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Reporting and Analyzing Inventories

5. Reporting and Analyzing Inventories. Balance Sheet. Income Statement. Assigning Costs to Inventory. Inventory affects. The matching principle requires matching cost of sales with sales. Costing Method. FIFO, LIFO, Weighted Average, Specific ID Inventory System. Perpetual or Periodic

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Reporting and Analyzing Inventories

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  1. 5 Reporting and Analyzing Inventories

  2. Balance Sheet Income Statement Assigning Costs to Inventory Inventory affects . . . The matching principle requires matching cost of sales with sales.

  3. Costing Method. FIFO, LIFO, Weighted Average, Specific ID Inventory System. Perpetual or Periodic Items included in costs. Use of market or other estimates. Assigning Costs to Inventory Accounting for inventory requires several decisions . . .

  4. Exh. 5.1 Assigning Costs to Inventory Use of Inventory Methods in Practice

  5. Exh. 5.2,3 Example Inventory Information

  6. Perpetual Inventory

  7. When units are sold, the specific cost of the unit sold is added to cost of goods sold. Specific Identification

  8. Specific Identification The above purchases were made by Trekking in August. On August 14, Trekking sold 8 bikes originally costing $91 and 12 bikes originally costing $106.

  9. Exh. 5.4 Specific Identification The Cost of Goods Sold for the August 14 sale is $2,000, leaving $500 and 5 units in inventory.

  10. Exh. 5.4 Specific Identification Additional purchases were made on August 17 and 28. Cost of sales on August 31 were as follows: 2 @ $91, 3 @ $106, 15 @ $115, & 3 @ $119.

  11. Cost of Goods Sold for August 31 = $2,582 Exh. 5.4 Specific Identification

  12. Income Statement COGS = $4,582 Balance Sheet Inventory = $1,408 Exh. 5.4 Specific Identification

  13. Cost of Goods Sold Ending Inventory First-In, First-Out (FIFO) Oldest Costs Recent Costs

  14. Exh. 5.5 First-In, First-Out (FIFO) The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes.

  15. The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory. Exh. 5.5 First-In, First-Out (FIFO)

  16. Exh. 5.5 First-In, First-Out (FIFO) Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold.

  17. Exh. 5.5 First-In, First-Out (FIFO) Cost of Goods Sold for August 31 = ($530 + $2,070) = $2,600

  18. Income StatementCOGS = $4,570 Balance Sheet Inventory = $1,420 Exh. 5.5 First-In, First-Out (FIFO)

  19. Cost of Goods Sold Ending Inventory Last-In, First-Out (LIFO) Recent Costs Oldest Costs

  20. Exh. 5.6 Last-In, First-Out (LIFO) The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes.

  21. Exh. 5.6 Last-In, First-Out (LIFO) The Cost of Goods Sold for the August 14 sale is ($1,590 + $455) $2,045, leaving $455 and 5 units in inventory.

  22. Exh. 5.6 Last-In, First-Out (LIFO) Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold.

  23. Exh. 5.6 Last-In, First-Out (LIFO) Cost of Goods Sold for August 31 = ($1,190 + $1,495) = $2,685

  24. Income Statement COGS = $4,730 Balance Sheet Inventory = $1,260 Exh. 5.6 Last-In, First-Out (LIFO)

  25. When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. ÷ Cost of Goods Available for Sale Units on hand on the date of sale Weighted Average

  26. Exh. 5.7 Weighted Average The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes.

  27. Exh. 5.7 Weighted Average ÷ The weighted average cost per unit is computed prior to each sale.

  28. Exh. 5.7 Weighted Average Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold.

  29. ÷ Exh. 5.7 Weighted Average

  30. Income Statement COGS = $4,622 Balance Sheet Inventory = $1,368 Exh. 5.7 Weighted Average

  31. Cost of Merchandise Inventory Invoice Price Freight-in Insurance Import Duties Storage Include all expenditures necessary to bring an item to a salable condition and location.

  32. Because prices change, the choice of an inventory method is important. Exh. 5.8 Financial Reporting

  33. Smooths out price changes. Ending inventory approximates current replacement cost. Better matches current costs in cost of goods sold with revenues. Financial Reporting Advantages of Each Method Weighted Average First-In, First-Out Last-In, First-Out

  34. The Internal Revenue Service (IRS) identifies several acceptable methods for inventory costing for financial reporting and reporting taxable income. If LIFO is used for tax purposes, the IRS requires it be used in financial statements. Tax Reporting

  35. The consistency principle requires a company to use the same accounting methods period after period so that financial statements are comparable across periods. Consistency in Reporting

  36. Exh. 5.10 Errors in Reporting Inventory Income Statement Effects

  37. Exh. 5.12 Errors in Reporting Inventory Balance Sheet Effects

  38. FOB Shipping Point Public Carrier Seller Buyer Ownership passes to the buyer here. Public Carrier Seller Buyer FOB Destination Point Items in Merchandise Inventory

  39. Items in Merchandise Inventory Goods on Consignment • Goods shipped by the owner (consignor) to another party (consignee). • Merchandise is included in the inventory of the consignor. Goods Damaged or Obsolete • Damaged or obsolete goods are not counted in inventory. • Cost should be reduced to net realizable value.

  40. InventoryCount Tag Countedby _______ Physical Count of Merchandise Inventory • Most companies take a physical countof inventory at least once each year. • When the physical count does not match the Merchandise Inventory account, an adjustment must be made. Quantity ___

  41. Inventory must be reported at market value when market is lowerthan cost. Defined as current replacement cost (not sales price). Consistent withthe conservatismprinciple. Lower of Cost or Market Can be applied three ways: (1) separately to each individual item. (2) to major categories of assets. (3) to the whole inventory.

  42. Exh. 5.14 Lower of Cost or Market A motorsports retailer has the following items in inventory:

  43. Exh. 5.14 Lower of Cost or Market Here is how to compute lower of cost or market for individual inventory items.

  44. Exh. 5.14 Lower of Cost or Market Here is how to compute lower of cost or market for the two groups of inventory items.

  45. Exh. 5.14 Lower of Cost or Market Here is how to compute lower of cost or market for the entire inventory.

  46. Often used to estimate inventory for interim period reporting. Needed Information includes: Retail Inventory Method Beginning inventory at cost and retail Net purchases at cost and retail Net sales

  47. Goods available for sale at retail Net sales at retail Ending inventory at retail – Step 1 = Goods available for sale at cost Goods available for sale at retail Cost to retail ratio Step 2 = ÷ Ending inventory at retail Cost to retail ratio Estimated ending inventory at cost Step 3 = × Exh. 5.15 Retail Inventory Method

  48. Retail Inventory Method

  49. Retail Inventory Method

  50. Exh. 5.16 Retail Inventory Method

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