Inventory

C H A P T E R 5

INVENTORY

MERCH

• Merchandise Inventory• Only account on both balance sheet and income

statement• Usually the largest current asset account

• Income Statement• Beginning and end used to get cost of merch sold

• Balance Sheet• Counted as an asset

INVENTORY SYSTEMS

• Perpetual Inventory System• Up-to-date record keeping• Using a Point-of Sale terminal

• Periodic Inventory System• Must physically count at end of period

• Physical Inventory• Both systems utilize• Perpetual at least once year• To detect loss from breakage, spoilage, and theft

THE SPECIFIC METHOD

• Every Item has an assigned actual cost• Usually Big ticket Items• Cars• Appliances• Furniture

FIFO

• First In First Out• First item purchased assumed first sold• Logical way to rotate merch• Grocers selling milk

LIFO

• Last in, First Out• When new inventory has to move first• Coal, is stored in piles, the oldest stays at the bottom• Dirt, Mulch, etc.

WEIGHTED AVERAGE COST METHOD

• A compromise of FIFO and LIFO• Total number of units divided by the total cost• Hardware stores that may mix products ex. nails

CONSISTENCY PRINCIPLE

• Apply the same method from period to period• A company must declare a method• Can only change with permission from the IRS

IMPORTANCE OF INVENTORY

• most active element of a merchandising business

• principal source of revenue

• largest current asset

• largest deduction from revenue -- COGS

P

EI

BI


COGS

GAFS

To Balance Sheet

To IncomeStatement


Inventory Net Income Assets Capital

Effects of Misstatement

Balance Sheet Income Statement

MI COGS

First In … First OUT

Late

st Ite

ms Left

Over

Time Time Time Time Time Time Time Time Time


MI COGS

Last

In F

irst

OU

TOldest Item

s Left



MI COGS

FIFO LIFO FIFO LIFO

Rising Prices

NI


LOWER-OF-COST-OR-MARKET RULE

• When assigning cost to Ending Inventory• Use the lowest of cost or market value

• EI is reflected on Balance Sheet• Assures accurate asset value

ESTIMATING COST OF INVENTORY

• When physical can not be performed• Loss, theft, natural disaster

• Retail method• Gross Profit method

RETAIL METHOD

Beginning Inv.Net PurchasesGAFSCost Ratio: $120,000 / $200,000 =60%Deduct retail salesRetail Ending Inv.

Apply cost ratio 58,000 x 60% =

At Cost At Retail$41,200 $68,600 78,800 131,400$120,000 $200,000

142,000 $58,000

$34,800

GROSS PROFIT METHOD

• Use the percentage of gross profit to estimate cost

• Percentage = gross profit / net sales

• Use several years of data to calculate

• Will be given in problems

GROSS PROFIT METHOD

1. Gross profit is estimated by multiplying net sales by gross profit percentage. $250,000 x .39 = $97,000

GROSS PROFIT METHOD

2. Cost of merchandise sold determined by estimated gross profit from net sales $250,000 – 97,000 = 152,500

GROSS PROFIT METHOD

3. Ending inventory difference between GAFS and COGS $199,000 – 152,000 = 46,500

INVENTORY TURNOVER

• Tells us how many times you sell inventory a year

• Compare to other similar companies

• Compare year to year for gains and losses

• Computed by dividing COGS by Average inventory

INVENTORY TURNOVER

BI 67,400EI 81,500

148,900Average Merch Inv. 148,900 / 2 = $74,450

COGS 219,300Avg Merch Inv 74,450 = 2.95 times a year

Inventory

Documents

Transcript of Inventory