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Accounting for Inventories - Lower of Cost or Market - Example - YouTube
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All right. Here we are with the last
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video in chapter five this is the
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example video for how to do the lcm,
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we talked about this list
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we talked about this topic in the
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previous video um about having to adjust
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for our inventory to be the lower of the
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cost or market so I just want to kind of
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show you the the
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the way we do this the way we calculate
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this kind of things and the way that I
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did it when I was going through as a
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student that kind of helped me again
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keeping that system in place to where if
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I know it works like this then this is
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how it's always going to be and it's
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super easy for me to remember. So let's
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look at our example
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a foxtrot company has in its ending
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inventory
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clothing electronics, toys, and food the
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quality the total quantity of each
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as well as their invoice costs and
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market costs are provided,
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find the lcm write down so that's
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something we're going to talk about in
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this video too
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and accompanying journal entries
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adjusting journal entries. Assuming lcm
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is calculated on an individual basis, so
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like I told you in the previous video
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this can be done in three different ways
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you could be done in
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individual inventory, it could be done in
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groups or classifications of
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inventory or it can be done as inventory
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as a whole, and in this video I'm going
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to show you two of those
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three methods because the categories are
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fairly similar to the individual
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inventory so
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we're going to be doing it as an
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individual inventory and as the
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inventory as a whole
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but this one we're just doing it
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individually. So the way I do this and
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notice it says we have t-shirts, gaming
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systems,
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yo-yos, and frozen pizzas so we're a
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hodgepodge of a store that we sell
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and it says we have the quantity of each
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of those what the inventory cost was
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per unit of each of those and then what
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today's market cost is
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of each of those per unit. And remember
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market cost is simply just saying how
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much it would cost us to replace those,
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in a normal way
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what I do to begin this is I'm going to
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create another table
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where you can extend extend to the table
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that you're already given
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but mine is going to have three columns
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as well it's going to have total invoice
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cost,
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total market cost, and then also lcm, and
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I'm going to put those four different
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types of or the four individual
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inventories down so I'm going to say
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t-shirts
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I want to say gaming systems and I'm
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going to say yo-yo and frozen pizzas,
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okay, so I'm just extending what's
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already there.
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And so for the first column it's just
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total invoice cost I know I have 45
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t-shirts and I know each one of them
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cost me inventory
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or invoice cost wise each one of them
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cost me four dollars a piece so if I
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multiply those together
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that's going to give me a total of 180
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dollars, so I'm going to put that next to
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t-shirts under total inventory invoice
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cost.
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I'm gonna do the same thing for the
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gaming system 15
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units times 150 dollars a piece that's
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gonna give me a total of two thousand to
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two hundred and fifty yoyos twenty at a
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buck fifty
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that's gonna give me a total of thirty
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dollars, and then finally frozen pizza is
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25
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at three dollars that's going to give me
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75 all right that takes care of the
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total invoice
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cost column. Now let's do the total
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market cost,
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same principle as I have 45 and if I
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have to replace those at today's
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costs what would it be in total so 45
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times the 450 that would give me a total
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of
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202.50. 15 times the 125 for the gaming
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market cost for the gaming systems
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that's going to give me thousand
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eight seventy five. Twenty
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yoyos at today's current market cost
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which would be a dollar a piece that's
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gonna be twenty dollars,
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and then finally twenty five times the
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four dollar market cost of frozen pizzas
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expensive pizzas for a hundred dollars
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in total.
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All right. So now I have my my
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the first part of my my table set up my
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total invoice cost my total market cost,
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the next part which is the lcm column is
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super easy
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because all you're going to do is you're
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going to look at the two
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columns next to it the total invoice
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cost and the total market cost
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and just simply choose which one's lower
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remember we're doing the lower of the
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cost or market.
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So for the t-shirts the lowest one would
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be the 180
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and so I'm going to take that move it
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over to my lcm column,
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for gaming systems it's going to be the
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1875
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move that over, for the yoyos it's going
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to be the 20
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move that over, and for the frozen pizzas
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is going to be 75,
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so I'll move that over so now I have
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three columns.
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The next step will be to sum those three
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columns take the sum of each of those so
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I'm going to do that
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next, so for the total invoice cost
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that's going to give me two thousand
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five thirty five
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for the total market cost it's gonna be
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a sum of two thousand one
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ninety seven fifty, and for the lcm
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column it's gonna give me two thousand
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one fifty, now before we get into what is
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the lcm write down I really want you to
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pay attention to what these numbers mean
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because the
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there is an importance uh to why you
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know what these numbers are
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not simply how to get them but what they
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really mean. And so this first one the
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2535 under the total invoice cost what
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does that mean,
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well that by itself is the ending
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inventory value
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before any lcm adjustments. Pretty much
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what that's saying is
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if you looked at your inventory t table
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right now
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without doing anything to it that is
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gonna be your ending balance that is
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what
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what that's what your inventory is on
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your books for right now,
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okay, so that's the total invoice cost.
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Let's look at the total market cost what
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does that number mean
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well that number means that's the total
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cost to replace all your inventory so if
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you had a warehouse fire or something
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happen and you lost
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everything that's what it would cost you
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right now to replace
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everything in a normal way. Now what does
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this lcm mean?
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Well the lcm is the lcm value
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it is what should be in your ending
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inventory value so we just talked about
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it earlier the total invoice cost is
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what's in your books
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now, the lcm is what your inventory needs
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to be
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after your adjustment so pretty much
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what you're saying is
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what is it going to be after your
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adjustment so I know that's my ending
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point
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what do I need to adjust it by in order
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to get to that point,
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so the way we do this and again this is
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the reason why I do this this way
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is it's super easy and it's again it's
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procedural
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it doesn't it's never going to change,
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when I have it like this I'm going to
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take the total of column a my total
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invoice cost,
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and the total of my column c my lcm and
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I'm going to subtract the two,
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it works every single time, and whatever
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I get
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that's going to give me my lcm write
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down
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and essentially what we're saying is
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that's what I'm going to write down my
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inventory by,
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that's what I have to put in the credit
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side of my inventory t table
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in order for that to be true, I have to
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decrease what is in my books now by 385
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in order to get it to the lcm
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amount and so now I have to do a journal
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entry for that.
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So I would just do whatever the period
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ends 12 31
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I would say cogs inventory loss because
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again I'm expensing this through
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inventory but it's not because I sold
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this because I just lost
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value of it of 385 and then I would also
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decrease my inventory because that's the
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whole purpose of this is decrease it to
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the lower cost or market
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by that same 385, and so that's how you
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do the lcm
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if you're doing this for an individual
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inventory basis.
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Now let's look at how we would do this
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if this was
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as a whole inventory as a whole, same
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stuff nothing's changed
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matter of fact I'm going to use I'm
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going to bring up the same table that we
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just did
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but I'm going to make one difference I
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wouldn't say major difference but I
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wouldn't say minor difference either
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I want to change one thing I'm going to
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take away the lcm column for just a
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moment,
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okay, because when we did this for the
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individual
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uh inventory we took the individual
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lower of the cost or market, so t-shirt
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the lowest of the t-shirts, the lowest of
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the gaming systems, the lowest of the
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yoyo,
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but we're not doing that here we're
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doing this for the inventory as a whole
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so what I'm going to be looking for
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is the lowest of the total amounts,
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which side has the lower amount
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between the total invoice cost
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total and the total market cost total
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and in this situation it would be
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two thousand one ninety seven fifty,
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that's what's moving over.
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So notice when you're dealing with
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inventory individually
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your lcm total is made up of the
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individual components,
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when you're looking at lcm as on
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inventory as a whole
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your total is made from the whole
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numbers of the total markets
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the sums of the total market cost and
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the total invoice cost that's
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that's the big difference. And so again
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our inventory right now what's on our
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books for is going to be
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uh you know ending inventory 2,535
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what does it need to be it needs to be
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two thousand one ninety seven
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fifty. So what do I need to write it down
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by in order to achieve that?
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Well again I'm gonna do the same thing I
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did before column a minus column c,
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total invoice cost minus lcm,
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that's going to give me a total of three
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thousand give me 337.50
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so that's what I need to bring the
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adjustment down by
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and so my journal entry would look like
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this it would look like
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12.31 cogs inventory loss
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again of 337.50 and inventory of 337.50.
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Now I do want to bring this up if for
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some reason if you're doing it exactly
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like this if you're doing it my way
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and in the sense of you're going to take
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total invoice cost minus lcm so column a
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minus column c
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and you have it set up just like this, if
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your write down is ever a negative
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number then you've done something wrong
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because remember the whole point of this
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is I want to get it to the lowest
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if there's a negative number that means
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it did not take the lowest,
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so it's either going to be 0 your answer
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your lcm write down is either going to
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be 0 or it's going to be a positive
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number,
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if it's 0 that means you are already at
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the lowest so you do nothing there is no
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journal entry you don't have to worry
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about anything like that
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if it's a positive then you need to do a
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write down if it's a negative that means
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you probably need to do it again because
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something went wrong,
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but that's how you do an lcm problem.
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Hopefully this is this is not too
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terribly bad for you I know this has
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been a long
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long chapter but hopefully this made
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sense but if you have any questions
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please leave them down in the comments,
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you all have a good one.
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