Reporting And Analyzing Inventories

Dr. Fred Barbee ACCT 201 1

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Reporting and Analyzing Inventories

UAA – ACCT 201 Principles of Financial

Accounting Dr. Fred Barbee

Chap

ter 5

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Day #2

Topic LO Read HW

Inventory Items and Cost

C1, C2

219-220

QS5, QS7

Other Inventory Valuations

P2, P3

220-223

E7, E8, P3A

Decision Analysis A3224-225

QS12, E9, E10

Chapter 5 - Day 2 - Agenda

P5-2A due today!


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Inventory Items and Costs

Chap

ter 5

FOB Destination Point

Public Carrier

Seller Buyer

Items in Merchandise Inventory

Public Carrier

Seller Buyer

FOB Shipping Point

Ownership passes to the buyer here.


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Goods on Consignment

Goods shipped by the owner (consignor) to another party (consignee).

Merchandise is included in the inventory of the consignor.


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Goods Damaged or Obsolete

Damaged or obsolete goods are not counted in inventory.

Cost should be reduced to net realizable value.

Include all expenditures necessary to bring an item to a salable condition and

location.

Invoice PriceInvoice PriceInvoice PriceInvoice Price

Import DutiesImport DutiesImport DutiesImport Duties

Freight-inFreight-inFreight-inFreight-in

StorageStorageStorageStorage

InsuranceInsuranceInsuranceInsurance

Cost of Merchandise Inventory


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Physical Count of Merchandise Inventory

Most companies take a physical count of inventory at least once each year. Quantity ___

InventoryCount TagCountedby _______


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Physical Count of Merchandise Inventory

When the physical count does not match the Merchandise Inventory account, an adjustment must be made.

Quantity ___

InventoryCount TagCountedby _______


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Chap

ter 5


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Lower of Cost or Market



Inventory must be reported at market value when market is

lower than cost.

Market is defined as current replacement cost (not sales

price).Consistent with the

conservatismprinciple.

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Can be applied three ways:

separately to each individual item.

to major categories of assets.

to the whole inventory.

A motorsports retailer has the following items in inventory (Exhibit 5.14) :


Here is how to compute lower of cost or market for individual inventory items.



Here is how to compute lower of cost or market for the two groups

of inventory items.


Here is how to compute lower of cost or market for the entire inventory.


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Retail Inventory Method



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Often used to estimate inventory for interim period reporting.

Needed Information includes:

Beginning inventory at cost and retail

Net purchases at cost and retail

Net sales


Step 3Step 3 Cost to Cost to retail ratioretail ratio

Ending Ending inventory inventory at retailat retail

Estimated Estimated ending ending

inventory inventory at costat cost

==××

Step 2Step 2Goods Goods

available available for sale at for sale at

retailretail

Goods Goods available available for sale at for sale at

retailretail


costcost


costcost=÷ Cost to Cost to

retail ratioretail ratioCost to Cost to

retail ratioretail ratio

Step 1 Net sales at retail

Net sales at retail

Goods available for sale at

retail


retail

– =Ending

inventory at retail

Ending inventory at retail


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Gross Profit Method



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Gross Profit Method

Estimate ending inventory by applying the gross profit ratio to net sales (at retail).

Useful when inventory has been destroyed, lost, or stolen.

Gross Profit Method

Step 11.0 – the

gross profit ratio

Net sales at retail × =

Estimated cost of goods sold

Step 2Estimated

cost of goods sold


cost

– =Estimated

ending inventory

at cost

Gross Profit Method

In March of 2002, Chemical Company’s inventory was destroyed by fire. Chemical’s normal gross profit ratio is 30% of net sales. At the time of the fire, Chemical showed the following balances:

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Sales 31,500$ Less: sales returns (1,500) Net sales 30,000 (100% - 30%) 70%Estimated cost of goods sold 21,000$

Sales 31,500$ Less: sales returns (1,500) Net sales 30,000 (100% - 30%) 70%Estimated cost of goods sold 21,000$

Step 1

Gross Profit Method

Step 2

Gross Profit Method

Goods Available for Sale: Inventory, 1/1/02 12,000$ Net cost of goods purchased 20,500 Goods available for sale 32,500 Less estimated cost of goods sold: Estimated cost of goods sold (21,000) Estimated March inventory loss 11,500$

Goods Available for Sale: Inventory, 1/1/02 12,000$ Net cost of goods purchased 20,500 Goods available for sale 32,500 Less estimated cost of goods sold: Estimated cost of goods sold (21,000) Estimated March inventory loss 11,500$


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Decision Analysis

Chap

ter 5

Inventory Turnover

Shows how many times a company turns over its inventory during a

period. Indicator of how well management is controlling the amount of inventory available.

Inventory Turnover =

Cost of goods sold Avg. inventory

Days’ Sales in Inventory

Reveals how much inventory is available in terms of the number of days’ sales.

Days' Sales in Inventory =

Ending Inventory

Cost of goods sold

× 365

Reporting And Analyzing Inventories

Business

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