Chap006
-
Upload
universidad-del-turabo -
Category
Business
-
view
102 -
download
1
Transcript of Chap006
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Chapter 6
INVENTORIES AND COST OF SALES
6 - 2
DETERMINING INVENTORY ITEMS
Merchandise inventory includes all goods that a Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where company owns and holds for sale, regardless of where
the goods are located when inventory is counted. the goods are located when inventory is counted.
Items requiring special attention include:Items requiring special attention include:Items requiring special attention include:Items requiring special attention include:
Goods in Transit
Goods Damaged or
ObsoleteGoods on Consignment
C1
6 - 3
FOB Destination Point
Public Carrier
Seller Buyer
GOODS IN TRANSIT
Public Carrier
Seller Buyer
FOB Shipping Point
Ownership passes to the buyer here.
C1
6 - 4
GOODS ON CONSIGNMENT
Merchandise is included in the inventory of the consignor, the owner of the inventory.
Consignor
Consignee
Thanks for selling my inventory in your
store.
C1
6 - 5
GOODS DAMAGED OR OBSOLETE
Damaged or obsolete goods are not counted in inventory if they cannot be sold.
Cost should be reduced to net realizable value if they can be sold.
C1
6 - 6
DETERMINING INVENTORY COSTS
Invoice Cost
Invoice Cost
Include all expenditures necessary to bring an item to Include all expenditures necessary to bring an item to a salable condition and location.a salable condition and location.
Minus Discounts
and Allowances
Minus Discounts
and Allowances
Plus Import Duties
Plus Import Duties Plus
FreightPlus
Freight
Plus StoragePlus
Storage
Plus Insurance
Plus Insurance
C2
6 - 7
Most companies take a physical count of inventory at least once each year.
INTERNAL CONTROLS AND TAKING A PHYSICAL COUNT
When the physical count does not match the Merchandise Inventory account, an adjustment must be made.
Good internal controls over count include:1.Pre-numbered inventory tickets.2.Counters have no inventory responsibility.3.Counts confirm existence, amount, andquality of inventory item.4.Second count is taken.5.Manager confirms all items counted.
Good internal controls over count include:1.Pre-numbered inventory tickets.2.Counters have no inventory responsibility.3.Counts confirm existence, amount, andquality of inventory item.4.Second count is taken.5.Manager confirms all items counted.
C2
6 - 8
INVENTORY COST FLOW ASSUMPTIONS
First-In, First-OutFirst-In, First-Out(FIFO)(FIFO)
Assumes costs flow in the order Assumes costs flow in the order incurred.incurred.
Last-In, First-OutLast-In, First-Out(LIFO)(LIFO)
Assumes costs flow in the Assumes costs flow in the reverse order incurred.reverse order incurred.
Weighted Weighted AverageAverage
Assumes costs flow at an Assumes costs flow at an average of the costs available. average of the costs available.
P1
6 - 9
FIRST-IN, FIRST-OUT (FIFO)
Cost of Goods Sold
Cost of Goods Sold
Ending InventoryEnding
Inventory
Oldest CostsOldest Costs
Recent Costs
Recent Costs
P1
6 - 10
LAST-IN, FIRST-OUT (LIFO)
Cost of Goods Sold
Cost of Goods Sold
Recent Costs
Recent Costs
Oldest CostsOldest Costs
P1
6 - 11
WEIGHTED AVERAGE
When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold.
Cost of Goods Available for
Sale
Units on hand on the date of
sale÷
P1
6 - 12
FINANCIAL STATEMENT EFFECTSOF COSTING METHODS
Because prices change, inventory methods nearly always assign different cost amounts.
A1
6 - 13
FINANCIAL STATEMENT EFFECTSOF COSTING METHODS
Advantages of MethodsAdvantages of MethodsAdvantages of MethodsAdvantages of Methods
Smoothes out price changes.Smoothes out price changes.
Better matches current costs in cost of goods sold with
revenues.
Better matches current costs in cost of goods sold with
revenues.
Ending inventory approximates
current replacement cost.
Ending inventory approximates
current replacement cost.
First-In, First-OutFirst-In, First-Out
Weighted Average
Weighted Average
Last-In, First-OutLast-In,
First-Out
A1
6 - 14
TAX EFFECTS OF COSTING METHODS
The Internal Revenue Service (IRS) identifies several The Internal Revenue Service (IRS) identifies several acceptable inventory costing methods for reporting acceptable inventory costing methods for reporting
taxable income.taxable income.
If LIFO is used for tax If LIFO is used for tax purposes, the IRS requires purposes, the IRS requires
it be used in financial it be used in financial statements.statements.
If LIFO is used for tax If LIFO is used for tax purposes, the IRS requires purposes, the IRS requires
it be used in financial it be used in financial statements.statements.
A1
6 - 15
LOWER OF COST OR MARKET
Inventory must be reported at market value Inventory must be reported at market value when when marketmarket is is lowerlower than cost.than cost.
Can be applied three ways:(1) separately to each
individual item.(2) to major categories of
assets.(3) to the whole inventory.
Can be applied three ways:(1) separately to each
individual item.(2) to major categories of
assets.(3) to the whole inventory.
P2
6 - 16
FINANCIAL STATEMENT EFFECTS OF INVENTORY ERRORS
Income Statement EffectsIncome Statement Effects
A2
6 - 17
FINANCIAL STATEMENT EFFECTS OF INVENTORY ERRORS
Balance Sheet EffectsBalance Sheet Effects
A2
6 - 18
END OF CHAPTER 6