Professional Documents
Culture Documents
6
Inventories
Chapter
6-1
Study
Study Objectives
Objectives
1.
2.
3.
4.
5.
6.
Chapter
6-2
Reporting
Reporting and
and Analyzing
Analyzing Inventory
Inventory
Classifying
Inventory
Determining
Inventory
Quantities
Finished
goods
Work in
process
Raw materials
Taking a
physical
inventory
Determining
ownership of
goods
Chapter
6-3
Inventory
Costing
Specific
identification
Cost flow
assumptions
Financial
statement
and tax
effects
Consistent
use
Lower-ofcost-ormarket
Inventory
Errors
Income
statement
effects
Balance sheet
effects
Statement
Presentation
and Analysis
Presentation
Analysis
Classifying
Classifying Inventory
Inventory
Merchandising
Company
One Classification:
Merchandise Inventory
Manufacturing
Company
Three Classifications:
Raw Materials
Work in Process
Finished Goods
Chapter
6-5
Determining
Determining Inventory
Inventory Quantities
Quantities
Periodic System
1. Determine the inventory on hand
2. Determine the cost of goods sold for the period.
Chapter
6-6
Determining
Determining Inventory
Inventory Quantities
Quantities
Chapter
6-7
Determining
Determining Inventory
Inventory Quantities
Quantities
Determining
Determining Inventory
Inventory Quantities
Quantities
Terms of Sale
Illustration 6-1
Determining
Determining Inventory
Inventory Quantities
Quantities
Review Question
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.
Chapter
6-10
Determining
Determining Inventory
Inventory Quantities
Quantities
Chapter
6-11
Inventory
Inventory Costing
Costing
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)
Cost Flow
Assumptions
Average-cost
Chapter
6-12
Inventory
Inventory Costing
Costing
Chapter
6-13
Inventory
Inventory Costing
Costing
Example
Young & Crazy Company makes the following purchases:
1.
2.
3.
Inventory
Inventory Costing
Costing
Assume one item is sold for $90
Inventory
Balance = $ 30
Purchase on
2/25/10 for $20
Purchase on
2/15/10 for $15
Purchase on
2/2/10 for $10
Chapter
6-15
$ 90
0
90
14
12
7
33
57
17
$ 40
Inventory
Inventory Costing
Costing
Specific Identification
Inventory
Balance = $ 30
Purchase on
2/25/10 for $20
Purchase on
2/15/10 for $15
Purchase on
2/2/10 for $10
Chapter
6-16
$ 90
15
75
14
12
7
33
42
13
$ 29
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Example
Young & Crazy Company makes the following purchases:
1.
2.
3.
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
First-In-First-Out (FIFO)
Earliest goods purchased are first to be
sold.
Often parallels actual physical flow of
merchandise.
Generally good business practice to sell
oldest units first.
Chapter
6-19
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
First-In-First-Out (FIFO)
Inventory
Balance = $ 35
Purchase on
2/25/10 for $20
Purchase on
2/15/10 for $15
Purchase on
2/2/10 for $10
Chapter
6-20
$ 90
10
80
14
12
7
33
47
14
$ 33
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Last-In-First-Out (LIFO)
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.
Chapter
6-21
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Last-In-First-Out (LIFO)
Inventory
Balance = $ 25
Purchase on
2/25/10 for $20
Purchase on
2/15/10 for $15
Purchase on
2/2/10 for $10
Chapter
6-22
$ 90
20
70
14
12
7
33
37
11
$ 26
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Average-Cost
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.
Chapter
6-23
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Average Cost
Inventory
Balance = $ 30
Purchase on
2/25/10 for $20
Purchase on
2/15/10 for $15
Purchase on
2/2/10 for $10
Chapter
6-24
$ 90
15
75
14
12
7
33
42
13
$ 29
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Comparative Financial Statement Summary
FIFO
Average
LIFO
$90
$90
$90
10
15
20
Gross profit
80
75
70
33
33
33
47
42
37
14
13
11
Net income
$33
$29
$26
Inventory balance
$35
$30
$25
Sales
Chapter
6-25
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
In Period of Rising Prices, FIFO Reports:
Lowest
Highest
Chapter
6-26
FIFO
Average
LIFO
$90
$90
$90
10
15
20
Gross profit
80
75
70
33
33
33
47
42
37
14
13
11
Net income
$33
$29
$26
Inventory balance
$35
$30
$25
Sales
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
In Period of Rising Prices, LIFO Reports:
Highest
Lowest
Chapter
6-27
FIFO
Average
LIFO
$90
$90
$90
10
15
20
Gross profit
80
75
70
33
33
33
47
42
37
14
13
11
Net income
$33
$29
$26
Inventory balance
$35
$30
$25
Sales
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Review Question
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.
Chapter
6-28
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Review Question
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.
Chapter
6-29
Inventory
Inventory Costing
Costing Cost
Cost Flow
Flow Assumptions
Assumptions
Discussion Question
Q6-12 Casey Company has been using the FIFO
cost flow method during a prolonged period of
rising prices. During the same time period,
Casey has been paying out all of its net
income as dividends. What adverse effects
may result from this policy?
See notes page for discussion
Chapter
6-30
Inventory
Inventory Costing
Costing
Chapter
6-31
Chapter
6-32
Inventory
Inventory Costing
Costing
Lower-of-Cost-or-Market
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.
Chapter
6-33
Inventory
Inventory Costing
Costing
Lower-of-Cost-or-Market
BE6-7: Alou Appliance Center accumulates the
following cost and market data at December 31.
$ 12,000
9,500
12,800
$ 34,300
Inventory
Inventory Errors
Errors
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.
Chapter
6-35
Inventory
Inventory Errors
Errors
Illustration 6-17
Chapter
6-36
Inventory
Inventory Errors
Errors
Inventory
Inventory Errors
Errors
Illustration 6-18
($3,000)
Net Income
understated
$3,000
Net Income
overstated
Inventory
Inventory Errors
Errors
Review Question
Understating ending inventory will overstate:
a. assets.
b. cost of goods sold.
c. net income.
d. owner's equity.
Chapter
6-39
Inventory
Inventory Errors
Errors
Illustration 6-19
Chapter
6-40
Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Presentation
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).
Chapter
6-41
Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Analysis
Inventory management is a double-edged sword
1. High Inventory Levels - may incur high carrying
lost sales.
Chapter
6-42
Statement
Statement Presentation
Presentation and
and Analysis
Analysis
Inventory turnover measures the number of times
on average the inventory is sold during the period.
Inventory
Turnover
Average Inventory
Statement
Statement Presentation
Presentation and
and Analysis
Analysis
BE6-9 At December 31, 2011, the following
information was available for J. Graff Company: ending
inventory $40,000, beginning inventory $60,000, cost
of goods sold $270,000, and sales revenue $380,000.
Calculate inventory turnover and days in inventory for
J. Graff Company.
Inventory
Turnover
Days in
Inventory
Chapter
6-44
$270,000
($60,000 + 40,000) / 2
365
5.4
5.4
67.59
days
Cost
Cost Flow
Flow Methods
Methods in
in Perpetual
Perpetual Systems
Systems
Example
Appendix
Appendix 6A
6A
Cost
Cost Flow
Flow Methods
Methods in
in Perpetual
Perpetual Systems
Systems
Perpetual Inventory
Chapter
6-46
FIFO Method
Cost
Cost Flow
Flow Methods
Methods in
in Perpetual
Perpetual Systems
Systems
Perpetual Inventory
Chapter
6-47
LIFO Method
Cost
Cost Flow
Flow Methods
Methods in
in Perpetual
Perpetual Systems
Systems
Perpetual Inventory
Moving Average
Cost per unit
sold is
determined by
dividing total
inventory $ by
total units on
hand after each
purchase.
Chapter
6-48
Cost
Cost Flow
Flow Methods
Methods in
in Perpetual
Perpetual Systems
Systems
Perpetual Inventory
Moving Average
Cost per unit
sold is
determined by
dividing total
inventory $ by
total units on
hand after each
purchase.
Chapter
6-49
Estimating
Estimating Inventories
Inventories
Gross Profit Method
The gross profit method estimates the cost of ending
inventory by applying a gross profit rate to net sales.
Illustration 6B-1
Chapter
6-50
Estimating
Estimating Inventories
Inventories
*BE6-11 At May 31, Creole Company has net sales of
$330,000 and cost of goods available for sale of
$230,000. Compute the estimated cost of the ending
inventory, assuming the gross profit rate is 35%.
Chapter
6-51
Estimating
Estimating Inventories
Inventories
Retail Inventory Method
Company applies the cost-to-retail percentage to ending
inventory at retail prices to determine inventory at cost.
Illustration 6B-3
Chapter
6-52
Estimating
Estimating Inventories
Inventories
*BE6-12 On June 30, Fabre Fabrics has the following data
pertaining to the retail inventory method: Goods available for
sale: at cost $35,000, at retail $50,000; net sales $40,000, and
ending inventory at retail $8,000. Compute the estimated cost
of the ending inventory using the retail inventory method.
Chapter
6-53
Copyright
Copyright
Copyright 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
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assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.
Chapter
6-54