Ch 6 Inventory

7/29/2019 Ch 6 Inventory

1/40

Powerpoint Templates

Page 1Powerpoint Templates

Chapter 6; Inventory

Prepared by Aj.Ratchadaporn Putjorn
http://www.powerpointstyles.com/http://www.powerpointstyles.com/http://www.powerpointstyles.com/http://www.powerpointstyles.com/http://www.powerpointstyles.com/


2/40


Page 2

Preview ofCHAPTER6
http://www.powerpointstyles.com/http://www.powerpointstyles.com/


3/40


Page 3

One Classification:

Inventory

Three Classifications:

Raw Materials

Work in Process

Finished Goods

MerchandisingCompany

ManufacturingCompany

Regardless of the classification, companies report all inventories underCurrent Assets on the balance sheet.

Classifying Inventory


4/40


Page 4

Physical Inventory taken for two reasons:

Perpetual System

1. Check accuracy of inventory records.

2. Determine amount of inventory lost (wasted raw

materials, shoplifting, or employee theft).

Periodic System

1. Determine the inventory on hand.

2. Determine the cost of goods sold for the period.

SO 1 Describe the steps in determining inventory quantities.

Determining Inventory Quantities


5/40


Page 5

Involves counting, weighing, or measuring each kind of

inventory on hand.

Taken,

when the business is closed or business is slow.

at end of the accounting period.

Taking a Physical Inventory




6/40


Page 6

Goods in Transit

Purchased goods not yet received.

Sold goods not yet delivered.

Determining Ownership of Goods


Goods in transit should be included in the inventory of the

company that has legal title to the goods. Legal title is

determined by the terms of sale.



7/40

Powerpoint Templates Page 7

Illustration 6-1Terms of sale

Ownership of the goods

passes to the buyer when the

public carrier accepts thegoods from the seller.

Ownership of the goodsremains with the seller until

the goods reach the buyer.

Goods in Transit



8/40


Goods in transit should be included in the inventory of the

buyer when the:

a. public carrier accepts the goods from the seller.

b. goods reach the buyer.

c. terms of sale are FOB destination.

d. terms of sale are FOB shipping point.

Question




9/40


Consigned Goods

Goods held for sale by one party.

Ownership of the goods is retained by another

party.



Determining Ownership of Goods


10/40


Unit costs can be applied to quantities on hand using thefollowing costing methods:

Specific Identification

First-in, first-out (FIFO)

Average-cost

SO 2 Explain the basis of accounting for inventories andapply the inventory cost flow methods.

Cost FlowAssumptions

Inventory Costing
http://www.powerpointstyles.com/http://www.powerpointstyles.com/http://www.powerpointstyles.com/


11/40


Illustration: Assume that Crivitz TV Company purchases threeidentical 50-inch TVs on different dates at costs of $700, $750,

and $800. During the year Crivitz sold two sets at $1,200 each.

These facts are summarized below.

Illustration 6-2

Inventory Costing



12/40



If Crivitz sold the TVs it purchased on February 3 and May 22,

then its cost of goods sold is $1,500 ($700 + $800), and its

ending inventory is $750.

Illustration 6-3

Inventory Costing



13/40


Actual physical flow costing method in which items still in

inventory are specifically costed to arrive at the total cost of

the ending inventory.

Practice is relatively rare.

Most companies make assumptions (Cost Flow

Assumptions) about which units were sold.

Inventory Costing




14/40


Illustration 6-11Use of cost flow methods in

major U.S. companies

Cost Flow Assumptions

do not need to match the

physical movement of

goods

Inventory Costing



15/40


Illustration: Data for Houston Electronics Astro condensers.

Illustration 6-4

(Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold

Inventory Costing



16/40


Earliest goods purchased are first to be sold.

Often parallels actual physical flow of merchandise.

Generally good business practice to sell oldest units

first.

First-In-First-Out (FIFO)

Inventory Costing



17/40


Illustration 6-5

SO 2


Inventory Costing


18/40


Illustration 6-5

Inventory Costing




19/40


Allocates cost of goods available for sale on the basis

of weighted-average unit cost incurred.

Assumes goods are similar in nature.

Applies weighted-average unit cost to the units on

hand to determine cost of the ending inventory.

Inventory Costing

Average Cost



20/40


Illustration 6-10

Inventory Costing

Average Cost



21/40


Illustration 6-10

Inventory Costing

Average Cost



22/40

Powerpoint Templates Page 22SO 3 Explain the financial effects of the inventory cost flow assumptions.

Financial Statement and Tax EffectsIllustration 6-12

Inventory Costing


23/40


The cost flow method that often parallels the actual

physical flow of merchandise is the:

a. FIFO method.b. LIFO method.

c. average cost method.

d. gross profit method.

Question

Inventory Costing

SO 3 Explain the financial effects of the inventory cost flow assumptions.


24/40


Using Cost Flow Methods Consistently

Method should be used consistently, enhances

comparability.

Although consistency is preferred, a company maychange its inventory costing method.

Illustration 6-14Disclosure of change incost flow method

Inventory Costing

SO 3 Explain the financial effects of the inventory cost flow assumptions.


25/40


Lower-of-Cost-or-Market

SO 4 Explain the lower-of-cost-or-market basis of accounting for inventories.

When the value of inventory is lower than its cost

Companies can write down the inventory to its market

value in the period in which the price decline occurs.

Market value = Replacement Cost

Example ofconservatism.

Inventory Costing


26/40


Illustration: Assume that Ken Tuckie TV has the following

lines of merchandise with costs and market values as

indicated.

Illustration 6-15

Inventory Costing

Lower-of-Cost-or-Market

SO 4 Explain the lower-of-cost-or-market basis of accounting for inventories.


27/40

Powerpoint Templates Page 27SO 5 Indicate the effects of inventory errors on the financial statements.

Common Cause:

Failure to count or price inventory correctly.

Not properly recognizing the transfer of legal title to

goods in transit.

Errors affect both the income statement and balance

sheet.

Inventory Errors


28/40


Inventory errors affect the computation of cost of goods sold

and net income.

Illustration 6-17

Illustration 6-16

SO 5 Indicate the effects of inventory errors on the financial statements.

Inventory Costing

Income Statement Effects


29/40

Powerpoint Templates Page 29SO 5 Indicate the effects of inventory errors on the financial statements.

Effect of inventory errors on the balance sheet is determined

by using the basic accounting equation:.

Illustration 6-16

Illustration 6-19

Inventory Costing

Balance Sheet Effects


30/40


Balance Sheet - Inventory classified as current asset.

Income Statement - Cost of goods sold subtracted from

sales.

There also should be disclosure of

1) major inventory classifications,

2) basis of accounting (cost or LCM), and

3) costing method (FIFO, LIFO, or average).

Statement Presentation and Analysis

Presentation


31/40


Inventory turnovermeasures the number of times onaverage the inventory is sold during the period.

Cost of Goods Sold

Average Inventory

Inventory

Turnover

=

Days in inventory measures the average number of days

inventory is held.

Days in Year (365)

Inventory Turnover

Days in Inventory=

SO 6 Compute and interpret the inventory turnover ratio.



32/40


Illustration: Wal-Mart reported in its 2010 annual report a beginning

inventory of $34,511 million, an ending inventory of $33,160 million, and

cost of goods sold for the year ended January 31, 2010, of $304,657

million. The inventory turnover formula and computation for Wal-Mart are

shown below.

SO 6 Compute and interpret the inventory turnover ratio.

Illustration 6-21

Days in Inventory: Inventory turnover of 9 times divided into 365 is

approximately 40.6 days. This is the approximate time that it takes a

company to sell the inventory.



33/40

Powerpoint Templates Page 33SO 7 Apply the inventory cost flow methods to perpetual inventory records.

Assuming the Perpetual Inventory System, compute Cost of Goods Sold

and Ending Inventory under FIFO and Average cost.

Illustration 6A-1

APPENDIX6APerpetual Inventory Systems


34/40



Cost of Goods SoldEnding Inventory

Illustration 6A-2

Perpetual Inventory System


35/40


Average-Cost

Illustration 6A-4

Cost of Goods Sold Ending Inventory

Perpetual Inventory System


36/40


Estimates the cost of ending inventory by applying a gross profit rate

to net sales.

Gross Profit Method

SO 8 Describe the two methods of estimating inventories.

Illustration 6B-1

APPENDIX6BEstimating Inventories


37/40


Illustration: Kishwaukee Companys records for January show net

sales of $200,000, beginning inventory $40,000, and cost of goods

purchased $120,000. The company expects to earn a 30% gross

profit rate. Compute the estimated cost of the ending inventory at

January 31 under the gross profit method.


Illustration 6B-2

Estimating Inventories


38/40


Company applies the cost-to-retail percentage to ending

inventory at retail prices to determine inventory at cost.


Illustration 6B-3


Retail Inventory Method


39/40

Powerpoint Templates Page 39SO 8 Describe the two methods of estimating inventories.

Note that it is not necessary to take a physical inventory to

determine the estimated cost of goods on hand at any given time.

Illustration 6B-4Illustration:



40/40

P i T l P 40

Exercise

In its first month of operations, Danielle Company madethree purchases of merchandise in the following sequence:(1) 300 units at $6, (2) 400 units at $7, and (3) 200 units at$8. Assuming there are 360 units on hand, compute thecost of ending inventory under the (a) FIFO method.

Danielle uses a periodic inventory system.

Documents

Ch 6 Inventory