective 301 A Global Text