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Transcript of MARKET PULSE SEC alleges Office Depot made selective disclosure Oct. 21, 2010, 3:10 p.m. EDT By...
MARKET PULSESEC alleges Office Depot made selective disclosureOct. 21, 2010, 3:10 p.m. EDTBy Ronald D. Orol
WASHINGTON (MarketWatch) -- Office Depot Inc. executives selectively shared information with analysts and its largest shareholders, giving some an unfair advantage, the Securities and Exchange Commission said Thursday after launching enforcement actions against the retailer and CEO Stephen A. Odland and then-CFO Patricia A. McKay for violating fair disclosure regulations. “Office Depot executives selectively shared information with analysts and the company's largest shareholders in order to manage earnings expectations,” said SEC Division of Enforcement Director Robert Khuzami. “This gave an unfair advantage to favored investors at the expense of other investors and, as today's action shows, is illegal.” The SEC alleged the pair directed investor relations officials to manage down their guidance for the second quarter of 2007.
Reporting and Interpreting Cost of Reporting and Interpreting Cost of Goods Sold and InventoryGoods Sold and Inventory
Chapter 7
Ch 7 -- Not tested Cash flows (pp. 355-357) Converting Income Statement and Balance Sheet to FIFO
(pp. 358-360) Errors in measuring ending inventory (pp. 362-363) LIFO liquidations (pp. 365-368) Changes in estimates (pp. 428-429)
Practice ProblemPerpetual Inventory
In a perpetual inventory system, a detailed inventory record is maintained, recording each purchase and sale during the accounting period. This up-to-date record is maintained on a transaction-by-transaction basis. To this point in the text, all journal entries for purchase and sale transactions have been recorded using a perpetual inventory system.
In a perpetual inventory system, purchase transactions are recorded directly in an inventory account. When each sale is recorded, a companion cost of goods sold entry is made, decreasing inventory and recording cost of goods sold. As a result, information on cost of goods sold and ending inventory is available on a continuous (perpetual) basis.
Practice ProblemPerpetual Inventory
Sept 30 Made catalog sales during the remainder of the month, as follows:Apparel Gift $2,980 $900The cost of the merchandise was $1,240 and $635, respectively. All catalog sales were made on credit.
EXTREMELY IMPORTANT FORMULAECost of Goods Sold calculation Income from Operations calculation
Beginning inventory Net sales**+ Net purchases* - Cost of goods sold Goods available for sale Gross margin (AKA Gross profit)- Ending inventory - Operating expenses Cost of goods sold Income from operations * Net purchases = Gross purchases
– Purchase returns, allowances, and discounts + Transportation, insurance, storage, taxes, etc.
** Net sales = Gross sales – Sales returns, allowances, and discounts
7-9
Costs Included in Inventory Purchases
The cost principlecost principle requires that inventory be recorded at the price paid or the
consideration given.
Invoice Price
Freight
Inspection Costs
Preparation Costs
7-10
Supplement B: Additional Issues in Measuring Purchases
Purchase returns and allowances are a reduction
in the cost of purchases associated with
unsatisfactory goods.
A purchase discount is a cash discount
received for prompt payment of an account.
7-11
Supplement B: Additional Issues in Measuring Purchases
Terms
Time
Due
Discount Period
Full amountless discount
Credit Period
Full amount due
Purchase or SalePurchase or Sale
2/10,n/302/10,n/30Discount Percent
Discount Percent
Number of Days Discount
Is Available
Number of Days Discount
Is Available
CreditPeriod
CreditPeriod
Purchase Discounts
Accounts Payable 500Cash 495Purchase Discounts 5
To record payment within discount period to
supplier who offers 1% purchase discount.
($ 500 × 1% = $5 discount)
Shipping Terms
When are goods in transit included in the inventory of theSeller?Purchaser?
FOB Shipping Point (p. 284)
Both sale and purchase recorded upon shipment Buyer responsible for (i.e., owns) inventory while in
transit
Seller Buyer
Titlepasses when
shipped
FOB Destination (p. 284)
Both sale and purchase recorded when inventory delivered at destination
Seller responsible for (i.e., owns) inventory while in transit
Seller Buyer
Titlepasses at
destination
FOB Shipping PointAggie sold goods costing $35,000 to Texas Company FOB
Shipping Point on September 1. The goods arrived at Texas Company on September 15.
When would Aggie record sales revenue? Who pays for shipping?
FOB DestinationAggie sold goods costing $40,000 to Waco Company FOB
destination on September 30. The goods were received by Waco Company on October 8.
When would Aggie record sales revenue? Who pays for shipping?
EXTREMELY IMPORTANT FORMULAECost of Goods Sold calculation Income from Operations calculation
Beginning inventory Net sales**+ Net purchases* - Cost of goods sold Goods available for sale Gross margin (AKA Gross profit)- Ending inventory - Operating expenses Cost of goods sold Income from operations * Net purchases = Gross purchases
– Purchase returns, allowances, and discounts + Transportation, insurance, storage, taxes, etc.
** Net sales = Gross sales – Sales returns, allowances, and discounts
7-19
Flow of Inventory Costs
MerchandiseMerchandisePurchasesPurchases
MerchandiseMerchandisePurchasesPurchases
Cost ofCost ofGoods SoldGoods Sold
Cost ofCost ofGoods SoldGoods Sold
MerchandiseMerchandiseInventoryInventory
MerchandiseMerchandiseInventoryInventory
Merchandiser
7-20
Nature of Cost of Goods Sold
BeginningBeginningInventoryInventory
BeginningBeginningInventoryInventory
PurchasesPurchasesfor the Periodfor the PeriodPurchasesPurchases
for the Periodfor the Period
Ending InventoryEnding Inventory(Balance Sheet)(Balance Sheet)
Ending InventoryEnding Inventory(Balance Sheet)(Balance Sheet)
Goods availableGoods availablefor Salefor Sale
Goods availableGoods availablefor Salefor Sale
Cost of Goods SoldCost of Goods Sold(Income Statement)(Income Statement)
Cost of Goods SoldCost of Goods Sold(Income Statement)(Income Statement)
Beginning inventory + Purchases = Goods Available for SaleBeginning inventory + Purchases = Goods Available for Sale
Goods Available for Sale – Ending inventory = Cost of goods soldGoods Available for Sale – Ending inventory = Cost of goods sold
Beginning inventory + Purchases = Goods Available for SaleBeginning inventory + Purchases = Goods Available for Sale
Goods Available for Sale – Ending inventory = Cost of goods soldGoods Available for Sale – Ending inventory = Cost of goods sold
EXTREMELY IMPORTANT FORMULAECost of Goods Sold calculation Income from Operations calculation
Beginning inventory Net sales**+ Net purchases* - Cost of goods sold Goods available for sale Gross margin (AKA Gross profit)- Ending inventory - Operating expenses Cost of goods sold Income from operations * Net purchases = Gross purchases
– Purchase returns, allowances, and discounts + Transportation, insurance, storage, taxes, etc.
** Net sales = Gross sales – Sales returns, allowances, and discounts
QUIZ #2, Ch 6 - WEDNESDAY (10/24)
Quiz # 3, Ch 7 - FRIDAY (10/26)
7-23
Inventory Costing Methods
Total Dollar Amount of Goods Total Dollar Amount of Goods Available for SaleAvailable for Sale
Total Dollar Amount of Goods Total Dollar Amount of Goods Available for SaleAvailable for Sale
Ending InventoryEnding InventoryEnding InventoryEnding Inventory Cost of Goods SoldCost of Goods SoldCost of Goods SoldCost of Goods Sold
Inventory Costing Method
Inventory Costing Methods1. Specific Identification2. First-in, First-out3. Last-in, First-out4. Weighted Average
7-24
Specific Identification
When units are sold, the
specific cost of the unit sold is
added to cost of goods sold.
When units are sold, the
specific cost of the unit sold is
added to cost of goods sold.
7-25
Cost Flow Assumptions
The choice of an inventory costing method is not based on the physical flow of goods
on and off the shelves.
LIFO
FIFOWeightedAverage
7-26
First-In, First-Out Method
Cost of Cost of Goods SoldGoods Sold
Cost of Cost of Goods SoldGoods SoldOldest CostsOldest CostsOldest CostsOldest Costs
Ending Ending InventoryInventoryEnding Ending
InventoryInventoryRecent CostsRecent CostsRecent CostsRecent Costs
7-27
First-In, First-Out
Remember: Remember: The costs of The costs of most most recent recent
purchasespurchases are are in ending in ending inventory. inventory. Start with Start with
11/29 and add 11/29 and add units units
purchased purchased until you reach until you reach the number in the number in
ending ending inventory.inventory.
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 ?
Cost of Goods Sold 1,050 ?
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 ?
Cost of Goods Sold 1,050 ?
7-28
First-In, First-Out
Now, we have allocated the cost to all Now, we have allocated the cost to all 1,200 units in ending inventory.1,200 units in ending inventory.
Now, we have allocated the cost to all Now, we have allocated the cost to all 1,200 units in ending inventory.1,200 units in ending inventory.
Beg. Inv. 1,000 @ 5.25$ Jan. 3 500 @ 5.30 450 @ $5.30June 20 300 @ 5.60 300 @ $5.60Sept. 15 250 @ 5.80 250 @ $5.80Nov. 29 200 @ 5.90 200 @ $5.90
1,200 Units Units
6,695$ Cost
Ending InventoryCost of Goods
SoldGiven Information
7-29
First-In, First-Out
Now, we have allocated the cost Now, we have allocated the cost to all 1,050 units sold.to all 1,050 units sold.
Now, we have allocated the cost Now, we have allocated the cost to all 1,050 units sold.to all 1,050 units sold.
Beg. Inv. 1,000 @ 5.25$ 1,000 @ 5.25$ Jan. 3 500 @ 5.30 450 @ $5.30 50 @ 5.30 June 20 300 @ 5.60 300 @ $5.60Sept. 15 250 @ 5.80 250 @ $5.80Nov. 29 200 @ 5.90 200 @ $5.90
1,200 Units 1,050 Units
6,695$ Cost 5,515$ Cost
Ending InventoryCost of Goods
SoldGiven Information
7-30
First-In, First-Out
Here is the Here is the cost of cost of ending ending
inventory inventory and cost and cost of goods of goods
sold using sold using FIFO.FIFO.
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 6,695.00$
Cost of Goods Sold 1,050 5,515.00$
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 6,695.00$
Cost of Goods Sold 1,050 5,515.00$
7-31
Last-In, First-Out Method
Ending Ending InventoryInventoryEnding Ending
InventoryInventory
Cost of Cost of Goods SoldGoods Sold
Cost of Cost of Goods SoldGoods Sold
Oldest CostsOldest CostsOldest CostsOldest Costs
Recent CostsRecent CostsRecent CostsRecent Costs
7-32
Last-In, First-Out
Remember: Remember: The costs of the The costs of the
oldest oldest purchasespurchases are are
in ending in ending inventory. Start inventory. Start with beginning with beginning inventory and inventory and
add units add units purchased until purchased until you reach the you reach the
number in number in ending ending
inventory.inventory.
Remember: Remember: The costs of the The costs of the
oldest oldest purchasespurchases are are
in ending in ending inventory. Start inventory. Start with beginning with beginning inventory and inventory and
add units add units purchased until purchased until you reach the you reach the
number in number in ending ending
inventory.inventory.
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 ?
Cost of Goods Sold 1,050 ?
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 ?
Cost of Goods Sold 1,050 ?
7-33
Last-In, First-Out
Now, we have allocated the cost to all Now, we have allocated the cost to all 1,200 units in ending inventory.1,200 units in ending inventory.
Now, we have allocated the cost to all Now, we have allocated the cost to all 1,200 units in ending inventory.1,200 units in ending inventory.
Beg. Inv. 1,000 @ 5.25$ 1,000 @ $5.25Jan. 3 500 @ 5.30 200 @ 5.30 June 20 300 @ 5.60 Sept. 15 250 @ 5.80 Nov. 29 200 @ 5.90
1,200 Units Units
6,310$ Cost
Ending InventoryCost of Goods
SoldGiven Information
7-34
Last-In, First-Out
Now, we have allocated the cost Now, we have allocated the cost to all 1,050 units sold.to all 1,050 units sold.
Now, we have allocated the cost Now, we have allocated the cost to all 1,050 units sold.to all 1,050 units sold.
Beg. Inv. 1,000 @ 5.25$ 1,000 @ $5.25Jan. 3 500 @ 5.30 200 @ 5.30 300 @ 5.30$ June 20 300 @ 5.60 300 @ 5.60 Sept. 15 250 @ 5.80 250 @ 5.80 Nov. 29 200 @ 5.90 200 @ 5.90
1,200 Units 1,050 Units
6,310$ Cost 5,900$ Cost
Ending InventoryCost of Goods
SoldGiven Information
7-35
Last-In, First-Out
Here is the Here is the cost of cost of ending ending
inventory inventory and cost of and cost of goods sold goods sold using LIFO.using LIFO.
Here is the Here is the cost of cost of ending ending
inventory inventory and cost of and cost of goods sold goods sold using LIFO.using LIFO.
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 6,310.00$
Cost of Goods Sold 1,050 5,900.00$
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 6,310.00$
Cost of Goods Sold 1,050 5,900.00$
7-36
Weighted Average (AKA Average Cost) Method
When a unit is sold, the average cost of each unit in inventory is assigned to cost
of goods sold.
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 Available for
Sale÷
7-37
Average Cost Method
12,210$ 2,250
= $5.42667
Weighted Average Cost
1,200 × 5.42667$
1,050 × 5.42667$
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 6,512.00$
Cost of Goods Sold 1,050 5,698.00$
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:Jan. 3 500 5.30 2,650.00 June 20 300 5.60 1,680.00 Sept. 15 250 5.80 1,450.00 Nov. 29 200 5.90 1,180.00 Goods Available for Sale 2,250 12,210.00$
Ending Inventory 1,200 6,512.00$
Cost of Goods Sold 1,050 5,698.00$
7-38
Comparison of Methods
FIFO LIFO
Weighted Average
Net sales 25,000$ 25,000$ 25,000$ Cost of goods sold:Merchandise inventory, beginning 5,250$ 5,250$ 5,250$ Net purchases 6,960 6,960 6,960 Goods available for sale 12,210$ 12,210$ 12,210$ Merchandise inventory, ending 6,695 6,310 6,512 Cost of goods sold 5,515$ 5,900$ 5,698$ Gross profit 19,485$ 19,100$ 19,302$ Operating expenses 750 750 750 Income before taxes 18,735$ 18,350$ 18,552$ Income taxes expense (30%)* 5,621 5,505 5,566 Net income 13,114$ 12,845$ 12,986$
* Tax expense amounts were rounded.
Computers, Inc.Income Statement
For Year Ended December 31, 2009
7-39
Financial Statement Effects of Costing Methods
Advantages of MethodsAdvantages of MethodsAdvantages of MethodsAdvantages of Methods
Better matches Better matches current costs in cost current costs in cost of goods sold with of goods sold with
revenues.revenues.
Better matches Better matches current costs in cost current costs in cost of goods sold with of goods sold with
revenues.revenues.
Ending inventory Ending inventory approximates approximates
current current replacement cost.replacement cost.
Ending inventory Ending inventory approximates approximates
current current replacement cost.replacement cost.
First-In, First-In, First-OutFirst-OutFirst-In, First-In, First-OutFirst-Out
Last-In, Last-In, First-OutFirst-OutLast-In, Last-In,
First-OutFirst-Out
Smoothes out Smoothes out price changes.price changes.Smoothes out Smoothes out price changes.price changes.
Weighted Weighted AverageAverage
Weighted Weighted AverageAverage
7-40
Managers Choice of Inventory Methods
Net Income EffectsNet Income EffectsManagers prefer to report Managers prefer to report higher earnings for their higher earnings for their
companies.companies.
Net Income EffectsNet Income EffectsManagers prefer to report Managers prefer to report higher earnings for their higher earnings for their
companies.companies.
Income Tax EffectsIncome Tax EffectsManagers prefer to pay the Managers prefer to pay the
least amount of taxes least amount of taxes allowed by law as late as allowed by law as late as
possible.possible.
Income Tax EffectsIncome Tax EffectsManagers prefer to pay the Managers prefer to pay the
least amount of taxes least amount of taxes allowed by law as late as allowed by law as late as
possible.possible.
LIFO Conformity RuleIf last-in, first-out is used on the
income tax return, it must also be used to calculate inventory and cost
of goods sold for financial statements.
7-41
LIFO and International Accounting
LIFO Permitted?LIFO Permitted?
YesYesNoNo
ChinaSingapore
Canada
Great Britain
Australia
7-43
Perpetual and Periodic Inventory Systems
Provides Provides up-to-dateup-to-date inventory records.inventory records.
Provides Provides up-to-dateup-to-date inventory records.inventory records.
Provides Provides up-to-date up-to-date cost of sales records. cost of sales records. Provides Provides up-to-date up-to-date
cost of sales records. cost of sales records.
Perpetual Perpetual SystemSystem
Perpetual Perpetual SystemSystem
In a periodic inventory system, ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical count.
7-44
Perpetual and Periodic Inventory SystemsInventory System
Item Periodic System Perpetual System
Beginning InventoryCarried over
from prior periodCarried over from
prior period
Add: PurchasesAccumulated in the Purchases
account
Accumulated in the Inventory
account
Less: Ending Inventory
Measured at end of period by
physical inventory count
Perpetual record updated at every
sale
Cost of Goods Sold
Computed as a residual amount at end of period
Measured at every sale based
on perpetual record
7-45
Supplement C: Comparison of Perpetual and Periodic Inventory Systems
Jan. 1
Apr. 14 Purchased 1,100 units at a unit cost of $50.Inventory 55,000
Accounts payable 55,000 Nov. 30 Sold 1,300 units at a sales price of $83.
Accounts receivable 107,900 Sales revenue 107,900
Cost of goods sold 65,000 Inventory 65,000
Dec. 31 Use cost of goods sold and inventory amounts.
Had beginning inventory of 800 units at a unit cost of $50.
Perpetual Inventory System
7-46
Supplement C: Comparison of Perpetual and Periodic Inventory Systems
Periodic Inventory System
7-48
Valuation at Lower of Cost or Market
Ending inventory is reported at the Ending inventory is reported at the lower of cost or market (LCM)lower of cost or market (LCM). .
Ending inventory is reported at the Ending inventory is reported at the lower of cost or market (LCM)lower of cost or market (LCM). .
Replacement CostReplacement CostThe current purchase price The current purchase price
for identical goods.for identical goods.
Replacement CostReplacement CostThe current purchase price The current purchase price
for identical goods.for identical goods.
The company will recognize a “holding” loss in the The company will recognize a “holding” loss in the current period rather than the period in which the current period rather than the period in which the
item is sold.item is sold.This practice is This practice is conservativeconservative..
The company will recognize a “holding” loss in the The company will recognize a “holding” loss in the current period rather than the period in which the current period rather than the period in which the
item is sold.item is sold.This practice is This practice is conservativeconservative..
7-49
Valuation at Lower of Cost or Market
Item Quantity Cost Replacement
Cost LCM Total LCMPentium chips 1,000 250$ 200$ 200$ 200,000$ Disk drives 400 100 110 100 40,000
Item Quantity Cost Replacement
Cost LCM Total LCMPentium chips 1,000 250$ 200$ 200$ 200,000$ Disk drives 400 100 110 100 40,000
7-50
Inventory Turnover Cost of Goods Sold
= Average Inventory
Inventory Turnover
Average Inventory is . . .Average Inventory is . . .(Beginning Inventory + Ending Inventory) ÷ 2(Beginning Inventory + Ending Inventory) ÷ 2
Average Inventory is . . .Average Inventory is . . .(Beginning Inventory + Ending Inventory) ÷ 2(Beginning Inventory + Ending Inventory) ÷ 2
This ratio reflects how many times This ratio reflects how many times average inventory was produced and average inventory was produced and sold during the period. A higher ratio sold during the period. A higher ratio indicates that inventory moves more indicates that inventory moves more quickly thus reducing storage and quickly thus reducing storage and
obsolescence costs. obsolescence costs.
This ratio reflects how many times This ratio reflects how many times average inventory was produced and average inventory was produced and sold during the period. A higher ratio sold during the period. A higher ratio indicates that inventory moves more indicates that inventory moves more quickly thus reducing storage and quickly thus reducing storage and
obsolescence costs. obsolescence costs.
HOMEWORK #3
INVENTORY & COST OF GOODS SOLD
BANK RECONCILIATION
Ch 7 -- Not tested Cash flows (pp. 355-357) Converting Income Statement and Balance Sheet to FIFO
(pp. 358-360) Errors in measuring ending inventory (pp. 362-363) LIFO liquidations (pp. 365-368) Changes in estimates (pp. 428-429)
End of Chapter 7