Inventory
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Inventory. Chapter 5. Merch. Merchandise Inventory Only account on both balance sheet and income statement Usually the largest current asset account Income Statement Beginning and end used to get cost of merch sold Balance Sheet Counted as an asset. Inventory Systems.

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Inventory

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Inventory

Chapter 5


Merch

  • Merchandise Inventory

    • Only account on both balance sheet and income statement

    • Usually the largest current asset account

  • Income Statement

    • Beginning and end used to get cost of merch sold

  • Balance Sheet

    • Counted as an asset


Inventory Systems

  • Perpetual Inventory System

    • Up-to-date record keeping

    • Using a Point-of Sale terminal

  • Periodic Inventory System

    • Must physically count at end of period

  • Physical Inventory

    • Both systems utilize

    • Perpetual at least once year

    • To detect loss from breakage, spoilage, and theft


The Specific Method

  • Every Item has an assigned actual cost

  • Usually Big ticket Items

    • Cars

    • Appliances

    • Furniture


Fifo

  • First In First Out

  • First item purchased assumed first sold

    • Logical way to rotate merch

    • Grocers selling milk


Lifo

  • Last in, First Out

  • When new inventory has to move first

    • Coal, is stored in piles, the oldest stays at the bottom

    • Dirt, Mulch, etc.


Weighted Average cost Method

  • A compromise of FIFO and LIFO

  • Total number of units divided by the total cost

  • Hardware stores that may mix products ex. nails


Consistency Principle

  • Apply the same method from period to period

  • A company must declare a method

  • Can only change with permission from the IRS


Importanceof Inventory

  • most active element of a merchandising business

  • principal source of revenue

  • largest current asset

  • largest deduction from revenue -- COGS


GAFS

COGS

Importance of Inventory

To Balance Sheet

P

EI

To Income

Statement

BI


Importance of Inventory

Effects of Misstatement

InventoryNet IncomeAssetsCapital


Time TimeTimeTimeTimeTimeTimeTimeTime

First In … First OUT

Latest Items Left Over

BalanceSheet

Income Statement

MI

COGS


Time TimeTimeTimeTimeTimeTimeTimeTime

Oldest Items Left

Last In First OUT

BalanceSheet

Income Statement

MI

COGS


Time TimeTimeTimeTimeTimeTimeTimeTime

Rising Prices

BalanceSheet

Income Statement

FIFOLIFO

FIFOLIFO

MI

COGS

NI


Lower-of-cost-or-market rule

  • When assigning cost to Ending Inventory

    • Use the lowest of cost or market value

  • EI is reflected on Balance Sheet

    • Assures accurate asset value


Estimating cost of inventory

  • When physical can not be performed

    • Loss, theft, natural disaster

  • Retail method

  • Gross Profit method


Retail Method

Beginning Inv.

Net Purchases

GAFSCost Ratio: $120,000 / $200,000 =60%

Deduct retail sales

Retail Ending Inv.

Apply cost ratio 58,000 x 60% =

At CostAt Retail

$41,200 $68,600

78,800 131,400

$120,000 $200,000

142,000

$58,000

$34,800


Gross profit method

  • Use the percentage of gross profit to estimate cost

  • Percentage = gross profit / net sales

  • Use several years of data to calculate

  • Will be given in problems


Gross profit method

1. Gross profit is estimated by multiplying net sales by gross profit percentage. $250,000 x .39 = $97,000


Gross profit method

2. Cost of merchandise sold determined by estimated gross profit from net sales $250,000 – 97,000 = 152,500


Gross profit method

3. Ending inventory difference between GAFS and COGS $199,000 – 152,000 = 46,500


Inventory turnover

  • Tells us how many times you sell inventory a year

  • Compare to other similar companies

  • Compare year to year for gains and losses

  • Computed by dividing COGS by Average inventory


Inventory Turnover

BI67,400

EI81,500

148,900

Average Merch Inv. 148,900 / 2 = $74,450

COGS219,300

AvgMerchInv74,450 = 2.95 times a year


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