5 Learning Objective 1Account for inventory transactions.
6 Inventory Accounting Systems Periodic systems do not keep a continuous record of inventory on hand.Perpetual systems maintain a running record to show the inventory on hand at all times.
7 Recording Transactions in the Perpetual System Purchase price of the inventory $600,000+ Freight-in 4,000– Purchase returns – 25,000– Purchase allowances – 5,000– Purchase discounts – 14,000= Net purchases of inventory $560,000
10 Recording Transactions and the T-Accounts InventoryCost of Goods Sold540,000Beg. 100,000560,000120,000540,000
11 Reporting in the Financial Statements Income Statement (partial)Sales revenue $900,000Cost of goods sold ,000Gross profit $360,000Ending Balance Sheet (partial)Current assets:Cash $ XXXShort-term investments XXXAccounts receivable, net XXXInventory ,000Prepaid expenses XXX
12 Reporting in the Financial Statements Net purchasesPurchases+ Freight-in– Purchase returns & allowances– Purchases discountNet salesSales revenue– Sales returns & allowances– Sales discounts
13 Learning Objective 2Analyze the various inventory methods.
14 What Goes Into Inventory Cost? Sum of all costs incurred to bring asset to its intended useInventory costing methods:Specific unit costWeighted-average costFirst-in, first-out (FIFO)Last-in, first-out (LIFO)
15 Illustrative Data Beginning inventory (10 units @ $10) $ 100 No. 1 (25 $14 per unit) $350No. 2 (25 $18 per unit) 450Total purchasesCost of goods available for sale $ 900Ending inventory: unitsCost of goods sold: units
16 Specific Unit Cost 5 Units @ $10 Cost of Goods Sold $ 50 350 180 $580 $ 50350180$58025 $1410 $18$900 – $580 = $320
17 Weighted-Average $900 total cost ÷ 60 units = $15/unit Ending inventory = 20 × $15 = $300Cost of goods sold = 40 × $15 = $600
18 First-In, First-Out Ending Inventory Cost: 60 units Less units sold 40 Ending inventory 20 units20 units × $18 per unit = $360
19 First-In, First-Out 10 Units @ $10 Cost of Goods Sold $100 350 90 $540
20 Last-In, First-Out Ending Inventory Cost: 60 units Less units sold 40 Ending inventory 20 units10 units × 10 = $10010 units × 14 = 140Total $240
21 Last-In, First-Out 25 Units @ $18 Cost of Goods Sold $450 210 $660
23 Learning Objective 3Identify the income and the tax effects of the inventory methods.
24 The Tax Advantage of LIFO Gross profit $460 $340Operating expensesIncome before taxes $200 $ 80Income tax expense (40%) $ $ 32FIFO LIFOThe most attractive feature of LIFO is lowincome tax payments when prices areincreasing.
26 Comparison of Inventory Methods FIFO produces inventory profits during periods of inflationLIFO allows managers to manipulate net incomeLIFO liquidation
27 Consistency Principle Use the same accounting methods and procedures from one period to the nextMay change inventory methods, but must disclose the effects of the change on net income
28 Disclosure PrincipleFinancial statements should report enough information to enable an outsider to make knowledgeable decisions about the company.
29 ConservatismThe least favorable figures are presented in the financial statements.
30 Lower-of-Cost-or-Market Rule Report inventory at the lower of its historical cost or market (replacement) valueIf the replacement cost falls below its historical cost, write down the value of the inventory
31 Learning Objective 4Use the gross profit percentage and inventory turnover to evaluate business.
32 Using the Financial Statements for Decision Making Gross profit percentage= Gross profit÷ Net sales revenueInventory turnover= Cost of goods sold÷ Average inventory
33 Learning Objective 5Estimate inventory by the gross profit method.
34 Estimating InventoryGross profit method - based on computation of cost-of-goods-soldBeginning inventory+ Purchases= Cost of goods available for sale– Ending inventory= Cost of goods sold- Cost of goods sold= Ending inventory
35 Objective 6Show how inventory errors affect cost of goods sold and income.
36 Effects of Inventory Errors An error in the ending inventory creates errors for cost of goods sold and gross profit.The current year’s ending inventory is next year’s beginning inventory.
37 Reporting Inventory Transactions on the Statement of Cash Flows Inventory transactions are operating activitiesThe purchase of inventory requires a cash payment, and the sale a cash receipt