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INVENTORY AND COST OF GOODS SOLD
Chapter Six
Types of Inventory
MERCHANDISING
Wholesalers Buy from
manufacturers sell to retailer
Retailers Buy from wholesalers Sell to general public
Acctg 101 Merchandise
Inventory
MANUFACTURING Buy from several
suppliers to make a product
Sell to wholesalers and sometimes retailers
Acctg 102 Raw Materials Work in Process Finished Goods
Inventory Normal Balance
Inventory is an asset so its normal balance is a Debit.
To increase inventory – Debit To decrease inventory – Credit
Purchases Normal Balance
Purchases is like expense Purchases is always increased with a
debit Purchase returns and allowances – credit
balance Purchase discount – credit balance
Cost of Goods Sold (COGS)
Cost of Goods Sold is an expense so it has a debit balance
Gross Margin
Sales -Sales Return and Allowances -Sales Discount =Net Sales -Cost of Goods Sold =Gross Margin
Cost of Goods Sold
Beginning Inventory 3000 +Purchases 12000 -Purchase Discount -600 -Purchases Return and Allow -400
+ Net Purchases 11000 + Freight In 1000 =Cost of Merchandise Purchased 10000 =Goods Available for Sale 13000 - Ending Inventory (or Goods not Sold) -
4000 = Cost of Goods Sold 9000
Brief Exercise 6-3 page 281 Exercise 6-1 page 283
MUST KNOW THIS FORMULA
MEMORIZE IT
Estimating Inventory-Why important Sales 150,000 Beginning Inventory 8,000
+Purchases 110,000 -Purchase Discount (1,000) -Purchases Ret & Allow (2,000)
+ Net Purchases 107,000 Goods Available for Sale 115,000 - Ending Inventory (or Goods not Sold) 15,000 = Cost of Goods Sold 100,000 Gross Margin 50,000
Overstating/Understating Ending Inventory
Over Under SALES 150 150
Beg Inventory + Net Purchases Can’t Change =Goods Available 115 115 - Ending Inventory 20 10 = COGS 95 105 =Gross Margin 55 45
WHAT EVER I DO TO ENDING INVENTORY,
I ALSO DO TO NET INCOME
Two methods to TRACK inventory Periodic
At some period of time
Perpetual All the time--- everytime there is a
purchase and everytime there is a sale
IF YOU KNOW PERIODIC YOU WILL KNOW PERPETUAL
SO LETS DO PERIODIC FIRST
4 METHODS TO DETERMINE COST
OF ENDING INVENTORY Specific Indentification First in First Out Last In First Out Average Cost
Specific Indentification
Not estimated Actual items Or specific identification Page 252 example
First In First Out
GUMBALL MACHINE Physical Flow matches Cost Flow First one purchased is first one sold Page 252 Used if few inventory items BE 6-4 page 281 Increasing costs --- higher cost in Ending
Inventory Lower cost in COGS so higher net income
Last In First Out
COOKIE JAR
Last one purchased first one sold Page 253 Used if want to put replacement cost in
Cost of Goods sold Increasing costs --- higher cost in COGS Lower cost in Ending Inventory so lower net
income BE 6-5 pg 281 IFRS – Not used US – tax savings
LIFO RESERVE
Additional amount of inventory a company would report if it used FIFO instead of LIFO
Cost of Goods Sold Inventory
MUST BE CONSISTENT
Can’t change inventory methods without IRS approval.
Can use different type of methods for different types of inventory
Average Cost
Weighted Average 500@$10, 600@$11, 800@$12
$50+$66+$96= 212/19 = $11.16 Used if a lot of little inventory items BE 6-6 page 281 Costs are evenly distributed in COGS and
Ending Inventory
Periodic versus Perpetual
Have been using Periodic Perpetual uses the periodic method
every time there is a sale and every time there is a sale.
Perpetual needs exact dates it was purchased and sold.
Perpetual Tracking pg 272
FIFO Usually not different under perpetual and
periodic
LIFO Usually different than periodic
Exercise 6-15 pg 286
Recording inventory transactions Periodic Method
Purchase Purchase A/P
Sale A/R Sales
Return & Allowance A/P Purchase Ret and Allowance
Purchase Discount A/P Cash Purchase Discount
Perpetual Method Purchase
Inventory A/P
Sale A/R Sales COGS Inventory
Return & Allowance A/P Inventory
Purchase Discount A/P Cash Inventory
Purchase Purchase A/P
Sale A/R Sales
Return & Allowance A/P Purchase Ret and
Allowance Purchase Discount
A/P Cash Purchase Discount
Purchase Inventory A/P
Sale A/R Sales COGS Inventory
Return & Allowance A/P Inventory
Purchase Discount A/P Cash Inventory
Periodic Perpetual
Freight - In
Freight InPurchases or COGS accountBringing it into the business
Freight In A/P
Freight out
Selling Expense Cost of Sending it to the customer Freight Expense Cash or A/P
Exercises
6-6 pg 284 Perpetual 6-7 Periodic
Lower Cost or Market pg 266 Normally Inventory is replacement cost
--- cost to restock the item after identical items are sold
If Market Value is less than Cost (if what you paid for the item is less than you can sell it for) you must make an adjustment.
COGS Inventory
Exercises
Page 285 6-11 6-12
Inventory Ratios
Inventory Turnover pg 269
COGS/ Average Inventory
# of Days in Inventory 365/ Inventory T/O
(Seasons)
6-13 pg 285 Inventory
Gross Profit Ratio
Gross Profit pg 271 Gross Profit/ Net Sales
Exercise 6-14 pg 286
Homework
Problem 6-2 COGS, Ending Inventory Problem 6-3 Periodic Problem 6-4 Perpetual Problem 6-6 Lower of Cost or Market Problem 6-8 Ratios