Account & Audit

7/31/2019 Account & Audit

1/40

RETAIL ACCOUNTING ANDAUDIT


2/40

Inventory and Cost of Goods Sold

Inventory Products purchased or manufactured for Sale toCustomers

Beginning InventoryQuantities of Merchandise on hand

Purchases New Purchases or Manufactured products Available for Sale = Beginning Inventory +

PurchasesMost that a company can sell during an accounting

period

Ending InventoryRemaining Unsold Merchandise

Cost of Goods SoldCost of Inventory Sold during accounting Period


3/40

Purchases consist of the following:

Purchase price of the inventory $600,000+ Freight-in (delivery charges) 4,000

Purchase returns 25,000Purchase allowances 5,000Purchase discounts 14,000= Net purchases of inventory $560,000


4/40

Calculation

Cost of BeginningInventory

+Cost of Purchases

___________________=Cost of Goods

Available for Sale

- Cost of Ending

Inventory___________________

=Cost of Goods Sold


+Cost of Purchases

___________________=Cost of Goods

Available for Sale

- Cost of Goods Sold

___________________=Cost of Ending

Inventory


5/40

Inventory vs Cost of Goods Sold

Inventory Cost of Goods Sold

Beginning

Purchases

Inventory Sold

Ending

Inventory Sold

As Inventory is Sold we remove its cost from the Asset side of A=L+E andInsert its cost into an Expense on the Equity side of A = L + E

This property exists for all Assets: As they are used up or sold the costTransfers from the Balance Sheet as a Future Economic Resource (Asset)

To the Income Statement as an Expense incurred to generate Revenue


6/40

Relationship between Balance Sheet andIncome Statement

Income Statement Items:Sales revenue is based on sale priceof

Inventory sold.

Cost of goods sold is based on costofInventory sold.

Gross profit (gross margin) is sales revenueless cost of goods sold.

Balance Sheet Item:Inventory on the balance sheet is based on

cost.


7/40

Income Statement Service Company


8/40

Balance Sheet Service Company


9/40

Income Statement Retail Company

Best Buy


10/40

Balance Sheet Retail Company

Best Buy


11/40

Inventory Accounting Systems

Periodic systemDoes not keep a running record of all goods

bought and sold.

Inventory counted at least once a yearUsed for inexpensive goods

Perpetual systemKeeps a running record of all goods bought and

sold.

Inventory counted at least once a year.

Used for all types of goods.


12/40

Accounting for Inventory

Inventory(balance sheet)

=Number of units ofinventory on hand

XCost per unitof inventory

Cost of Goods Sold(income statement)

=Number of units of

inventory soldX

Cost per unitof inventory


13/40

General Journal

Date Accounts and Explanations PR Debit Credit

Recording Transactions and the T-Accounts

Accounts Payable

560,000Beg. 100,000560,000

Inventory

Inventory 560,000

Accounts Payable 560,000

Purchased inventory on account


14/40

Recording Transactionsand the T-Accounts

Sale on account $900,000 of Inventorywhich cost $540,000:

General Journal

Date Accounts and Explanations PR Debit Credit

Accounts Receivable 900,000

Sales Revenue 900,000

Cost of Goods Sold 540,000Inventory 540,000


15/40

Recording Transactionsand the T-Accounts

Cost of Goods Sold

540,000

Inventory

Beg. 100,000560,000

120,000

540,000


16/40

Reporting in theFinancial Statements

Income Statement (partial)Sales revenue $900,000Cost of goodssold 540,000Gross profit $360,000

Ending Balance Sheet (partial)Current assets:

Cash $ XXX

Short-term investments XXXAccounts receivable, net XXXInventory 120,000Prepaid expenses XXX


17/40

Inventory Costing

Sum of all costs incurred to bring asset toits intended use

Methods for determining per unit InventoryCost

Specific unit cost

Average cost

First-in, first-out (FIFO) cost

Last-in, first-out (LIFO) cost


18/40

Which Method will a Company Use?

Decision is up to Management

NOT based on Actual Inventory Movements

A tool for managing Earnings

A tool for managing Taxes


19/40

Beginning inventory (10 units @ $10) $ 100No. 1 (25 units @ $14 per unit) $350No. 2 (25 units @ $18 per unit) 450

Total purchases 800Cost of goods available for sale $ 900

Ending inventory: 20 units

Cost of goods sold: 40 units

Illustrative Data


20/40

Specific Unit Cost

Identify each inventory unit and determine thecostOf the 20 Units left, how many came from the:

Of the 40 Units sold, how many came from the:$10, $14, or $18 purchase

Multiply each unit by that specific units cost

For example if we assume:Inventory: 10@10, 5@14 and 5@18

Inventory = $260

Cost of Goods Sold: 20@14 and 20@18CGS = $640


21/40

Average Costing

Average Costper unit

= Cost of Goods Available

Number of units available

Inventory (at average cost)Beg Bal (10 units @ $10) 100

25 units @ $14 350

Purchases:

25 units @ $18 450

Cost of goods sold (40 units@ average cost of $15per unit 600

Ending Bal (20 units@ average cost of $15per unit 300


22/40

Weighted-Average

$900 total cost 60 units = $15/unit

Cost of goods sold = 40 $15 = $600

Ending inventory = 20 $15 = $300


23/40

FIFO

Inventory (at FIFO cost)

Beg Bal (10 units @ $10) 100

25 units @ $14 350

Purchases:

25 units @ $18 450

Cost of goods sold (40 units):(10 units @ $10 = 100)(25 units @ $14 = 350)( 5 units @ $18 = 90) 540

Ending Bal(20 units @ $18) 360

First costs into inventory are first costs assigned to cost ofgoods sold.


24/40

LIFO

Inventory (at LIFO cost)

Beg Bal (10 units @ $10) 100

25 units @ $14 350

Purchases:

25 units @ $18 450Cost of goods sold (40 units):(25 units @ $18 = 450)(15 units @ $14 = 210) 660

Ending Bal(10 units @ $10 = 100)(10 units @ $14 = 140) 240

Last costs into inventory are first costs assigned to cost ofgoods sold.


25/40

Income Effects ofInventory Methods

Specific unit cost $1,000 640 = $360Weighted-average $1,000 600 = $400FIFO $1,000 540 = $460

LIFO $1,000 660 = $340

AssumedSales

Revenue

Cost ofGoodsSold

GrossProfit

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren


26/40

Income Effects

When inventory costs are increasing

LIFO cost of goods sold is highest, gross profitis lowest.

FIFO cost of goods sold is lowest, gross profit ishighest.

When inventory costs are decreasing

FIFO cost of goods sold is highest.LIFO cost of goods sold is lowest.


27/40

Other Issues

Tax advantages of LIFO in periods ofrising prices

Higher Cost of Goods Sold = Lower Net Income

= Lower Income Taxes

Inventory Method & managing income

International issue LIFO not allowed in

some countries


28/40

Inventory Errors

Each inventory error affects:

Inventory

Cost of goods sold

Gross profit

Net income


29/40

Inventory Errors

Period 1 Period 2

Inventory Error

Cost of

Goods Sold

Gross Profit

and Net Income

Cost of

Goods Sold

Gross Profit

and Net Income

Period 1 Ending

inventory overstated Understated Overstated Overstated Understated

Period 1 Ending

inventory understated Overstated Understated Understated Overstated


30/40

Accounting Principles

Consistency principle Same Accounting Methods from Period to Period

Accounting Changes must be disclosed Effect of accounting Change must be disclosed

Disclosure principle Enough information must be reported for stakeholders to make

informeddecisions Relevant, Reliable, and Comparable Information

Accounting conservatism

Anticipate or disclose all likely losses, but gains are not reporteduntil they occur

Assets are recorded as lowest reasonable amount

Liabilities are recorded at highest reasonable amount:


31/40

Lower of Cost or Market

Lower-of-Cost-or-Market rule (LCM) Inventory is reported at the lowest value

Historical Cost Or Market (Replacement Cost)

Inventory is below cost Record an increase in Cost of Goods Sold (debit)

Record the reduction in Inventory (credit)

To record a $1,000 decline in inventory value

Cost of Goods Sold 1,000

Inventory 1,000

Wrote inventory down to market value


32/40

Ratios

Gross ProfitPercentage

=Gross Profit

Net Sales Revenue

InventoryTurnover

=Cost of goods sold

Average Inventory


33/40


34/40

Best Buy


35/40

Gross Profit Method

Gross profit method is a way to estimateinventory based on the cost of goods soldmodel.

Also called gross marginmethod.


36/40

CalculationCost of BeginningInventory

+Cost of Purchases

___________________

=Cost of GoodsAvailable for Sale

- Cost of EndingInventory

___________________=Cost of Goods Sold


+Cost of Purchases

___________________

=Cost of GoodsAvailable for Sale

- Cost of Goods Sold

___________________

=Cost of EndingInventory


37/40

Calculation Continued

Sales Cost of Goods Sold = Gross Profit

Gross Profit% = Gross Profit / Sales

Cost of Goods Sold = Sales x (1- Gross Profit%)


38/40

Estimate CGS using GP%

We know Beginning Inventory = 14,000

We know Purchases = 66,000

We know Sales = 100,000We know Gross Profit % = 43%

We Dont know Cost of Goods SoldWe Dont know Ending Inventory


39/40

Gross Profit Method

Beginning inventory $14,000

Purchases 66,000

Goods available 80,000

Cost of goods sold:

Net sales revenue $100,000Less estimated

gross profit 43% (43,000)Estimated cost of goods sold 57,000

Estimated cost of ending inventory $23,000


40/40

THANK YOU

Documents

Account & Audit