Chapter 6
Retail inventory
201044 - Retail inventory 1
Learning objectives
• Define accounting principles related to inventory
• Define inventory costing methods
• Account for perpetual inventory using the three most common
costing methods
• Compare the effects of the three most common inventory costing
methods
4/6/2022 201044 - Retail inventory 2
6.2. Inventory costing methods
• The specific-unit-cost method uses the specific cost of each unit
of inventory to determine ending inventory and to determine cost of
sales
• The FIFO (first-in, first-out) inventory costing method bases the
cost of sales on the oldest purchases
• Under the average-cost inventory costing method, the business
calculates a new average cost per unit after each purchase
• The different inventory costing methods produce different amounts
for ending inventory and cost of goods sold
4/6/2022 201044 - Retail inventory 3
6.3. Inventory accounting in a
perpetual system
First-in, first-out (FIFO) method
4/6/2022 201044 - Retail inventory 4
6.3. Inventory accounting in a
perpetual system
First-in, first-out (FIFO) method
Date Account title Dr Cr
Jul 5 Inventory (6 × $45) (A+) 270
Accounts payable (L+) 270
Purchased inventory on credit.
Jul 15 Accounts receivable (4 × $80) (A+) 320
Sales revenue (R+) 320
Sale on credit.
Jul 15 Cost of sales (2 @ $40 + 2 @ $45) (E+) 170
Inventory (A–) 170
Cost of sales.
4/6/2022 201044 - Retail inventory 5
6.3. Inventory accounting in a
perpetual system
First-in, first-out (FIFO) method
Date Account title Dr Cr
Jul 26 Inventory (9 × $47) (A+) 423
Accounts payable (L+) 423
Purchased inventory on credit.
Jul 31 Accounts receivable (10 × $80) (A+) 800
Sales revenue (R+) 800
Sale on credit.
Jul 31 Cost of sales (4 @ $45 + 6 @ $47) (E+) 462
Inventory (A–) 462
Cost of sales.
4/6/2022 201044 - Retail inventory 6
6.3. Inventory accounting in a
perpetual system
Average-cost method
4/6/2022 201044 - Retail inventory 7
6.3. Inventory accounting in a
perpetual system
Average-cost method
Date Account title Dr Cr
Jul 5 Inventory (6 × $45) (A+) 270
Accounts payable (L+) 270
Purchased inventory on credit.
Jul 15 Accounts receivable (4 × $80) (A+) 320
Sales revenue (R+) 320
Sale on credit.
Jul 15 Cost of sales (4 @ $43.75) (E+) 175
Inventory (A–) 175
Cost of sales.
4/6/2022 201044 - Retail inventory 8
6.3. Inventory accounting in a
perpetual system
Average-cost method
Date Account title Dr Cr
Jul 26 Inventory (9 × $47) (A+) 423
Accounts payable (L+) 423
Purchased inventory on credit.
Jul 31 Accounts receivable (10 × $80) (A+) 800
Sales revenue (R+) 800
Sale on credit.
Jul 31 Cost of sales (10 @ $46.00) (E+) 460
Inventory (A–) 460
Cost of sales.
4/6/2022 201044 - Retail inventory 9
6.4. Comparing FIFO and average cost
Average-cost method
FIFO Average cost
Sales revenue $1 120 $1 120
Cost of sales 632 635
Gross profit $488 $485
4/6/2022 201044 - Retail inventory 10
Summary: Chapter 6
• The accounting principles are the foundations that guide how we
record transactions
• Inventory costing methods include specific-unit-cost, FIFO and
average cost
• Specific unit identifies the specific cost of each unit of inventory
that is in ending inventory and each item that is in cost of goods
sold
• Under LIFO, the cost of goods sold is based on the newest
purchases
• Under the average-cost method, the business computes a new
average cost per unit after each purchase
4/6/2022 201044 - Retail inventory 11
Tasks at home
1/ Textbook: Chapter 6
• Quick Check
• Starters
• Exercises and Problems
• Apply
2/ Self-study:
Key References [2]: Chapter 11
Key References [3]: Chapter 3
4/6/2022 201044 - Retail inventory 12
The end of Chapter 6
Retail inventory
201044 - Retail inventory 13
