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Inventory

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Inventory

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  1. Inventory By Jessica Huff

  2. Ownership of Goods • Goods in Transit • Free on Board (FOB) shipping says that the goods are yours once another company ships them to you • FOB destination means that the goods are yours when you receive them • Consigned Goods • These are goods that you are holding, but they are not yours • You sell them for a fee/commission • Antique dealers do this quite often

  3. Inventory Systems • Perpetual- Perpetual systems keep track of inventory simultaneously • An example would be a grocery store where every time an items crosses the scanner, it is taken off of inventory • Periodic- Inventory is physically checked at certain times • This could be a small business that cannot afford to have a perpetual system • Many companies adopt both systems because even a computer can be wrong (theft is a good example of why it would be wrong)

  4. Solving Inventory Problems • When doing inventory problems, you first need to think about the system that is being used • Every company will begin with a certain amount, then make purchases and sell inventory in any given period • FIFO will sell inventory starting with the beginning balance • LIFO will sell inventory starting with the last purchase • Weighted-Average will sell inventory in any order without giving preference

  5. Inventory Methods • FIFO (First-in, First-out)- The goods that are received or made first will be sold first • Most companies use this method • Makes sense for things that expire because if you don’t sell them now, they will go bad (milk, eggs, etc.) • LIFO (Last-in, First-out)- The newest goods that are received or made will be sold first • General Accepted Accounting Principles (GAAP) is doing away with this method • Companies that don’t have goods that expire can use this (tires, laundry detergent, etc.) • Weighted-Average- The average unit cost is found and then everything is sold as a lump

  6. Formula Cost of Goods Available for Sale Less: Ending Inventory = Cost of Goods Sold It can also be written as: • Cost of Goods Available for Sale • Less: Cost of Goods Sold • = Ending Inventory • Ending Inventory • Add: Cost of Goods Sold • = Cost of Goods Available for Sale • Cost of Goods Sold • Add: Ending Inventory • =Cost of Goods Available for Sale

  7. Formula, Continued • The point of the different variations is to point out that there are many different ways to solve inventory problems • Depending on what is easiest for you will dictate how to approach the problems • Cost of Goods Available for Sale is almost always given • What is important is calculating Cost of Goods Sold or Ending Inventory • Problems will give one of these two to calculate the rest of the equation

  8. FIFO Example DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Units sold during the year= 600

  9. Cost of Goods Available for Sale • The Cost of Goods Available for Sale (COGAS) is calculated by taking the beginning inventory + any purchases made during the period being looked at • Question: So, for this problem, what is the Cost of Goods Available for Sale?

  10. Cost of Goods Available for Sale DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Cost of Goods Available for Sale

  11. Calculating Ending Inventory • The problem says that 600 units were sold during the period • Question: What is the amount for Ending Inventory (EI)? • Remember, we’re doing FIFO!!

  12. Ending Inventory DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 • Since we’re selling 600, we’re selling everything in red and part of the orange which leaves 100 units not sold • 100*$6= $600 is the Ending Inventory

  13. Calculating Cost of Goods Sold • The problem says that 600 units were sold during the period • Question: What is the amount for Cost of Goods Sold (COGS)? • Work it out not plugging into the formula

  14. Cost of Goods Sold DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 • Since we’re selling 600, we’re selling everything in red and part of the orange to make up the 600 • $1,000+$400+$1,200+ (50*$6)= $2,900 is Cost of Goods Sold

  15. Checking Your Work • Now, to check your work, you put the numbers into the equation Cost of Goods Available for Sale $3,500 Less: Cost of Goods Sold 2,900 Ending Inventory $600 • Sure enough, the equation works out • Another way of solving the problem is to figure out two parts of the equation and solve for the third • This is where what’s easiest for you comes in • Since COGAS was given, you can calculated EI or COGS to get to the other answer instead of working it out by hand

  16. LIFO Example- Same Problem DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Units sold during the year= 600

  17. Solving • Question: What is the Cost of Goods Available for Sale? • Question: What is the Ending Inventory? • Remember: we’re doing LIFO!! • Question: What is the Cost of Goods Sold? • Don’t plug it into the formula again

  18. Cost of Goods Available for Sale DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Cost of Goods Available for Sale Note: It’s the same answer as before

  19. Ending Inventory DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 • Since we’re selling 600, we’re selling everything in red and part of the orange which leaves 100 units not sold • 100*$5= $500 is the Ending Inventory

  20. Cost of Goods Sold DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 • Since we’re selling 600, we’re selling everything in red and part of the orange to make up the 600 • $900+$1,200+$400+ (100*$5)= $3,000 is Cost of Goods Sold

  21. Checking Your Work • Now, to check your work, you put the numbers into the equation Cost of Goods Available for Sale $3,500 Less: Cost of Goods Sold 3,000 Ending Inventory $500 • Sure enough, the equation works out

  22. Weighted-Average- Same Problem DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 Units sold during the year= 600

  23. Solving • Question: What is the Cost of Goods Available for Sale? • If you said $3,500, you are correct!! • Question: What is the Ending Inventory? • Remember: we’re doing Weighted-Average!! • Question: What is the Cost of Goods Sold? • Don’t plug it into the formula again

  24. Ending Inventory DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 • Unit Cost= COGAS/Units= $3,500/700= $5 • Since there are 100 units left • 100*5=$500 is Ending Inventory

  25. Cost of Goods Sold DateExplanationUnitsUnit CostTotal Cost Jan. 1 Beg. Bal. 200 x $5 = $1,000 Mar. 10 Purchase 50 x 8 = 400 Jun. 20 Purchase 300 x 4 = 1,200 Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500 • Since we’re selling 600 units • 600*5=$3,000 Cost of Goods Sold

  26. Checking Your Work • Now, to check your work, you put the numbers into the equation Cost of Goods Available for Sale $3,500 Less: Cost of Goods Sold 3,000 Ending Inventory $500 • Sure enough, the equation works out

  27. Income Statement Effects FIFO Average LIFO • COGAS $3,500 $3,500 $3,500 • COGS 2,900 3,000 3,000 • EI 600 500 500 • Net Income Highest Medium Medium • With the exception of this problem, Weighted-Average and LIFO do not usually come out equal • LIFO has a higher COGS and lower EI • LIFO will result in a lower Net Income than Weighted- Average

  28. Lower of Cost or Market • This is used after an inventory method is chosen • This replacement method is used when the value of inventory go down (is impaired) • Basically, the company looks at if the cost is lower than the market or vice versa and takes that amount as the new value

  29. Lower of Cost or Market Example Lower of Cost Market Cost or Market Books $3,000 $2,500$2,500 Music 3,500 3,600 3,500 Movies 4,0005,0004,000 Total Inventory $10,500 $11,100 $10,000 • So, you take the lower of the cost or market, and that becomes your new amount ($10,000)

  30. More Problems • You can challenge yourself by coming up with different problems • Once you understand the basics, these problems are very easy to do • Work them as many ways as you can think of and remember to CHECK YOUR WORK!!