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Reporting & Analyzing Inventory
Chapter 5
Determining Inventory Items
Merchandise inventory includes all goods that a company owns and holds for sale
Regardless of where the goods are located when inventory is counted
Goods in Transit
If ownership has passed to the purchaser, the goods are included in the purchaser’s inventory
FOB shipping point
Goods on Consignment
Are goods shipped by the owner, to another party.
No change in ownership of the goods
Goods Damaged or Obsolete
Are not counted in inventory if they cannot be sold.
If they can be sold at a reduced price, then included in inventory at net realizable value
NRV = Sales price – Cost of making sale
Determining Inventory Costs
Merchandise inventory includes cost of expenditures necessary, directly or indirectly, to bring at item to a salable condition and location.
Freight, storage, insurance, etc.
Internal Control
Inventory account under a perpetual system is updated for each purchase and sale, but the events can cause the account balance to be different from the actual inventory available. Physical inventory Prenumbered inventory tickets Counters assigned
Inventory Costing under a Perpetual System
Four methods Specific Identification First in, First out (FIFO) Last in, First out (LIFO) Weighted Average
Illustration
Date Activity Units at Cost Units at Retail
Units Inv.
Aug 1 Beg Inv 10units @ $91 = $910 10 units
Aug 3 Purch 15 @ $106 = $1,590 25 units
8/14 Sales 20 units 5 units
8/ 17 Purch 20 @ $115 = $2300 25
8/28 Purch 10 @ $119 = $1190 35
8/31 Sales 23 12 units
55units for $5990 43 sold 12 inv.
Specific Identification
Each item in inventory can be identified with a specific purchase and invoice.
Suppose for prior example company identified that Aug 14 is 8 from $91 purchase and 12 for $106.
Suppose that 8/31 was 2 @ $913@$10615@ $1153 @ $119
Specific Identification
Date Activity Units @ Cost COGS Inv.1-Aug Beg 10 @ $91 103-Aug Purch 15 @$106 25
14-Aug Sale 8 @$91 2 @ 9112 @ 106 3 @ 106
17-Aug Purch 20 @ $115 2 @ 913 @ 10620 @ 115
28-Aug Purch 10 @ 119 3 @ 1062 @ 913 @ 10620 @ 11510 @ 119
31-Aug Sale 2 @ 913 @ 106 5 @ 11515 @ 115 7@ 1193 @ 119
Specific Identification
Cost of goods sold 8 @ $91 = $ 728 12@ 106 = $ 1,272 $2,000 2 @ $91 = $ 182 3 @ $106 = 318 15 @ 115 1,725 3 @ 119 357 2,582 Total 4,582
Specific Identification
Ending Inventory 5 @ $115 = $575 7 @ $119 = 833 TOTAL $1,408
First in, First out
Assigning costs to both inventory and cost of goods sold that assumes that inventory items are sold in the order acquired.
First in, First out
Date Activity Units @ Cost COGS Inv.1-Aug Beg 10 @ $91 103-Aug Purch 15 @$106 25
14-Aug Sale 10 @ 91 010 @ 106 5 @ $106
17-Aug Purch 20 @ $115 5 @ $10620 @ $115
28-Aug Purch 10 @ 119 5 @ $10620 @ $11510 @ 119
31-Aug Sale 5 @ $10618 @ $115 2 @ $115
10 @ $119
FIFO
Cost of Goods sold 10 @ $91 = $ 910 10 @ $106 = 1060
Total Aug 14 $1970 5@ $106 = $ 530 18@ $115= 2070
Total Aug 31 2600 TOTAL 4570
Last in, First out
Method of assigning costs assumes that the most recent purchases are sold first
LIFO
Activity Units @ Cost COGS Inv.Beg 10 @ $91 10@$91Purch 15 @$106 10@$91
15@$106Sale 15@$106
5@$91 5@$91Purch 20 @ $115 5 @ $91
20 @ $115Purch 10 @ 119 5 @ $91
20 @ $11510 @ 119
Sale 10 @ $11913 @ $115 5 @ $91
7 @ $115
LIFO
Cost of goods sold 8/14 15@$106 $1,590
5@$455 455 2,045 8/31 10@$119 $1,190 13@$115 1,495 2,685
Total cost of goods sold 4,730
LIFO
Ending Inventory 5 @ $91 = 455 7 @ $115 = 805 $1,260
Weighted Average
Method of assigning cost requires that we compute the weighted average cost per unit of inventory at the time of each sale.
W.A.C. = Cost of goods available for sale Units available for sale
Weighted Average
Date Activity Units @ Cost COGS Inv. Avg
1-Aug Beg 10 @ $91 10@$91 = $ 910 $91
Purch 15 @$106 10@$91 = 910
3-Aug 15@$106 = 106 $100
14-Aug Sale 20@$100
5@$100 = $500
17-Aug Purch 20 @ $115 5 @ $100 = $500
20@$115 = $2300 $112
28-Aug Purch 10 @ 119 5 @ $100=$500
20@$115 = $2300
10@$119= $1190 $114
31-Aug Sale
23@$114 12@$114 = $1368
Financial Statement Effects of Costing Methods
Specific FIFO LIFO W/AvgSales $6,050 $6,050 $6,050 $6,050Cost of goods sold $4,582 $4,570 $4,730 $4,622Gross profit $1,468 $1,480 $1,320 $1,428Expenses $450 $450 $450 $450Income before taxes $1,018 $1,030 $870 $978Income tax expense 30% $305 $309 $261 $293Net income $713 $721 $609 $695
Merchandise Inventory $1,408 $1,420 $1,260 $1,368
Effect
FIFO assigns the lowest amount to cost of goods sold – highest gross profit
LIFO assigns the highest amount to cost of goods sold – yielding lowest gross profit
Weighted average – yields the results between the two above
Specific id – depends on units sold
Lower of Cost or Market
Accounting principles require that inventory be reported at the market value (cost) of replacing inventory when market value is lower than cost.
Lower of cost or market
Select the lower cost or market price as the value of ending inventory
Per UnitItems Units Cost Market LCM End Inv
Tulips 100 $15 $16 $15 $15x100=$1500Roses 75 $25 $23 $23 $23x75 = $1725Lily 80 $16 $16 $16 $16X80 =$1280Daisy 125 $10 $11 $10 $10X125=$1250Sunflower 26 $5 $4 $4 $4X26= 104
5,859.00$
Effects of Inventory Errors
Inventory Error Cost of Goods Sold Net IncomeUnderstate End Inv Overstated UnderstatedUnderstate Beg Inv Understated OverstatedOverstate End Inv Understated OverstatedOverstate Beg Inv Overstated Understated
Effects of Inventory Errors
2004 2005 2006Sales $100,000 $100,000 $100,000Cost of goods sold Beg inv $20,000 $16,000 $20,000 Purchases $60,000 $60,000 $60,000 Goods available $80,000 $76,000 $80,000 Ending Inv $16,000 $20,000 $20,000 Cost of goods sold $64,000 $56,000 $60,000Gross profit $36,000 $34,000 $40,000
Homework
Perpetual Ex 5-1, 5-3
LCM Ex 5-5
Retail Ex 5-14