1 / 51

Chapter 8

Chapter 8. Accounting for Inventory. Learning Objective 1. Describe goods available for sale and name its components. Tracking Inventory Costs. The terms “merchandise inventory” and “inventory” are often used to describe the cost of the items as well as the items themselves.

meda
Download Presentation

Chapter 8

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 8 Accounting for Inventory

  2. Learning Objective 1 Describe goods available for sale and name its components.

  3. Tracking Inventory Costs The terms “merchandise inventory” and “inventory” are often used to describe the cost of the items as well as the items themselves. Beginning inventory + Purchases = Goods available for sale

  4. Tracking Inventory Costs Goods available for sale – Ending inventory = Cost of goods sold Goods available for sale – Cost of goods sold = Ending inventory

  5. Learning Objective 2 Explain the relationship between ending inventory and cost of goods sold.

  6. Beginning inventory $200 Ending inventory $150 Goods available for sale $900 Purchases $700 Cost of goods sold $750 Relationships AmongGAFS, EI, and COGS

  7. + Purchases = Goods available Beginning inventory Units sold (Cost of goods sold) Units still on hand (Ending inventory) Flow of Inventory

  8. Learning Objective 3 Differentiate between the physical flow of merchandise and the cost flow of merchandise.

  9. Physical Flow of Inventory (Reality) Computer Exchange, Inc., purchased a computer on January 17, 2003, for $800, and placed it in its warehouse. The company sold the computer to a customer on February 6, 2003, for $1,500.

  10. Computer Exchange’s warehouse Purchase 1/17/03 Sale 2/6/03 Customer Physical Flow of Inventory (Reality) Manufacturer

  11. January 31 Units Cost Beginning inventory, January 1 0 $ 0 + Purchases 1 800 = Goods available for sale 1 800 – Cost of goods sold 0 0 = Ending inventory 1 $800 Inventory Cost Flow (Measurement of Reality)

  12. Computer Exchange, Inc. Income Statement For the Month Ended January 31, 2003 Sales $ 0 Cost of goods sold 0 Gross margin $ 0 Operating expenses: Warehouse rent – 200 Net income (loss) $ – 200 Computer Exchange’sFinancial Statements

  13. Computer Exchange’sFinancial Statements Computer Exchange, Inc. Statement of Retained Earnings For the Month Ended January 31, 2003 Beginning retained earnings $ 0 Net income (loss) – 200 $ –200 Less dividends 0 Ending retained earnings $ –200

  14. Computer Exchange’sFinancial Statements Computer Exchange, Inc. Balance Sheet January 31, 2003 Assets: Cash $22,000 Merchandise inventory 800 Total assets $22,800 Liabilities and stockholders’ equity: Common stock 15,000 Additional paid-in capital 8,000 Retained earnings – 200 Total liabilities and stockholders’ equity $22,800

  15. February 28 Units Cost Beginning inventory, January 1 0 $ 0 + Purchases 1 800 = Goods available for sale 1 800 – Cost of goods sold 1 800 = Ending inventory 0 $ 0 Inventory Cost Flow (Measurement of Reality)

  16. Computer Exchange, Inc. Income Statement For the Month Ended February 28, 2003 Sales $1,500 Cost of goods sold 800 Gross margin $ 700 Operating expenses: Warehouse rent – 200 Net income (loss) $ 500 Computer Exchange’sFinancial Statements

  17. Computer Exchange’sFinancial Statements Computer Exchange, Inc. Statement of Retained Earnings For the Month Ended February 28, 2003 Beginning retained earnings $ – 200 Net income (loss) 500 $ 300 Less dividends 0 Ending retained earnings $ 300

  18. Computer Exchange’sFinancial Statements Computer Exchange, Inc. Balance Sheet February 28, 2003 Assets: Cash $21,800 Accounts receivable 1,500 Merchandise inventory 0 Total assets $23,300 Liabilities and stockholders’ equity: Common stock 15,000 Additional paid-in capital 8,000 Retained earnings 300 Total liabilities and stockholders’ equity $23,300

  19. Purchase 1/17/03 Computer Exchange’s warehouse Sale 2/6/03 Customer Purchase 1/17/03 Computer Exchange’s Balance sheet: $800 asset Sale 2/6/03 Computer Exchange’s Income statement: $800 cost of goods old Physical Movement of Computer Manufacturer

  20. Learning Objective 4 Explain the differences between periodic and perpetual inventory systems.

  21. Inventory Systems Under a periodic system, companies do their inventory and cost of goods sold calculations at the end of the income statement period. Under a perpetual system, companies update their inventory records continually to keep track of both the physical count of inventory units and the cost of those units.

  22. Purchases Date 1/17 2/06 Explanation Purchase Sale Units 1 Unit Cost $800 Total Cost $800 Cost of Goods Sold Date 1/17 2/06 Explanation Purchase Sale Units 1 Unit Cost $800 Total Cost $800 Inventory Balance Date 1/17 2/06 Explanation Purchase Sale Units 1 0 Unit Cost $800 Total Cost $800 $0 Inventory Control Report: Perpetual System

  23. Book Inventory Units Cost Beginning inventory, 1/1 20 $200 + Purchases 70 700 = Goods available for sale 90 900 – Cost of goods sold 75 750 = Ending inventory 15 $150 The Necessity of Physical Inventory Count A physical count reveals that there are only 13 units in inventory.

  24. The Necessity of Physical Inventory Count Adjusted Record Units Cost Beginning inventory, 1/1 20 $200 + Purchases 70 700 = Goods available for sale 90 900 – Cost of goods sold 77 770 = Ending inventory 13 $130

  25. Learning Objective 5 List three different inventory cost flow assumptions and contrast how they affect net income.

  26. Inventory Cost Flow Methods Specific Identification Assumptions First-in, First-out Last-in, First-out Average Cost

  27. Date Date Selling Purchased Description Cost Sold Price Beginning inventory: 10/15/02 1926 Bentley $ 35,000 03/05/03 $45,000 12/20/02 1960 Mercedes 15,000 01/25/03 1955 Thunderbird 25,000 03/09/03 38,000 02/10/03 1929 Model A Ford 24,000 03/18/03 36,000 Purchases: 03/10/03 1955 Cadillac 20,000 03/25/03 1964 Corvette 31,000 Cost of goods available $150,000 Specific Identification

  28. Specific Identification Cost of goods sold: Bentley $35,000 Thunderbird 25,000 Ford 24,000 Total $84,000 Sales: $119,000 Bentley $45,000 Thunderbird 38,000 Ford 36,000 Ending inventory: Mercedes $15,000 Cadillac 20,000 Corvette 31,000 Total $66,000

  29. Learning Objective 6 Calculate cost of goods sold and the cost of ending inventory using FIFO, LIFO, and average cost inventory cost flow assumptions

  30. Unit Total Quantity Cost Cost March 1 Beginning inventory 1 $ 800 $ 800 March 3 Purchase 2 $1,000 2,000 March 17 Purchase 1 $1,200 1,200 March 22 Sale 1 March 26 Purchase 1 $1,300 1,300 March 29 Purchase 1 $1,400 1,400 March 30 Sale 1 Total goods available for sale $6,700 Cost Flow Assumptions Example

  31. Cost of Goods Sold and Ending Inventory Cost Under FIFO March 3 Purchase 1 unit @ $1,000 = $1,000 March 17 Purchase 1 unit @ $1,200 = $1,200 March 26 Purchase 1 unit @ $1,300 = $1,300 March 29 Purchase 1 unit @ $1,400 = $1,400 Ending inventory 4 units $4,900 Cost of goods sold = $6,700 – $4,900 = $1,800

  32. Cost of Goods Sold and Ending Inventory Cost Under LIFO March 1 Beginning inventory 1 unit @ $ 800 = $ 800 March 3 Purchase 2 units @ $1,000 = $2,000 March 26 Purchase 1 unit @ $1,300 = $1,300 Ending inventory 4 units $4,100 Cost of goods sold = $6,700 – $4,100 = $2,600

  33. – Ending inventory $3,000 (3 × $1,000) = Cost of goods sold $1,000 (1 × $1,000) Average Cost Method:March 22 Sale Unit cost = $4,000 ÷ 4 = $1,000 Cost of goods available for sale $4,000

  34. – Ending inventory $4,560 (4 × $1,140) = Cost of goods sold $1,140 (1 × $1,140) Average Cost Method:March 30 Sale Unit cost = $5,700 ÷ 5 = $1,140 Cost of goods available for sale $5,700 Total cost of goods sold = $2,140

  35. Average FIFO LIFO Cost Goods available for sale $6,700 $6,700 $6,700 Income statement: Cost of goods sold $1,800 $2,600 $2,140 Net income $1,000 $ 200 $ 660 Balance sheet: Ending inventory $4,900 $4,100 $4,560 Retained earnings $1,300 $ 500 $ 960 Effects of Inventory Cost Assumptions Beginning retained earnings was $300.

  36. Effects of FIFO FIFO matches the oldest product cost with current sales revenue. When inventory prices are changing, it is probable that sales revenue will be matched with costs that are older than the current replacement costs.

  37. Effects of LIFO Palmer purchased 1,000 aloe vera plants at the beginning of 1983 for $1.00 each. The company has kept a minimum of 1,000 plants in inventory through the years. At the end of 2003, the company has 1,000 plants in inventory. Assume that the cost of nursery plants has increased 3% per year.

  38. Effects of LIFO What is the inventory’s replacement cost? $1,000 ×1.86 = $1,860 How does Palmer value the inventory on hand? $1,000 × 1.00 = $1,000

  39. Use of InventoryCosting Methods

  40. Learning Objective 7 Calculate and interpret the inventory turnover ratio.

  41. Palmer Nursery, Inc. Income Statement For the Year Ended December 31, 2003 Sales $1,850,000 Cost of goods sold 1,125,000 Gross margin $ 725,000 Operating expenses 577,000 Net income (loss) $ 148,000 Using Financial Information

  42. Using Financial Information Palmer Nursery, Inc. Balance Sheets December 31, 2003, and 2002 Assets: 20032002 Cash $175,000 $116,000 Merchandise inventory (using LIFO) 100,000 106,000 Other assets 415,000 315,000 Total assets $690,000 $537,000 Liabilities and stockholders’ equity: Accounts payable $ 75,000 $ 70,000 Common stock 25,000 25,000 Additional paid-in capital 10,000 10,000 Retained earnings 580,000 432,000 Total stockholders’ equity 615,000 467,000 Total liabilities and stockholders’ equity $690,000 $537,000

  43. Using Financial Information FIFO inventory was $191,860 at the end of 2002 and $186,000 at the end of 2003. The inventory turnover ratio expresses the theoretical number of times the complete inventory was sold during the year. Cost of goods sold ÷ Average inventory 2003: $1,125,000 ÷ ($191,860 + $186,000) = $1,1251,000 ÷ $188,930 = 5.95 times

  44. Using Financial Information Average inventory holding period in days = 365 ÷ Inventory turnover ratio 2003: 365 ÷ 5.95 = 61.34 days

  45. Learning Objective 8 Describe the impact of payment terms and freight terms.

  46. Terms 2/10, N30 1/10, EOM, net 60 days EOM FOB shipping point FOB destination

  47. Learning Objective 9 Prepare journal entries associated with the purchase and sale of merchandise inventory.

  48. Journal Entries On March 3, 2003, Montoya purchased two generators on account for $2,000, 2/10, net 30, FOB destination, freight collect. On March 4, Montoya paid UPS $125. 2003 March 3 Merchandise Inventory 2,000 Accounts Payable 2,000 2003 March 4 Merchandise Inventory 125 Cash 125

  49. Journal Entries Assume that on March 12, 2003, Montoya paid for the generator it purchased on March 3. 2003 March 12 Accounts Payable 2,000 Cash 1,960 Merchandise Inventory (or Purchase Discount) 40 On March 17, Montoya sold a generator carried in inventory at $800 for $1,500 with terms of 2/10, net 30.

  50. Journal Entries 2003 March 17 Accounts Receivable 1,500 Sales 1,500 Cost of Goods Sold 800 Merchandise Inventory 800 On March 26, the buyers paid Montoya. 2003 March 26 Cash 1,470 Sales Discounts 30 Accounts Receivable 1,500

More Related