ACCOUNTING - CLUTCH CH. 5 -...
10
www.clutchprep.com ACCOUNTING - CLUTCH CH. 5 - INVENTORY
Transcript of ACCOUNTING - CLUTCH CH. 5 -...
! www.clutchprep.com
!
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
CONCEPT: MERCHANDISING COMPANY VS MANUFACTURING COMPANY
● A merchandising company has ______ Inventory account. Merchandisers __________ goods manufactured by others.
□ The Inventory account might also be called Merchandise Inventory
XYZ Company purchases goods from its supplier for $10,000 on account. Journal Entry:
Assets
= Liabilities + Equity
● A manufacturing company has ______ Inventory accounts. Manufacturers __________ goods and then sell them.
□ Raw Materials Inventory – inputs into production; this is what the company ______________ from suppliers
□ Work-in-Process Inventory – goods that are still in production at the end of the period
□ Finished Goods Inventory – the value of the finished product
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 2
CONCEPT: PHYSICAL INVENTORY COUNT AND OWNERSHIP OF GOODS
● Whether using perpetual or periodic inventory systems, all companies must determine Inventory at the end of the period.
□ A physical count involves actually counting and measuring all goods that are still in Inventory.
- Perpetual Inventory – the count should _________________ the inventory balance from the records.
> Any discrepancies can be explained by wasted materials, shoplifting, or employee theft.
- Periodic Inventory – a physical count is _________________
● We may own some goods that are not in the warehouse.
□ FOB Shipping Point – _______________ of the goods changes hands at the shipping point
- Any FOB Shipping Point ______________ in transit belong to the company.
□ FOB Destination – ___________________ of the goods changes hands at the destination
- Any FOB Destination ___________________ in transit belong to the company.
● We may not own some goods that are in the warehouse.
□ Consigned Goods – Goods you are selling, but are owned by another company.
- You do not own consigned goods, so they are ________ part of your Inventory.
- Generally, you earn some commission upon selling consigned goods.
Jan’s Boutique sells Sophie’s dresses on consignment. Sophie pays Jan $100 for each dress sold. At the beginning of the month, Jan’s store displayed five of Sophie’s dresses, with a cost of $250 each. Jan sold two dresses during the month for $1,000 each. Record Jan’s journal entries related to the consigned goods. Journal Entry:
Inventory Balance:
Revenue: Liabilities:
Supplier Shipping Company
Our Warehouse
Our Warehouse
Shipping Company
Customer
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 3
CONCEPT: SPECIFIC IDENTIFICATION
● A company can properly value its cost of goods sold and inventory balance if it can specifically identify each unit sold.
□ Specific Identification usually requires goods that are ____________ or otherwise easily identified.
□ COGS Price we paid for each unit sold
□ Ending Inventory Price we paid for units left unsold
EXAMPLE:
ABC Yacht Company resells yachts and only keeps a few units on hand. The units on hand at the beginning of June were: Yacht A with a value $350,000, Yacht B with a value of $500,000, and Yacht C with a value of $600,000. During June, the company sold Yacht B to a customer for $800,000, half of which was paid in cash. Journalize this sale and note the ending balance in the following accounts . Journal Entry:
Inventory Balance:
Revenue: COGS:
PRACTICE:
Unique Robots Company currently has four robots in its factory. Two units of X3ZA, which it purchased for $80,000 each, one unit of EE1C for $60,000, and one unit of C4P0 for $125,000. The company then sold the EE1C model for $140,000. Journalize this sale and note the ending balance in the following accounts. . Journal Entry:
Inventory Balance:
Revenue: COGS:
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 4
CONCEPT: PERIODIC SYSTEM – FIFO, LIFO, AND AVERAGE COST
● When we sell large amounts of _______________ units, we can use cost flow assumptions to track COGS and Inventory
□ First In, First Out (_________) – the ____________ unit is sold first (COGS what you paid for older units)
□ Last In, First Out (_________) – the ____________ unit is sold first (COGS what you paid for newer units)
□ Average Cost – goods are sold at their average cost (COGS average of what you paid)
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 =𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
□ Note: The cost flow assumption does NOT have to be consistent with the ______________ flow of goods
- In a periodic system, an inventory count reveals the __________________ in ending inventory.
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 = 𝐺𝑜𝑜𝑑𝑠 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒 𝑓𝑜𝑟 𝑆𝑎𝑙𝑒
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠 − 𝑪𝑶𝑮𝑺 = 𝐸𝑛𝑑𝑖𝑛𝑔 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
EXAMPLE: A company had the following inventory data for the month of July in its periodic inventory system:
Date Activity Units Cost Total Cost of Purchase
July 1 Inventory Balance 1,000 $20.00
11 Purchase 500 $22.40
30 Purchase 600 $23.30
Total Available for Sale
The month-end physical count noted that there were 800 units on hand. Calculate COGS and Ending Inventory.
FIFO LIFO Average Cost
COGS
Ending
Inventory
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 5
CONCEPT: PERPETUAL SYSTEM – FIFO, LIFO, AND AVERAGE COST
● When we sell large amounts of _______________ units, we can use cost flow assumptions to track COGS and Inventory
□ First In, First Out (_________) – the ____________ unit is sold first (COGS what you paid for older units)
□ Last In, First Out (_________) – the ____________ unit is sold first (COGS what you paid for newer units)
□ Average Cost – goods are sold at their average cost (COGS average of what you paid)
- A perpetual system features a moving average; the average is updated after each _________________
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 =𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
□ Note: The cost flow assumption does NOT have to be consistent with the _______________ flow of goods
EXAMPLE: A company had the following inventory data for the month of July:
Date Activity Units Cost Units Balance Total Cost
July 1 Inventory Balance 1,000 $20.00
5 Sale @ $30 700
11 Purchase 500 $22.40
23 Sale @ $30 360
29 Sale @ $30 240
30 Purchase 600 $23.30
Calculate COGS and Ending Inventory assuming the company uses a perpetual inventory system.
FIFO LIFO Average Cost
COGS
July 5:
July 23:
July 29:
Total:
July 5:
July 23:
July 29:
Total:
July 5:
July 23:
July 29:
Total:
Ending
Inventory
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 6
CONCEPT: FINANCIAL STATEMENT EFFECTS OF COSTING METHODS
● The choice between FIFO, LIFO, and Average Cost leads to differences in the following accounts/calculations:
□ COGS
□ Gross Profit = Sales Revenue – COGS
□ Net Income = Gross Profit – Other Expenses/Revenues
□ Ending Merchandise Inventory = Beginning Inventory + Purchases – Ending Inventory
Excerpts from periodic inventory example
FIFO LIFO Average Cost
Sales 39,000 39,000 39,000
COGS 26,720 29,180 27,968
Gross Profit
Inventory Balance, July 31 18,460 20,000 17,212
● The differences in these values are dependent on whether prices are generally rising or declining over the period.
Rising Price Environment
FIFO LIFO
COGS
Gross Profit
Net Income
Ending Inventory
Falling Price Environment
FIFO LIFO
COGS
Gross Profit
Net Income
Ending Inventory
Rising FIFO Rising LIFO Falling FIFO Falling LIFO
$ $ $ $
$ $ $ $
$ $ $ $
$ $ $ $
Note: Companies reporting in LIFO must also show what Inventory would be under FIFO using a LIFO reserve.
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 7
CONCEPT: LOWER OF COST OR MARKET
● The rule of conservatism tells us to be looser with recording losses than gains.
□ If an asset has lost value, we generally ____________ take an expense/loss in the period of the change in value
□ If an asset has gained value, we generally _______________ take a revenue/gain until it is ____________
□ The Inventory account should be marked to the lower of cost or market
- Cost – The historical cost of the inventory (what you paid for it)
- Market – the net realizable value of the inventory or the current replacement cost
𝑁𝑒𝑡 𝑟𝑒𝑎𝑙𝑖𝑧𝑎𝑏𝑙𝑒 𝑣𝑎𝑙𝑢𝑒 = 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 − 𝐷𝑖𝑠𝑝𝑜𝑠𝑎𝑙 𝐶𝑜𝑠𝑡𝑠
- If the Inventory is marked down, we take a loss from write-down of inventory
EXAMPLE: Obsocorp purchased inventory four years ago for $84,000. In the current year, Obsocorp estimated it could sell
this inventory for $86,000 while incurring selling expenses of $7,000. In its financial statements, Obsocorp should report this
inventory at:
a. $77,000
b. $79,000
c. $84,000
d. $86,000
PRACTICE: Using the following data, determine the value of inventory at the lower of cost or market. Apply lower of cost or
market to each inventory item. Assume expenses of $2 per unit are expected to be incurred in selling the inventory.
Item Inventory Quantity Cost per Unit Estimated Selling Price
TR301 10 $39 $42
QT314 7 $110 $100
a. $1,160
b. $1,120
c. $1,086
d. $1,076
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 8
CONCEPT: INVENTORY ERRORS
● Inventory errors correct themselves after ________ years. If it is the first year, there is an overstatement/understatement.
EXAMPLE: On January 1, Year 1, a company had a balance in Inventory of $50,000. During the year, purchases of
$75,000 were made. On December 31, Year 1, an error in the inventory count caused a final balance in Inventory of
$35,000, when the correct amount would have been $30,000. During Year 2, the company purchased $60,000 of Inventory
and the year-end physical count found the correct balance of $40,000.
Correct Incorrect
Y1 COGS
Y1 Ending Inventory
Y2 COGS
Y2 Ending Inventory
Total COGS from Both Years
PRACTICE: A company had an ending inventory that was overstated by $5,000 due to a miscount during the year-end
inventory count. The amounts reflected in the end of the period balance sheet are:
Assets Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 9
PRACTICE: A company had a beginning inventory that was understated by $4,000 because the ending inventory in the
previous period was understated by $4,000. The amounts reflected in the current end of period balance sheet are:
Assets Equity
a. Overstated Overstated
b. Correct Correct
c. Understated Understated
d. Overstated Correct
ACCOUNTING - CLUTCH
CH. 5 - INVENTORY
Page 10
