Accounting For Inventories
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Transcript of Accounting For Inventories
Chapter 5, Slide #1
Ch.5Accounting for Inventories
and Cost of Goods Sold
Prof. J. Wang
Chapter 5, Slide #2
Part I
Introduction
Chapter 5, Slide #3
• 1. merchandise inventory
• 2. I/S of a merchandise company
• 3. how companies keep track of their inventory: perpetual v. periodic systems
• 4. purchase of inventory on account
• 5. shipping cost
Chapter 5, Slide #4
1.1 Inventory of Wholesalers and Retailers
Purchased in finished form Resold without transformation Classified as “Merchandise Inventory”
on balance sheet
LO1
Chapter 5, Slide #5
1.2 Condensed Income Statement for a Merchandiser
Net sales $100,000Cost of goods sold 60,000Gross profit $ 40,000Selling and administrative expenses 29,300Net income before tax $ 10,700Income tax expense 4,280
Net income $ 6,420
Chapter 5, Slide #6
1.3 how companies keep track of their inventory
• Perpetual inventory system
• Periodic inventory system
Chapter 5, Slide #7
Perpetual Inventory Systems
Point-of-sale terminals have improved the ability of mass merchandisers to maintain perpetual systems
Company knows the cost of sales and ending inventory figure from their books
Inventory records are updated after each purchase or sale
Chapter 5, Slide #8
Periodic Inventory Systems
Reduces record keeping but also decreases the ability to track theft, breakage, etc., and prepare interim financial statements
Inventory records are updated periodically
based on physical inventory counts
Chapter 5, Slide #9
An increase in ending inventory means more was bought than sold
The Cost of Goods Sold Model
Beginning inventory $ 15,000
+ Cost of goods purchased 63,000
= Cost of goods available for sale 78,000
– Ending inventory (18,000)
= Cost of goods sold $ 60,000
“Pool” of goodsavailable to sell
during the period
Chapter 5, Slide #10
1.4 Purchase of inventory on account
• Cash discount
Chapter 5, Slide #11
Credit Terms and Sales Discounts
n/30 Payment due 30 days from invoice date
1/10, n/30 Deduct 1% of invoice amount if paid within 10 days; otherwise full invoice amount is due in 30 days
2/10, n/30 Deduct 2% of invoice amount if paid within 10 days; otherwise full invoice amount is due in 30 days
Chapter 5, Slide #12
• On July 16, the company purchased merchandise inventory on account for $500. Term: 1/10, n/30.
Dr. Purchases 500Cr. A/P 500
Chapter 5, Slide #13
Recording Purchase DiscountsOn July 25, the company paid for the purchase, less
discount.Accounts Payable 500
Cash 495Purchase Discounts 5
To record payment within discount period to supplier who offers 1% purchase discount.
($ 500 × 1% = $5 discount)
Chapter 5, Slide #14
Cost of Goods Purchased Includes invoice price:
Less:
Purchase returns and allowances
Purchase discounts
Plus:
Transportation-in
Chapter 5, Slide #15
Inventory Costs Included
Any freight costs incurred by buyer Cost of insurance for inventory in transit Cost of storing inventory before selling Excise and sales taxes
Chapter 5, Slide #16
1.5 Shipping cost:FOB Destination Point
No sale or purchase until inventory reaches its destination Seller responsible for inventory while in transit
Seller Buyer
Titlepasses at
destination
Chapter 5, Slide #17
1.5 Shipping cost:FOB Shipping Point
Both sale and purchase recorded upon shipment Buyer responsible for inventory while in transit
Seller Buyer
Titlepasses when
shipped
Chapter 5, Slide #18
Analysis of Profitability
Gross Profit %
Of particular
interest to current and
potentialinvestors
LO4
Chapter 5, Slide #19
Gross Profit Ratio = Gross Profit Net Sales
(How many cents on every $ of sales are leftover after covering the cost of the product)
Daisy’s Profitability
Net sales $100,000 Cost of goods sold 60,000 Gross profit $ 40,000
Gross profit ratio = 40%
Chapter 5, Slide #20
Part IIInventory Costing Method
How to determine the cost of inventory left on hand and cost of inventory sold in a period of inflation
Chapter 5, Slide #21
Inventory Valuation and Income Measurement
Value assigned toinventory on balance
sheet
Valueexpensedas cost of goods soldon incomestatement
When Sold =
LO5
Beginning inventory, Jan. 1: 500 units (unit cost $10)
Inventory purchases:Date Units Unit Cost1/20 300 $ 114/8 400 129/5 200 1312/12 100 14Total purchases 1,000 units
Ending inventory, Dec. 31: 600 units
Detailed Costing Method Example
What’re the cost of goods sold and ending inventory?
Chapter 5, Slide #23
Inventory Costing Methods(in a period of inflation)
Four costing methods available:
SpecificIdentification
WeightedAverage
First-in, First-out(FIFO)
Last-in, First-out(LIFO)
LO6
Chapter 5, Slide #24
Specific Identification Method
Step 1: Identify the specific units in inventory at the end of the year and their costs.
Chapter 5, Slide #25
Specific Identification Method
Units in ending inventory:
Date purchased Units Cost Total Cost
1/20 100 $11 $1,100
4/8 300 12 3,600
9/5 200 13 2,600
Ending inventory 600 $7,300
Units × Cost = Total cost
Chapter 5, Slide #26
Specific Identification Method
Step 2: cost of goods sold = cost of goods available for sale – ending inventory = 17,100 – 7,300 = 9,800
* Few companies use this method
Chapter 5, Slide #27
Weighted Average Method
Step 1: Calculate the cost of goods available for sale.
Chapter 5, Slide #28
Weighted Average Method
Date purchased Units Cost Total cost
Beg. inventory 500 $10 $ 5,000
1/20 300 11 3,300
4/8 400 12 4,800
9/5 200 13 2,600
12/12 100 14 1,400
Cost of goods available for sale 1,500 $17,100
Chapter 5, Slide #29
Weighted Average Method
Step 2: Divide the cost of goods availablefor sale by the total units todetermine the weighted averagecost per unit.
:
Chapter 5, Slide #30
Weighted Average Method
Cost of Goods Available for SaleUnits Available for Sale
$17,100 1,500
= $11.40/unit
Chapter 5, Slide #31
Weighted Average Method
Step 3: Calculate ending inventory and cost of goods sold by multiplying the weighted average cost per unit by the number of units in ending inventory and the number of units sold.
×Avg.Cost
# ofUnits
Chapter 5, Slide #32
Weighted Average Method
ALLOCATE TO Ending Cost of Inventory Goods
SoldUnits on hand 600 Units sold 900Weighted average cost × $11.40 $ 11.40
Total cost of goods available of $17,100 allocated: $6,840 $10,260
Chapter 5, Slide #33
First-in, First-out (FIFO) Method
Step 1: Assign the cost of the beginning inventory to cost of goods sold.
1stin
Chapter 5, Slide #34
First-in, First-out (FIFO) Method ALLOCATE TO Ending Cost ofUnits Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 300 $11
4/8 400 $12
9/5 200 $13
12/12 100 $14
Chapter 5, Slide #35
First-in, First-out (FIFO) Method
Step 2: Continue to work forward until you assign the total number of units sold during the period to cost of goods sold. Allocate the remaining costs to ending inventory.
2nd3rd etc.
Chapter 5, Slide #36
First-in, First-out (FIFO) Method
ALLOCATE TO Ending Cost ofUnits Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 300 $11 3,300
4/8 300 / 100 $12 $3,600 1,200
9/5 200 $13 2,600
12/12 100 $14 1,400
TOTALS $7,600 $9,500
Chapter 5, Slide #37
Last-in, First-out (LIFO) Method
Step 1: Assign the cost of the last units purchased to cost of goods sold.
1stin
Chapter 5, Slide #38
Last-in, First-out (LIFO) Method ALLOCATE TO
Ending Cost ofUnits Cost Inventory Goods Sold
1/1 500 $10
1/20 300 $11
4/8 400 $12
9/5 200 $13
12/12 100 $14 $1,400
Chapter 5, Slide #39
1stin
Step 2: Work backwards until you assign the total number of units sold during the period to cost of goods sold (allocate the remaining costs to ending inventory).
Last-in, First-out (LIFO) Method
Chapter 5, Slide #40
Last-in, First-out (LIFO) Method
ALLOCATE TO Ending Cost ofUnits Cost Inventory Goods Sold
1/1 500 $10 $5,000
1/20 100 / 200 $11 1,100 $ 2,200
4/8 400 $12 4,800
9/5 200 $13 2,600
12/12 100 $14 1,400
TOTALS $6,100 $11,000
Chapter 5, Slide #41
Comparison of Costing Methods
Cost of GoodsSold
Ending Inventory
11,000
6,840
7,600
10,260
9,500
17,100
17,000
17,100
WeightedAverageFIFO
LIFO
Goods Available for Sale
6,100
Specific Identification $7,300 $ 9,800 $17,100
Chapter 5, Slide #42
Chapter 5, Slide #43
Comparison of Costing Methods
X X X
X X
Weighted Average FIFO LIFO
In periods of rising prices: Highest cost of goods sold? Lowest cost of goods sold?Highest gross profit?Lowest net income?Lowest income taxes?
LO7
Chapter 5, Slide #44
LIFO Conformity Rule LIFO conformity rule
• If used for tax, LIFO must also be used for books
• In general, companies can use one accounting method for financial reporting purpose and use a different method for tax purpose. Accounting choice should be made based on which method produces most useful information.
Chapter 5, Slide #45
Lower of Cost or Market(for your information only)
• If inventory’s market value has fallen below the cost, the inventory must be reported at the lower market value, and a loss must be recorded.