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Inventory

Inventory. 14. Inventory held for sale by retailers, manufacturers and wholesalers. Learning Objectives Identify all costs and apply the lower of cost or market to merchandise inventory Assign costs to sold inventory using four different methods

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Inventory

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  1. Inventory 14 Inventory held for sale by retailers, manufacturers and wholesalers. • Learning Objectives • Identify all costs and apply the lower of cost or market to merchandise inventory • Assign costs to sold inventory using four different methods • Compare periodic with perpetual inventory systems • Estimate ending inventory • Analysis: Calculate and explain inventory turnover and days sales in inventory

  2. Overview Inventory subsidiary ledgers are separate records for each item of inventory. Control Ledger Inventory Acct #150 The Subsidiary Ledgers must add up to the Control Ledger Balance Subsidiary Ledgers Inventory Brass Chimes #150.236822 Subsidiary example

  3. Overview The number of units and the cost paid per unit are collected for each purchase and sale With a Perpetual Inventory system, sales and purchases are updated as they happen to the Inventory Control Ledger Subsidiary Ledgers Inventory Brass Chimes #150.236822

  4. Objective 14.1: Identify all costs and apply the lower of cost or market to inventory The Cost Concept guides the initial valuation of inventory. Purchases are recorded at cost less any purchase discounts earned. O14.1

  5. Cost of Inventory • However, Inventory values should also include any incidental costs incurred to bring inventory to the sales location and into a saleable condition including: • Freight In , storage and insurance costs • Costs to prepare, condition and assemble inventory for sale

  6. Freight In • Freight In is the cost incurred to bring inventory to the sale location • FOB (for Free On Board) describes shipping terms • FOB shipping point means freight is free to the purchaser only to the shipping point • FOB destination means freight is free to the purchaser to the purchaser’s destination Destination Shipping Point O14.1

  7. Inventory ownership while in transit • FOB terms also indicate ownership of the inventory in transit • For FOB shipping point, the purchaser owns the inventory from the shipping point on • FOB destination means the seller owns the inventory in transit until it arrives at the seller’s location In transit FOB Destination Seller owns FOB Shipping Point Purchaser owns Destination Shipping Point O14.1

  8. Items not included in Inventory • Inventory in transit owned by the seller • Inventory on consignment (for sale by the firm but owned by others ) • Damaged or obsolete goods that are not saleable* *If saleable, the Conservatism Concept argues that damaged & obsolete goods should be recorded at their net realizable value O14.1

  9. Inventory and the Cost Benefit Concept Many firms rely on both the materiality and the cost benefit concept to argue that the incidental inventory acquisition costs of freight, storage, insurance, etc. are not material and further, the cost of appropriately assigning these costs to items of inventory outweigh any benefits received. They justify recording inventory costs using invoice prices only. O14.1

  10. Lower of cost or market The Conservatism Concept governs the issue of changing market values for inventory When preparing end of fiscal period financial statements the Lower of Cost or Market values should be used when the end of period inventory adjusting entry is considered. O14.1

  11. Lower of cost or market • In practice, lower of cost or market can be applied to inventory on the following bases: • An item by item ¾ • Category by category ¾ • Inventory as a whole ¾ Example O14.1

  12. Lower of cost or market The item total column brings over the lower from the total cost or total market column for each inventory item. O14.1

  13. Lower of cost or marketAdjusting Entry(assumes item by item analysis) Total cost of $22,321 minus Total market value on an item by item basis of $21,830 = $491 The value of inventory is reduced by the adjustment. O14.1

  14. Objective 14.2: Assign costs to sold inventory using four different methods LIFO FIFO Weighted Average Specific Identification O14.2

  15. Cost of sold inventory Cost Concept -followed in recording the value of inventory purchased for sale in the ordinary course of business Matching Concept -match expenses with the revenue those expenses helped to generate during any fiscal period. One of those expenses of course is the cost of inventory sold during the period. O14.2

  16. Which cost? Prices paid for identical inventory items change often. Which cost should be expensed when an item is sold? O14.2

  17. Which cost? • Methods used to determine which cost to expense include: • Specific Identification • Weighted Average • Last in First Out –LIFO • First in First Out –FIFO O14.2

  18. Which cost? Specific Identification expense as Cost of Goods Sold the costs incurred to purchase the exact inventory item sold This may be impractical if inventory includes a large number of items which are difficult to match to the actual cost paid without considerable effort. O14.2

  19. Which cost? If identifying the specific cost paid for an item of inventory is excessive, these methods may be used: • LIFO –Last in First Out • FIFO –First in First Out • Weighted Average O14.2

  20. Which cost? LIFO method expenses the most recent inventory costs first FIFO method expenses the oldest inventory costs first Weighted average method expenses the average of all inventory costs incurred for the category O14.2

  21. LIFO The price paid and the date purchased is recorded for each item of inventory. Note the need to record purchase information when accounting for inventory $10.60 May 25 $10.50 May 21 $10.40 May 12 $10.25 May 5 $10.00 May 1 O14.2

  22. LIFO One blue hockey puck is sold. Which cost should be expensed? Regardless of which item was sold, What cost should be expensed with LIFO method? $10.60 May 25 $10.50 May 21 $10.40 ? May 12 $10.25 May 5 $10.00 May 1 O14.2

  23. LIFO Cost expensed $10.60 $10.60 May 25 $10.50 May 21 $10.40 May 12 Using LIFO method, take the most recent purchase cost out to match with a sale. $10.25 May 5 $10.00 May 1 O14.2

  24. FIFO Using FIFO method, take the oldest purchase cost out to match with a sale. $10.60 May 25 $10.50 May 21 $10.40 May 12 Cost expensed $10.25 May 5 $10.00 $10.00 May 1 O14.2

  25. Weighted Average $10.60 Using weighted average method, a moving average cost is expensed. May 25 $10.50 May 21 $10.40 May 12 $10.25 Cost expensed May 5 $10.00 May 1 $10.35 $51.75/5 = $10.35 O14.2

  26. Specific Identification Using the Specific ID method, the physical item sold is matched with its cost $10.60 Cost expensed May 25 $10.50 May 21 $10.40 $10.40 May 12 $10.25 May 5 I want that green one. $10.00 May 1 O14.2

  27. LIFO -example Karin’s Gifts sells a special punch bowl which is purchased regularly as required. Using the LIFO method, record the purchase of 10 Units of inventory at $23 per unit on April 3. O14.2

  28. LIFO Next record the sale of 2 units on April 8 O14.2

  29. LIFO Next record the sale of 20 units on April 12 O14.2

  30. LIFO Next record the purchase of 20 units @ $24 on April 15 O14.2

  31. LIFO Next record the sale of 23 units on April 20 O14.2

  32. LIFO Finally record the purchase of 25 units @ $25 on April 25 O14.2

  33. LIFO O14.2

  34. FIFO -example Karin’s Gifts sells a special punch bowl which is purchased regularly as required. Using the FIFO method, record the purchase of 10 Units of inventory at $23 per unit on April 3. O14.2

  35. FIFO Next record the sale of 2 units on April 8 O14.2

  36. FIFO Next record the sale of 20 units on April 12 O14.2

  37. FIFO Next record the purchase of 20 units @ $24 on April 15 O14.2

  38. FIFO Next record the sale of 23 units on April 20 O14.2

  39. FIFO Record the purchase of 25 units for $25 on April 25 O14.2

  40. FIFO O14.2

  41. Weighted Average -example Karin’s Gifts sells a special punch bowl which is purchased regularly as required. Using the weighted average method, record the purchase of 10 units of inventory at $23 per unit on April 3. O14.2

  42. Weighted Average ($230 + $440 = $670/30 = $22.33) Next record the sale of 2 units on April 8 O14.2

  43. Weighted Average Next record the sale of 20 units on April 12 O14.2

  44. Weighted Average Next record the purchase of 20 units @ $24 on April 15 O14.2

  45. Weighted Average Next record the sale of 23 units on April 20 O14.2

  46. Weighted Average Finally record the purchase of 25 units @ $25 on April 25 O14.2

  47. Weighted Average O14.2

  48. Specific Identification For Specific Identification: Date Specific Units Sold 4/8 2 @ $22 4/12 12 @$22 8 @ $23 4/20 3 @ $22 20 @ $24 O14.2

  49. Specific Identification O14.2

  50. Objective 14.3: Compare periodic with perpetual inventory systems Periodic –the inventory account is updated only at the end of the fiscal period Perpetual –the inventory account is updated with each purchase, sale and return that affects inventory. 14.3

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