• Unit 6: Accounting for Inventory – Measuring and Reporting

    Many businesses have to buy merchandise for their end-users to conduct their daily activities. There are a number of ways to account for the purchasing and integration of this merchandise within a business, and the decision on how a business will account for this rests on a number of factors. This unit introduces the inventory valuation concepts FIFO (First in First Out), LIFO (Last in First Out), and the weighted average. Choosing an inventory valuation method is a major decision a merchandising business entity will have to make before the merchandise is purchased. It also dictates the valuation of the merchandise on hand within the business. Understanding how inventory valuation method choice impacts the reported financial results is also important in analyzing financial statements.

    Completing this unit should take you approximately 10 hours.

    • Upon successful completion of this unit, you will be able to:

      • describe the effects of a company's choice of valuation method on its financial statements;
      • calculate COGS and ending inventory value under the various inventory costing methods;
      • calculate the inventory turnover ratio;
      • produce journal entries for the flow of goods in inventory for merchandising and manufacturing companies; and
      • describe appropriate internal controls to safeguard inventory.

    • 6.1: Introduction to Inventories and the Classified Income Statement

      • Introduction to Inventories and the Classified Income Statement Book

        Read this chapter and pay attention to the comparison of the two income statements. This chapter reviews the difference in reporting and financial presentation of information for service and merchandising operations and compares recording inventories for two separate types of businesses.

      • Understanding Inventory Book

        Read this section, which focuses on the nature of inventory, categories of goods included in inventory, components of inventory cost, and the flow of inventory costs.

      • Controlling Inventory Book

        Read this section, which focuses on internal controls, perpetual verses periodic counting, conducting a physical inventory, and the impact of measurement error.

    • 6.2: Measuring and Reporting Inventories

      • Measuring and Reporting Inventories Book

        Read this chapter. For many organizations, inventory represents a large portion of their assets, so it is important to be familiar with measurement and reporting techniques. Inventory is a major cost for many businesses, and a big source of potential opportunity for firms looking to improve their financial results.

      • Determine Physical Units of Inventory Page
        This video addresses shipping costs and when inventory should be recorded as an asset or not during shipping.
      • Valuing Inventory Book

        Read this section, which focuses on the four inventory costing methods and the impact each has on the financial statements. It is important to understand the impact of inventory valuation on your own company, and the companies that you partner with, sell to, buy from, and invest in.

      • Inventory Valuation Methods Page

        This video, and the others that follow, will help you understand the calculations involved in inventory valuation. The differences between LIFO, FIFO, Average Cost and Specific Cost may seem difficult to grasp, but the videos will lay them out in an easy to follow, concise manner. Watching them should also help you with the practice problems at the end of the unit. This first video will introduce the four main inventory costing methods.

      • FIFO Method Page

        This video details the use of the FIFO method under a perpetual inventory system.

      • LIFO Method Page

        This video details the use of the LIFO method under a perpetual inventory system.

      • Average Cost Method Page

        This video details the use of the Average Cost method under a perpetual inventory system.

      • Specific Cost Method Page

        This video details the use of the Specific Cost method.

      • Additional Topics in Inventory Valuation Book

        In addition to the four inventory costing methods above, there are a couple more methods you should be aware of. This section discusses the lower of cost or market and methods in retail inventory.

      • Lower of Cost or Market Value Page

        This video will demonstrate how to apply the lower of cost or market rule in inventory valuation, which you just read about.

      • Assessing Inventory Management Book

        Read this section, which focuses on efficiency metrics and the impact of inventory method on financial statement analysis.

      • Reporting and Analyzing Inventories Book

        Read this section, which focuses on reporting inventories and inventory turnover ratio.

    • Unit 6 Assessment