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INVENTORIES

CHAPTER 15. INVENTORIES. Merchandise inventory. Merchandise inventory consists of all goods that are owned and held for sale in the regular course of business, including goods in transit. The goods in stock for sale. Merchandising company. Supermarket. All the items for sale.

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INVENTORIES

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  1. CHAPTER 15 INVENTORIES

  2. Merchandise inventory Merchandise inventory consists of all goods that are owned and held for sale in the regular course of business, including goods in transit. The goods in stock for sale Merchandising company Supermarket All the items for sale

  3. Merchandise inventory Purchased merchandise in transit should be included in the inventory count. The Title of the merchandise passed to the company

  4. Merchandise inventory Merchandise inventory FOB Destination FOB Shipping Point Incoming goods Outgoing goods

  5. Merchandise inventory Title belongs to Company A Merchandise Company A Company B Consigned ? ? Merchandiseinventory

  6. Beginning inventory and ending inventory Merchandise inventory At the end of accounting period At the beginning of the accounting period The beginning inventory The ending inventory The beginning inventory for the next accounting period

  7. The cost of goods sold Purchases – Purchase Returns and Allowances – Purchase Discount + Freight In Formula = + Goods Available for Sale Beginning Inventory Net Purchases = – Cost of Goods Sold Goods Available for Sale Ending Inventory = – Gross Margin from Sales Revenues from Sales Cost of Goods Sold

  8. The cost of goods sold The higher the cost of ending inventory, the lower the cost of goods sold will be and the higher the gross margin. Vice versa, the lower the ending inventory, the higher The cost of goods sold will be and the lower the gross margin.

  9. Methods of Pricing Inventory at Cost • Specific identification method • Average-cost method • First-in, first-out method • Last-in, first-out method

  10. Methods of Pricing Inventory at Cost Suppose that the following transactions happened in August， 2006.

  11. Specific Identification Method Specific Identification Method Method 1

  12. Specific Identification Method A method of tracking inventory when each item can be identified. This method used in the purchase and sale of high-priced articles such as automobile, heavy equipment, jewels and dear fashions.

  13. Specific Identification Method First, let’s Look at an example …

  14. Specific Identification Method Suppose that the sale consists of 50 units from beginning inventory, 60 units of August 6, 80 units of August 17 and 10 units of August 20. ? Value of the ending inventory Ending Inventory = 90 × $2.50 + 150 × $2.60 = $615 Cost of Goods Sold = $1064 - $615 = $449

  15. Specific Identification Method Disadvantages First, it is difficult and impractical in most cases to keep track of the purchase and sale of individual items. Second, the company could raise or reduce income by choosing whether to sell either the high-cost or the low-cost items.

  16. Weighted-Average-Cost Method Weighted-Average-Cost Method Method 2

  17. Weighted-Average-Cost Method Under this method, it is assumed that the cost of inventory is the average cost of goods on hand at the beginning of the period plus all goods purchased during the accounting period. Total cost of goods available for sale The weighted-average unit cost = Total units available for sale

  18. Weighted-Average-Cost Method Formula Cost of Beginning Inventory + ∑(unit price per purchase × quantity per purchase) Total cost of goods available for sale Average Unit Cost = Total units available for sale Quantity of beginning inventory+ ∑quantity of each purchase

  19. Weighted-Average-Cost Method Let’s go back to the previous example …

  20. Weighted-Average-Cost Method (100 + 132 + 192 + 250 + 390) Average Unit Cost = 440 = $2.42 × Cost of Goods Sold = Quantity of sale Average unit cost = $484 = 200×$2.42 Ending Inventory = $1,064 - $484 = $580

  21. Weighted-Average-Cost Method Advantages The value of ending inventory is influenced by all the prices of beginning inventory and purchases for the period, so it overlooks the effects of the prices increases and decreases. Disadvantages The method doesn't't make the recent costs gain more Attention and doesn't't reflect the relevance between the recent prices with the income measurement and decision-making.

  22. First-In, First-Out Method First-In, First-Out Method Method 3

  23. First-In, First-Out Method Under this method, it is assumed that the first lots of Merchandise purchased are sold firstly. During periods of consistently rising prices ? Net Income INCREASE When the prices are decreasing Net Income ? DECREASE

  24. First-In, First-Out Method Let’s go back to the previous example again …

  25. First-In, First-Out Method Cost of Goods Sold = 50×$2.00 + 60 × $2.20 +80 × $2.40 + 10 × 2.50 = $(100 + 132.00 + 192.00 + 25) = $449 Ending Inventory = $(1064 – 449) = $615 Net Income = – Revenues from Sales Cost of Goods Sold – Operating Expenses

  26. First-In, First-Out Method Suppose the business encounters a price-decreasing period, the result will be opposite to that of the price-increasing period.

  27. First-In, First-Out Method Cost of Goods Sold = 50 ×$2.60 + 60 × $2.50 + 80 × $2.40 + 10 ×$2.20 $494 = During the period of price-decreasing, the cost of goods sold will be higher. $494＞ $449 The gross margin LOWER The net income

  28. Last-In, First-Out Method Last-In, First-Out Method Method 4

  29. Last-In, First-Out Method This method is practiced under the assumption that the items purchased last should be sold first and the cost of ending inventory is the cost of goods purchased earliest. The last-in, first-out method indicates that the cost of goods sold will show costs closer to the price level at the time the goods were sold when prices are increasing or decreasing.

  30. Last-In, First-Out Method Let’s still look at the previous example …

  31. Last-In, First-Out Method Cost of Goods Sold = 150×$2.60 + 50×$2.50 = $515 Ending Inventory = $1064 - $515 = $549

  32. Last-In, First-Out Method Suppose the company meets with a price-decreasing period

  33. Last-In, First-Out Method Cost of Goods Sold = 150×$2.00 + 50×$2.20 = $410 Ending Inventory = $ 992-410 = $582 $515＞ $410 During the period of price-decreasing, the cost of goods sold will be lower.

  34. Last-In, First-Out Method During the price-increasing period Net Income ? DECREASE Gross margin During the price-increasing period Net Income ? INCREASE Gross margin

  35. Comparison of the four methods Suppose the revenue from sales is the same data, $1,000.

  36. Comparison of the four methods Based The accrual cost Specific identification method on Average-cost method The assumption that cost is flowing, not the physical movement of goods Based First-in, first-out method on Last-in, first-out method

  37. Comparison of the four methods First-in, first-out method During the period of price increasing, Beneficial to yielding higher gross margin and net income. Last-in, first-out method During the period of price decreasing, Incur higher gross margin and net income than other methods.

  38. WE ARE SAILING RIGHT ALONG!!

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