Cash short term investments and accounts receivable
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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

Cash, Short-term Investmentsand Accounts Receivable

Chapter 4

Chapter 4


Chapter 5

Chapter 5

Inventory

Chapter 5


Cash short term investments and accounts receivable

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


Comparison of perpetual and periodic inventory systems

Comparison of Perpetual and Periodic Inventory Systems

Chapter 5


Inventory accounting terms

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


Shipping terms

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


Accounting for common inventory transactions

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


Purchasing inventory from a supplier

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


Paying for freight in on purchases

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


Returning inventory to a supplier

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


Selling inventory to a customer

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


Accepting returns of inventory from a customer

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


Paying on account for purchases of inventory

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


Summary of perpetual inventory transactions

Summary of Perpetual Inventory Transactions

Chapter 5


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Inventory cost flow methods

Inventory Cost Flow Methods

  • Specific Identification

  • First In First Out

  • Last In First Out

  • Weighted Average

Chapter 5


Cost flow example

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


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Cost of goods sold gross profit and inventory amounts

Cost of Goods Sold, Gross Profit and Inventory Amounts

Chapter 5


Cost flow

Cost Flow

Chapter 5


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

Problem Review Solution

Chapter 5


Retail inventory method

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


Retail inventory method illustrated

Retail Inventory Method Illustrated

Chapter 5


Cash short term investments and accounts receivable

Problem Review

Compute estimated ending inventory using the retail inventory method for the King Company on December 31, 2011.

Chapter 5

Chapter 5

32


Cash short term investments and accounts receivable

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


Lower of cost or market

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


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

Chapter 5


Cash short term investments and accounts receivable

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


Cash short term investments and accounts receivable

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


Relevant ratios

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


Cash short term investments and accounts receivable

THE END!

Chapter 5

Chapter 5

41


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