Reporting and Interpreting Cost of Goods Sold and Inventory Chapter 7 McGraw-Hill/Irwin © 2009 The...
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Reporting and Interpreting Reporting and Interpreting Cost of Goods Sold and Cost of Goods Sold and Inventory Inventory Chapter 7 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
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Transcript of Reporting and Interpreting Cost of Goods Sold and Inventory Chapter 7 McGraw-Hill/Irwin © 2009 The...
Reporting and Interpreting Cost of Reporting and Interpreting Cost of Goods Sold and InventoryGoods Sold and Inventory
Chapter 7
McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin Slide 2
Flow of Inventory Costs
MerchandiseMerchandisePurchasesPurchases
MerchandiseMerchandisePurchasesPurchases
Cost ofCost ofGoods SoldGoods Sold
Cost ofCost ofGoods SoldGoods Sold
MerchandiseMerchandiseInventoryInventory
MerchandiseMerchandiseInventoryInventory
Merchandiser
RawRawMaterialsMaterials
RawRawMaterialsMaterials
Raw MaterialsRaw MaterialsInventoryInventory
Raw MaterialsRaw MaterialsInventoryInventory
Work in ProcessWork in ProcessInventoryInventory
Work in ProcessWork in ProcessInventoryInventory
Finished GoodsFinished GoodsInventoryInventory
Finished GoodsFinished GoodsInventoryInventory
Cost ofCost ofGoods SoldGoods Sold
Cost ofCost ofGoods SoldGoods Sold
Manufacturer
DirectDirectLaborLaborDirectDirectLaborLabor
FactoryFactoryOverheadOverheadFactoryFactory
OverheadOverhead
McGraw-Hill/Irwin Slide 3
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
McGraw-Hill/Irwin Slide 4
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
McGraw-Hill/Irwin Slide 5
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.
McGraw-Hill/Irwin Slide 6
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
McGraw-Hill/Irwin Slide 7
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
McGraw-Hill/Irwin Slide 8
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
Number of Units
Available for Sale
÷
McGraw-Hill/Irwin Slide 9
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
McGraw-Hill/Irwin Slide 10
Valuation at Lower of Cost or Market
Ending inventory is reported at the Ending inventory is reported at the lower lower of cost or market (LCM)of cost or market (LCM)..
Ending inventory is reported at the Ending inventory is reported at the lower lower of cost or market (LCM)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 current The company will recognize a “holding” loss in the current period rather than the period in which the item is sold.period rather than the period in which the item is sold.
This practice is This practice is conservativeconservative..
The company will recognize a “holding” loss in the current The company will recognize a “holding” loss in the current period rather than the period in which the item is sold.period rather than the period in which the item is sold.
This practice is This practice is conservativeconservative..
McGraw-Hill/Irwin Slide 11
Internal Control of Inventory
Separation of inventory accounting and physical
handling of inventory.
Storage in a manner that protects from theft and
damage.
Limiting access to authorized employees.
Maintaining perpetual inventory records.
Comparing perpetual records to periodic
physical counts.
McGraw-Hill/Irwin Slide 12
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.
McGraw-Hill/Irwin Slide 13
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
© 2009 The McGraw-Hill Companies, Inc.
End of Chapter 7
