Slide 6-1. Slide 6-2 Chapter 6 Inventories Financial Accounting, Seventh Edition.
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Transcript of Slide 6-1. Slide 6-2 Chapter 6 Inventories Financial Accounting, Seventh Edition.
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Slide 6-1
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Slide 6-2
Chapter 6
InventoriesInventories
Financial Accounting, Seventh Edition
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Slide 6-3
1. Describe the steps in determining inventory quantities.
2. Explain the accounting for inventories and apply the inventory cost flow methods.
3. Explain the financial effects of the inventory cost flow assumptions.
4. Explain the lower-of-cost-or-market basis of accounting for inventories.
5. Indicate the effects of inventory errors on the financial statements.
6. Compute and interpret the inventory turnover ratio.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
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Slide 6-4
Statement Statement Presentation Presentation and Analysisand Analysis
Statement Statement Presentation Presentation and Analysisand Analysis
Reporting and Analyzing InventoryReporting and Analyzing InventoryReporting and Analyzing InventoryReporting and Analyzing Inventory
Taking a Taking a physical physical inventoryinventory
Determining Determining ownership of ownership of goodsgoods
Classifying Classifying InventoryInventory
Classifying Classifying InventoryInventory
Determining Determining Inventory Inventory QuantitiesQuantities
Determining Determining Inventory Inventory QuantitiesQuantities
Inventory Inventory CostingCosting
Inventory Inventory CostingCosting
Inventory Inventory ErrorsErrors
Inventory Inventory ErrorsErrors
Finished Finished goodsgoods
Work in Work in processprocess
Raw materialsRaw materials
Specific Specific identificationidentification
Cost flow Cost flow assumptionsassumptions
Financial Financial statement statement and tax and tax effectseffects
Consistent Consistent useuse
Lower-of-Lower-of-cost-or-cost-or-marketmarket
Income Income statement statement effectseffects
Balance sheet Balance sheet effectseffects
PresentationPresentation
Analysis using Analysis using inventory inventory turnoverturnover
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Slide 6-5
Classifying InventoryClassifying InventoryClassifying InventoryClassifying Inventory
One Classification:
Merchandise Inventory
Three Classifications:
Raw Materials
Work in Process
Finished Goods
Merchandising Company
Manufacturing Company
Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.
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Slide 6-6
Physical Inventory taken for two reasons:
Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost (wasted raw
materials, shoplifting, or employee theft).
Periodic System
1. Determine the inventory on hand
2. Determine the cost of goods sold for the period.
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
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Slide 6-7
Involves counting, weighing, or measuring each kind of inventory on hand.
Taken,
when the business is closed or when business is slow.
at end of the accounting period.
Taking a Physical Inventory
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
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Slide 6-8
Goods in Transit
Purchased goods not yet received.
Sold goods not yet delivered.
Determining Ownership of Goods
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal
title is determined by the terms of sale.
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Slide 6-9
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
Illustration 6-1
Ownership of the goods passes to the buyer
when the public carrier accepts the goods from
the seller.
Ownership of the goods remains with the seller
until the goods reach the buyer.
Goods in Transit
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Slide 6-10
Consigned Goods
In some lines of business, it is common to hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of goods.
These are called consigned goods.
Determining Ownership of Goods
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
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Slide 6-11
58
How Much Inventory Should a How Much Inventory Should a Company Have?Company Have?
Only enough for Only enough for salessales needs needs Excess inventory costs: Excess inventory costs:
storage costsstorage costs interest costsinterest costs obsolescence - technology, fashion obsolescence - technology, fashion
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Slide 6-12
Unit costs can be applied to quantities
on hand using the following costing
methods:
Specific Identification
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Average-cost
Inventory CostingInventory CostingInventory CostingInventory Costing
Cost Flow Assumptio
ns
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-13
Suppose you own a bike shopSuppose you own a bike shop
With ONLY With ONLY oneone model of bike model of bike That you buy in large quantities…That you buy in large quantities… At different timesAt different times What do you use for cost?What do you use for cost?
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Slide 6-14
45
What Makes What Makes Cost Flow Cost Flow AssumptionsAssumptions Necessary? Necessary?
Changing Prices
You probably did NOT purchase the bikes (even the
same models) at the same price levels. . . . .
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Slide 6-15
An actual physical flow costing method in
which items still in inventory are specifically
costed to arrive at the total cost of the ending
inventory.
Practice is relatively rare.
Most companies make assumptions (Cost
Flow Assumptions) about which units were
sold.
Specific Identification Method
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-16
Illustration: Assume that Crivitz TV Company purchases three identical 46-inch TVs on different dates at costs of $700, $750, and $800. During the year Crivitz sold two sets at $1,200 each.
Inventory CostingInventory CostingInventory CostingInventory Costing
Illustration 6-2
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-17
Illustration: If Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold is $1,500 ($700 $800), and its ending inventory is $750.
Inventory CostingInventory CostingInventory CostingInventory Costing
Illustration 6-3
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-18
Specific Identification Method Specific Identification Method
Is appropriate for firms with a small number of items that are generally large, luxury items such as custom jewelry,
yachts or luxury cars.
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Slide 6-19
Specific Identification Method Specific Identification Method
Would not be appropriate for firms with many identical items with relatively low costs such as sneakers, soup or
candy bars.
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Slide 6-20
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Illustration 6-11Use of cost flow methods in major U.S. companies
Cost Flow
Assumption
does not need to
equal
Physical Movement
of Goods
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-21
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
What should you use for Cost???
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
Date Explanation Units Unit Cost Total Cost
2-JunBeg. Inv 500 $ 100 $ 50,000
8-JunPurchase 400 $ 125 $ 50,000
25-JunPurchase 350 $ 130 $ 45,500
Total 1,250 $ 145,500
Ending Inventory 250
Units Sold 1,000 ???
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Slide 6-22
Earliest goods purchased are first to be sold.
Often parallels actual physical flow of merchandise.
Generally good business practice to sell oldest units first.
“First-In-First-Out (FIFO)”
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-23
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
“First-In-First-Out (FIFO)”
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
FIFO calculating COGS
2-Jun 500 $ 100 $ 50,000
8-Jun 400 $ 125 $ 50,000
25-Jun 100 $ 130 $ 13,000
COGS 1,000 $ 113,000
Ending Inventory 250 $ 32,500
Date Explanation Units Unit Cost Total Cost
2-JunBeg. Inv 500 $ 100 $ 50,000
8-JunPurchase 400 $ 125 $ 50,000
25-JunPurchase 350 $ 130 $ 45,500
Total 1,250 $ 145,500 Ending Inventory 250
Units Sold 1,000 ???
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Slide 6-24
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Slide 6-25
FIFO – First In First Out FIFO – First In First Out
FIFO assumes that the first units purchased are the first units sold
FIFO leaves the most recent purchases in Ending Inventory
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Slide 6-26
Allocates cost of goods available for sale on the basis of weighted average unit cost incurred.
Assumes goods are similar in nature.
Applies weighted average unit cost to the units on hand to determine cost of the ending inventory.
“(Weighted) Average-Cost”
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-27
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
“Average Cost”Illustration 6-
10
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Slide 6-28
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
(Weighted) Average Cost
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
Average Cost - calculating COGS
Total Cost $ 145,500
Units Available 1,250 bikes
Avg Cost/bike $116.40
COGS 1,000
$116.40 $ 116,400
Ending Inventory 250 $ 29,100
Date Explanation Units Unit Cost Total Cost
2-JunBeg. Inv 500 $ 100 $ 50,000
8-JunPurchase 400 $ 125 $ 50,000
25-JunPurchase 350 $ 130 $ 45,500
Total 1,250 $ 145,500 Ending Inventory 250
Units Sold 1,000 ???
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Slide 6-29
Latest goods purchased are first to be sold.
Seldom coincides with actual physical flow of merchandise.
Exceptions include goods stored in piles, such as coal or hay.
“Last-In-First-Out (LIFO)”
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-30
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
“Last-In Last Out (LIFO)”
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
LIFO calculating COGS
25-Jun 350 $ 130 $ 45,500
8-Jun 400 $ 125 $ 50,000
2-Jun 250 $ 100 $ 25,000
COGS 1,000 $ 120,500
Ending Inventory 250 $ 25,000
Date Explanation Units Unit Cost Total Cost
2-JunBeg. Inv 500 $ 100 $ 50,000
8-JunPurchase 400 $ 125 $ 50,000
25-JunPurchase 350 $ 130 $ 45,500
Total 1,250 $ 145,500 Ending Inventory 250
Units Sold 1,000 ???
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Slide 6-31
LIFO – Last In First Out LIFO – Last In First Out
LIFO assumes that the Last units purchased are the first units sold
LIFO leaves the earliest purchases in Ending Inventory
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Slide 6-32 SO 3 Explain the financial effects of the inventory cost flow SO 3 Explain the financial effects of the inventory cost flow
assumptions.assumptions.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsIncome Statement Effects
George's Bike Shop - using periodic inventory
FIFO Average Cost LIFO
Sales $ 240,000 $ 240,000 $ 240,000
Beginning Inv 50,000 50,000 50,000
Purchases 95,500 95,500 95,500
Cost of Good Available 145,500 145,500 145,500
Ending Inv 32,500 29,100 25,000
COGS 113,000 116,400 120,500
Gross Profit 127,000 123,600 119,500
Operating Exp. 52,800 52,800 52,800
Income before Tax 74,200 70,800 66,700
Tax Exp (30%) 22,260 21,240 20,010
Net Income $ 51,940 $ 49,560 $ 46,690
The costing flow method affects
Net Income, Taxes, and
Ending Inventory costs!
Note: in this
example, prices are increasing = Inflation
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Slide 6-33 SO 3 Explain the financial effects of the inventory cost flow SO 3 Explain the financial effects of the inventory cost flow
assumptions.assumptions.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsBalance Sheet Effects-INFLATION
A major advantage of the FIFO method is that in a
period of inflation, the costs allocated to Ending
Inventory will approximate their current cost.
A major shortcoming of the LIFO method is that in
a period of inflation, the costs allocated to ending
inventory may be significantly understated in
terms of current cost.
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Slide 6-34 SO 3 Explain the financial effects of the inventory cost flow SO 3 Explain the financial effects of the inventory cost flow
assumptions.assumptions.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsBalance Sheet Effects -- DEFLATION
FIFO – during a period of deflation, the costs
allocated to Ending Inventory may be significantly
understated in terms of current cost.
LIFO – during a period of deflation, the costs
allocated to ending inventory will approximate
their current cost.
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Slide 6-35 SO 3 Explain the financial effects of the inventory cost flow SO 3 Explain the financial effects of the inventory cost flow
assumptions.assumptions.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsTax Effects
Many companies have selected LIFO. Why?
The reason is that LIFO results in the lowest income
taxes (because of lower net income) during times
of rising prices.
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Slide 6-36
Using Cost Flow Methods Consistently
Inventory CostingInventory CostingInventory CostingInventory Costing
Method should be used consistently, enhances comparability.
Although consistency is preferred, a company may change its inventory costing method.
Illustration 6-14Disclosure of change in cost flow method
SO 3 Explain the financial effects of the inventory cost flow SO 3 Explain the financial effects of the inventory cost flow assumptions.assumptions.
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Slide 6-37
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Slide 6-38
Lower-of-Cost-or-Market
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 4 Explain the lower-of-cost-or-SO 4 Explain the lower-of-cost-or-market basis of accounting for market basis of accounting for inventories.inventories.
When the value of inventory is lower than its cost
Companies can “write down” the inventory to its market value in the period in which the price decline occurs.
Market value = Replacement Cost
Example of conservatism.
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Slide 6-39
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 4 Explain the lower-of-cost-or-SO 4 Explain the lower-of-cost-or-market basis of accounting for market basis of accounting for inventories.inventories.
Illustration: Assume that Ken Tuckie TV has the following lines of merchandise with costs and market values as indicated.
Illustration 6-15
Lower-of-Cost-or-Market
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Slide 6-40
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Common Cause:
Failure to count or price inventory correctly.
Not properly recognizing the transfer of legal title to goods in transit.
Errors affect both the income statement and balance sheet.
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Slide 6-41
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Inventory errors affect the computation of cost of goods sold and net income.
Income Statement Effects
Illustration 6-17
Illustration 6-16
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Slide 6-42
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Inventory errors affect the computation of cost of goods sold and net income in two periods.
An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period.
Over the two years, the total net income is correct because the errors offset each other.
The ending inventory depends entirely on the accuracy of taking and costing the inventory.
Income Statement Effects
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Slide 6-43
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
I ncorrect Correct Incorrect Correct
Sales 80,000$ 80,000$ 90,000$ 90,000$
Beginning inventory 20,000 20,000 12,000 15,000
Cost of goods purchased 40,000 40,000 68,000 68,000
Cost of goods available 60,000 60,000 80,000 83,000
Ending inventory 12,000 15,000 23,000 23,000
Cost of good sold 48,000 45,000 57,000 60,000
Gross profit 32,000 35,000 33,000 30,000
Operating expenses 10,000 10,000 20,000 20,000
Net income 22,000$ 25,000$ 13,000$ 10,000$
2010 2011
($3,000)Net Income understated
$3,000Net Income overstated
Combined income for 2-year period is
correct.
Illustration 6-18
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Slide 6-44
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Effect of inventory errors on the balance sheet is determined by using the basic accounting equation:.
Balance Sheet Effects
Illustration 6-16
Illustration 6-19
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Slide 6-45
Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis
Balance Sheet - Inventory classified as current asset.
Income Statement - Cost of goods sold subtracted from sales.
There also should be disclosure of
1) major inventory classifications,
2) basis of accounting (cost or LCM), and
3) costing method (FIFO, LIFO, or average).
Presentation
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Slide 6-46
Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis
Inventory management is a double-edged sword
1. High Inventory Levels - may incur high
carrying costs (e.g., investment, storage,
insurance, obsolescence, and damage).
2. Low Inventory Levels – may lead to
stockouts and lost sales.
Analysis Using Inventory Turnover
SO 6 Compute and interpret the inventory turnover ratio.SO 6 Compute and interpret the inventory turnover ratio.
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Slide 6-47
Inventory turnover measures the number of times on average the inventory is sold during the period.
Cost of Goods Sold
Average Inventory
Inventory Turnover
=
Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis
Days in inventory measures the average number of days inventory is held.
Days in Year (365)
Inventory Turnover
Days in Inventory
=
SO 6 Compute and interpret the inventory turnover ratio.SO 6 Compute and interpret the inventory turnover ratio.
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Slide 6-48
Days in Inventory: Inventory turnover of 8.8 times divided into 365 is approximately 41 days. This is the approximate time that it takes a company to sell the inventory.
Illustration: Wal-Mart reported in its 2009 annualreport a beginning inventory of $35,159 million, an ending inventory of $34,511 million, and cost of goods sold for the year ended January 31, 2009, of $306,158 million. The inventory turnover formula and computation for Wal-Martare shown below.
Statement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and AnalysisStatement Presentation and Analysis
SO 6 Compute and interpret the inventory turnover ratio.SO 6 Compute and interpret the inventory turnover ratio.
Illustration 6-21
Solution on notes page
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Slide 6-49
Good Bye and Good Luck!
End of Chapter 6End of Chapter 6End of Chapter 6End of Chapter 6
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Slide 6-50
The National Food Service Security Council estimates that employee theft costs U.S. restaurants $15 billion to $25 billion annually.
The average supermarket has inventory shrinkage losses of 2.28% of sales, or $224,808 per year. Average net profit is only 1.1% of sales, so inventory shrinkage is twice the level of profits.
Fear of getting caught and being fired ranks among one of the top reasons employees give, in surveys of reasons why they do not steal from their employer.
Employee Theft—An Inside Job
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Slide 6-51
Tips from customers are the No. 1 way that many stores catch thieving employees.
The average employee caught stealing costs his or her company $1,341, while the average loss from a shoplifting incident is only $207.
Employee Theft—An Inside Job
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Slide 6-52
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Slide 6-53
Suppose you own a number of wine shops selling mid-level as well as expensive bottled wine. You have been experiencing significant losses from theft at your stores. You suspect that it is a combination of both employee and customer theft. Assuming that it would be cost-effective, would you install video cameras to reduce both employee theft and customer theft? YES: Most employees and customers are honest. However, management has a responsibility to employ reasonable, cost-effective approaches to safeguard company assets.
NO: The use of video technology to monitor employees and customers sends a message of distrust. You run the risk of alienating your employees. Cameras might also reduce the welcoming atmosphere for your customers.
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Slide 6-54
Illustration
Cost Flow Methods in Perpetual Cost Flow Methods in Perpetual SystemsSystemsCost Flow Methods in Perpetual Cost Flow Methods in Perpetual SystemsSystems
SO 7 Apply the inventory cost flow methods to perpetual inventory SO 7 Apply the inventory cost flow methods to perpetual inventory records.records.
Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Average cost.
Appendix 6AAppendix 6A
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Slide 6-55
Cost Flow Methods in Perpetual Cost Flow Methods in Perpetual SystemsSystemsCost Flow Methods in Perpetual Cost Flow Methods in Perpetual SystemsSystems
SO 7 Apply the inventory cost flow methods to perpetual inventory SO 7 Apply the inventory cost flow methods to perpetual inventory records.records.
“First-In-First-Out (FIFO)”
Cost of Goods SoldEnding Inventory
Illustration 6A-2
Solution on notes page
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Slide 6-56
Cost Flow Methods in Perpetual Cost Flow Methods in Perpetual SystemsSystemsCost Flow Methods in Perpetual Cost Flow Methods in Perpetual SystemsSystems
SO 7 Apply the inventory cost flow methods to perpetual inventory SO 7 Apply the inventory cost flow methods to perpetual inventory records.records.
Cost of Goods SoldEnding Inventory
“Last-In-First-Out (LIFO)” Illustration 6A-3
Solution on notes page
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Slide 6-57
Cost Flow Methods in Perpetual Cost Flow Methods in Perpetual SystemsSystemsCost Flow Methods in Perpetual Cost Flow Methods in Perpetual SystemsSystems
SO 7 Apply the inventory cost flow methods to perpetual inventory SO 7 Apply the inventory cost flow methods to perpetual inventory records.records.
““Average Cost”Average Cost” (Moving-Average (Moving-Average System)System) Illustration 6A-
4
Cost of Goods Sold Ending Inventory
Solution on notes page
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Slide 6-58
Estimating InventoriesEstimating InventoriesEstimating InventoriesEstimating Inventories
The gross profit method estimates the cost of ending inventory by applying a gross profit rate to net sales.
Gross Profit Method
SO 8 Describe the two methods of estimating inventories.SO 8 Describe the two methods of estimating inventories.
Illustration 6B-1
Appendix 6BAppendix 6B
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Slide 6-59
Estimating InventoriesEstimating InventoriesEstimating InventoriesEstimating Inventories
Illustration: Kishwaukee Company’s records for January show net sales of $200,000, beginning inventory $40,000, and cost of goods purchased $120,000. The company expects to earn a 30% gross profit rate. Compute the estimated cost of the ending inventory at January 31 under the gross profit method.
SO 8 Describe the two methods of estimating inventories.SO 8 Describe the two methods of estimating inventories.
Illustration 6B-2
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Slide 6-60
Estimating InventoriesEstimating InventoriesEstimating InventoriesEstimating Inventories
Company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost.
Retail Inventory Method
SO 8 Describe the two methods of estimating inventories.SO 8 Describe the two methods of estimating inventories.
Illustration 6B-3
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Slide 6-61
Estimating InventoriesEstimating InventoriesEstimating InventoriesEstimating Inventories
SO 8 Describe the two methods of estimating inventories.SO 8 Describe the two methods of estimating inventories.
Note that it is not necessary to take a physical inventory to determine the estimated cost of goods on hand at any given time.
Illustration 6B-4
Illustration:
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Slide 6-62
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CopyrightCopyrightCopyrightCopyright
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Slide 6-63
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Slide 6-64
Goods in transit should be included in the inventory of the buyer when the:
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.
Review Question
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
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Slide 6-65
The cost flow method that often parallels the actual physical flow of merchandise is the:
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.
Review Question
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
SO 2 Explain the accounting for inventories SO 2 Explain the accounting for inventories and apply the inventory cost flow and apply the inventory cost flow methods.methods.
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Slide 6-66
In a period of inflation, the cost flow method that results in the lowest income taxes is the:
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.
Review Question
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
SO 3 Explain the financial effects of the inventory cost flow SO 3 Explain the financial effects of the inventory cost flow assumptions.assumptions.
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Slide 6-67
Understating ending inventory will overstate:
a. assets.
b. cost of goods sold.
c. net income.
d. owner's equity.
Review Question
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.