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Cash, Short-term Investments and Accounts Receivable

Cash, Short-term Investments and Accounts Receivable. Chapter 4. Chapter 5. Inventory. Chapter 5 Learning Objectives. Account for common inventory transactions. Use the four major inventory cost flow methods to calculate ending inventory and cost of goods sold.

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Cash, Short-term Investments and Accounts Receivable

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  1. Cash, Short-term Investmentsand Accounts Receivable Chapter 4 Chapter 4

  2. Chapter 5 Inventory Chapter 5

  3. Chapter 5Learning Objectives • Account for common inventory transactions. • Use the four major inventory cost flow methods to calculate ending inventory and cost of goods sold. • Use the retail inventory method to calculate ending inventory and cost of goods sold. • Apply the lower-of-cost-or-market rule to inventory. • Determine the effects of inventory errors on financial statements. • Use ratios and other analysis techniques to make decisions about inventory. Chapter 5 Chapter 5 3

  4. Comparison of Perpetual and Periodic Inventory Systems Chapter 5

  5. Inventory Accounting Terms • Sales • Sales Returns and Allowances • Sales Discounts • Purchase Returns and Allowances • Purchase Discounts • Freight-In • Delivery Expense(Freight-out) • Cost of Goods Sold Chapter 5

  6. Shipping Terms FOB Shipping Point: Buyerpays to get the goods to the destination. FOB Destination: Seller pays to get the goods to the destination. Chapter 5

  7. Accounting for Common Inventory Transactions Six common transactions are related to accounting for inventory: • Purchasing inventory from a supplier • Paying for freight on purchases • Returning inventory to a supplier • Selling inventory to a customer • Accepting returns of inventory from a customer • Paying on account for purchases of inventory The next few slides will show examples of journal entries for the above transactions. Chapter 5

  8. Purchasing Inventory From a Supplier On August 1, Marcia’s Boutique purchased 12 dresses at $50 each from a supplier, Kwon, Inc. The credit terms are 2/10, n/30 and the shipping terms are FOB shipping point. Chapter 5

  9. Paying for Freight-In on Purchases On August 3, Marcia receives and pays the $22 freight bill on the dresses purchased on August 1. Chapter 5

  10. Returning Inventory to a Supplier On August 5, Marcia’s Boutique returned a dress to Kwon because the dress had a fabric flaw. Chapter 5

  11. Selling Inventory to a Customer Marcia’s Boutique sells three dresses for cash ($110 per dress) on August 7. Because the company uses a perpetual inventory system, two journal entries are required. Chapter 5

  12. Accepting Returns of Inventory from a Customer On August 8, one customer who bought a dress on August 7 decided to return it. Marcia’s Boutique will prepare two journal entries to record the return. Chapter 5

  13. Paying on Account for Purchases of Inventory On August 11, Marcia’s paid for the dresses purchased from Kwon. The credit terms allow Marcia’s Boutique to deduct 2% from the total amount owed if payment is made by August 11. Chapter 5

  14. Summary of Perpetual Inventory Transactions Chapter 5

  15. Review The entry to purchase merchandise under a perpetual inventory system includes a debit to: • purchases. • accounts payable. • inventory. • accounts receivable. Chapter 5 Chapter 5 15

  16. Review The entry to purchase merchandise under a perpetual inventory system includes a debit to: • purchases. • accounts payable. • inventory. • accounts receivable. Chapter 5 Chapter 5 16

  17. Review The entry under a perpetual inventory system for the seller to record the cost of merchandise returned includes a credit to: • purchases. • accounts payable. • inventory. • cost of goods sold. Chapter 5 Chapter 5 17

  18. Review The entry under a perpetual inventory system for the seller to record the cost of merchandise returned includes a credit to: • purchases. • accounts payable. • inventory. • cost of goods sold. Chapter 5 Chapter 5 18

  19. Review The entry under a perpetual inventory system to record the cost of merchandise sold includes a debit to: • accounts receivable. • inventory. • cost of goods sold. • sales. Chapter 5 Chapter 5 19

  20. Review The entry under a perpetual inventory system to record the cost of merchandise sold includes a debit to: • accounts receivable. • inventory. • cost of goods sold. • sales. Chapter 5 Chapter 5 20

  21. Inventory Cost Flow Methods • Specific Identification • First In First Out • Last In First Out • Weighted Average Chapter 5

  22. Cost Flow Example The operations of University Bookstore are used to explore the topic of inventory costing. Following are inventory data for January for a Principles of Marketing textbook. The text is a paperback version and, thus, there are no used copies of the text available for sale. To simplify the example, it is assumed that University Bookstore is only open two days in January; all sales, therefore, occur on those two days. 1/ 1 Beginning inventory 100 copies @ $30 each $ 3,000 1/ 8 Purchased 400 copies @ $35 each 14,000 1/14 Sold 360 copies 1/18 Purchased 70 copies @ $39 each 2,730 1/22 Sold 180 copies Chapter 5

  23. Item: Principles of Marketing, Perpetual Inventory Record, FIFO Method Purchases Sold Balance Date # Unit Cost Total # Unit Cost Total # Unit Cost Balance Jan. 1 100 $30 $3,000 Jan. 8 400 $35 14,000 100 400 500 $30 35 $ 3,000 14,000 $17,000 Jan. 17 100 260 $30 35 $3,000 $9,100 140 $35 $4,900 Jan. 18 70 $39 $2,730 140 70 210 $35 39 $4,900 2,730 $7,630 Jan. 22 140 40 $35 39 $4,900$1,560 30 $39 $1,170 Chapter 5

  24. Item: Principles of Marketing, Perpetual Inventory Record, Perpetual LIFO Purchases Sold Balance Date # Unit Cost Total # Unit Cost Total # Unit Cost Balance Jan. 1 100 $30 $3,000 Jan. 8 400 $35 $14,000  100 400 500 $30 35  $ 3,000 14,000 $17,000 Jan. 17 360 $35 $12,600 100 40 $30 35 $ 3,000 1,400 $4,400 Jan. 18 70 $39 $2,730 100 40 70 210  $30 35 39 $3,000 1,400 2,730 $7,130 Jan. 22 70 40 70 $39 35 30 $2,730 1,400 2,100  30  $30 $ 900 Chapter 5

  25. Item: Principles of Marketing, Perpetual Inventory Record, Moving Average Method Purchases Sold Balance Date # Unit Cost Total # Unit Cost Total # Unit Cost Balance Jan. 1 100 $30 $ 3,000 Jan. 8 400 $35 $14,000 500 $17,000 Jan. 17 360 $34 $12,240 140 $34 $ 4,760 Jan. 18 70 $39 $2,730 210 $ 7,490 Jan. 22 180 $35.67 $6,421 30 $35.67 $ 1,069 Chapter 5

  26. Cost of Goods Sold, Gross Profit and Inventory Amounts Chapter 5

  27. Cost Flow Chapter 5

  28. Problem Review Compute the ending inventory for Rayborn Company using the LIFO perpetual method based on the following information. On January 1 Rayborn Company had 25 units at a cost of $50 each. Chapter 5 Chapter 5 28

  29. Problem Review Solution Chapter 5

  30. Retail Inventory Method • Often used in small businesses to estimate the amount of inventory on hand. • Should be a consistent relationship between the costs and selling prices of a company’s products. • Can be used with FIFO, LIFO, or average cost flow assumptions. Chapter 5

  31. Retail Inventory Method Illustrated Chapter 5

  32. Problem Review Compute estimated ending inventory using the retail inventory method for the King Company on December 31, 2011. Chapter 5 Chapter 5 32

  33. Problem Review Solution Compute estimated ending inventory using the retail inventory method for the King Company on Dec. 31, 2011. Chapter 5 Chapter 5 33

  34. Lower of Cost or Market Total Market 540 340 1000 560 2440 Total Cost 420 480 750 720 2,370* LCM 420 340 750 560 2,070** Replacement Cost 18 17 20 14 ITEM 727 Jeans 757 Jeans Tank tops Pullovers Quantity 30 20 50 40 Unit Cost 14 24 15 18 *Applying LCM on a total inventory basis **Applying LCM on an Item by Item basis Chapter 5

  35. Review John Company has 200 units of inventory on hand at December 31. John’s cost under FIFO is $52 per unit. The Dec. 31 current cost is $55 per unit. Using lower-of-cost-or-market, John should show an ending inventory balance of • $10,400. • $11,000. • $10,700. • $10,500. Chapter 5 Chapter 5 35

  36. Review John Company has 200 units of inventory on hand at December 31. John’s cost under FIFO is $52 per unit. The Dec. 31 current cost is $55 per unit. Using lower-of-cost-or-market, John should show an ending inventory balance of • $10,400. • $11,000. • $10,700. • $10,500. Chapter 5 Chapter 5 36

  37. Chapter 5

  38. Review John Company overstated 2010 ending inventory by $25,000. What effect will this error have on 2010 and 2011 net income, respectively? • overstate and understate • overstate and overstate • understate and understate • understate and overstate Chapter 5 Chapter 5 38

  39. Review John Company overstated 2010 ending inventory by $25,000. What effect will this error have on 2010 and 2011 net income, respectively? • overstate and understate • overstate and overstate • understate and understate • understate and overstate Chapter 5 Chapter 5 39

  40. Relevant Ratios Inventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory The inventory turnover ratio indicates the number of times that a company sells or "turns over" its inventory each year. Age of Inventory = 360 days ÷ Inventory Turnover Ratio Inventory age indicates the average period required to sell an item of inventory. Chapter 5

  41. THE END! Chapter 5 Chapter 5 41

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