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(c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren 6 - 1 CHAPTER 6 Accounting for Merchandising Inventory, Cost.

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Presentation on theme: "(c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren 6 - 1 CHAPTER 6 Accounting for Merchandising Inventory, Cost."— Presentation transcript:

1 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren CHAPTER 6 Accounting for Merchandising Inventory, Cost of Goods Sold, and the Gross Margin

2 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Opening Vignette - Huntington Galleries Change in way Huntington accounts for inventory helped increase companys net income Significant because Huntington is a merchandising company Earns substantial portion of revenues selling products to customers What is the relationship between inventory accounting and financial statements?

3 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory accounting decisions have trickle- down effect Income statement - Cost of goods sold Balance sheet - Inventory (asset) Statement of cash flows Cash flows from operating activities Opening Vignette - Huntington Galleries

4 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Learning Objectives 1.Account for inventory by the perpetual and periodic systems 2.Apply the inventory costing methods: specific unit cost, weighted-average cost, FIFO, and LIFO 3.Identify the income effects and the tax effects of the inventory costing methods 4.Apply the lower-of-cost-or-market rule to inventory

5 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Learning Objectives 5.Compute the effects of inventory errors on cost of goods sold and net income 6.Estimate inventory by the gross margin method 7.Use the gross margin percentage and the inventory turnover ratio to evaluate a business

6 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Objective 1 Account for inventory by the perpetual and periodic systems

7 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren The Basic Concept of Inventory Accounting Record amount and quantity of inventory on hand at end of accounting period

8 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren The Basic Concept of Inventory Accounting Record amount and quantity of inventory on hand at end of accounting period Recognize cost of sales (an expense) to be matched against period sales revenues

9 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory is primary current asset for merchandising organization Cost of goods sold (cost of sales) is organizations primary expense Refer to Lands Ends financial statements (textbook Chapter 1) The Basic Concept of Inventory Accounting

10 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren COST OF GOODS SOLD $588,017, cents of every sales dollar earned goes to pay for cost of merchandise sold to customers by Lands End The Basic Concept of Inventory Accounting

11 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren COST OF GOODS SOLD $588,017, cents of every sales dollar earned goes to pay for cost of merchandise sold to customers by Lands End INVENTORY $164,816,000 Comprises 74.2% of Lands End total current assets Comprises nearly 51% of total company assets The Basic Concept of Inventory Accounting

12 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Accounting - Perpetual System Generally used for expensive merchandise items: trucks, jewelry, furniture Point-of-sale technology eases implementation Keeps perpetual (continuous) accounting records for every inventory item purchased and sold by company

13 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Allows quick determination of cost of goods sold and merchandise inventory from ledger account balances Facilitates inventory resource management activities Links to electronic document interchange (EDI) systems decrease inventory ordering time Product managers perform multidimensional analyses of inventory/sales data Managers make realtime changes to sales plans, purchasing budgets, etc. Perpetual System Advantages

14 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Improves internal control over merchandise inventory Physical counts should agree with amounts reported in records Otherwise, adjust records for spoilage, theft, etc. Perpetual System Advantages

15 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Improves internal control over merchandise inventory Physical counts should agree with amounts reported in records Otherwise, adjust records for spoilage, theft, etc. Enhances customer service Report up-to-date information to customers: quantity, expected delivery dates, etc. Perpetual System Advantages

16 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Perpetual System Goods purchased debited to Inventory (or Merchandise Inventory) ledger account Cash or A/P credited SITUATION: On November 14, Asian Art, Inc. purchases $43,000 of sculptures and watercolors on account for resale to customers.

17 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren How would you record this transaction? 11/14/xx Inventory$43,000 A/P $43,000 To record inventory purchased on account Entries Under the Perpetual System

18 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren How would you record this transaction? 11/14/xx Inventory$43,000 A/P $43,000 To record inventory purchased on account Inventory 11/14 $43,000 Entries Under the Perpetual System

19 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren How would you record this transaction? 11/14/xx Inventory$43,000 A/P $43,000 To record inventory purchased on account Inventory Accounts Payable 11/14 $43,000 $43,000 11/14 Entries Under the Perpetual System

20 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Perpetual System Sales to customers captured through two journal entries (1) record sales revenue (2) reduce inventory and increase cost of goods sold

21 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Perpetual System Sales to customers captured through two journal entries (1) record sales revenue (2) reduce inventory and increase cost of goods sold How would Asian Art journalize a $7,000 sale on account on Nov. 29, assuming cost of goods sold is $2,900?

22 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren /29/xx A/R $7,000 Sales Revenue $7,000 To record sale on account Entries Under the Perpetual System

23 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren /29/xx A/R $7,000 Sales Revenue $7,000 To record sale on account Accounts Receivable 11/29 $7,000 Entries Under the Perpetual System

24 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren /29/xx A/R $7,000 Sales Revenue $7,000 To record sale on account Accounts Receivable Sales Revenue 11/29 $7,000 $7,000 11/29 Entries Under the Perpetual System

25 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren /29/xx Cost of Goods Sold $2,900 Inventory $2,900 To record cost of sales Entries Under the Perpetual System

26 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren /29/xx Cost of Goods Sold $2,900 Inventory $2,900 To record cost of sales Cost of Goods Sold 11/29 $2,900 Entries Under the Perpetual System

27 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren /29/xx Cost of Goods Sold $2,900 Inventory $2,900 To record cost of sales Cost of Goods Sold Inventory 11/29 $2,900 $2,900 11/29 Entries Under the Perpetual System

28 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Accounting records do not continuously track on- hand inventory At period end, physical count performed to determine proper ending inventory account balance Inventory and cost of goods sold account balances adjusted before preparing financials Inventory Accounting - Periodic System INVENTORY COUNT SCHEDULE: March 31

29 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Fewer journal entries required during accounting period Easy to use for small companies with rather homogenous goods Although computerized accounting and sales systems make perpetual system just as easy to work with Periodic System Advantages

30 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Goods purchased debited to Purchases ledger account Cash or A/P credited SITUATION: On February 20, Rays Seafood Shack purchases $850 of shark, red snapper, and black grouper filets for the next weeks dinner specials.

31 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren How would you record this transaction? 2/20/xx Purchases$850 A/P $850 To record inventory purchased on account Entries Under the Periodic System

32 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren How would you record this transaction? 2/20/xx Purchases$850 A/P $850 To record inventory purchased on account Purchases 2/20 $850 Entries Under the Periodic System

33 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren How would you record this transaction? 2/20/xx Purchases$850 A/P $850 To record inventory purchased on account Purchases Accounts Payable 2/20 $850 $850 2/20 Entries Under the Periodic System

34 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Only entry necessary to capture Seafood Shacks sales to customers is one to record sales revenues earned REMEMBER: inventory and cost of goods sold adjusted at month-end only

35 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Textbook Exhibit 6-2 details adjusting entries used to update account balances

36 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Textbook Exhibit 6-2 details adjusting entries used to update account balances INVENTORY Beginning balance COST OF GOODS SOLD

37 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Textbook Exhibit 6-2 details adjusting entries used to update account balances INVENTORY Beginning balance COST OF GOODS SOLD Beginning bal.

38 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Textbook Exhibit 6-2 details adjusting entries used to update account balances INVENTORY Ending Beginningbalance COST OF GOODS SOLD Beginning bal.

39 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Textbook Exhibit 6-2 details adjusting entries used to update account balances INVENTORY Ending Beginningbalance COST OF GOODS SOLD Beginning bal. Ending bal.

40 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Textbook Exhibit 6-2 details adjusting entries used to update account balances INVENTORY PURCHASES Ending Beginning Net purchases balancebalance during period COST OF GOODS SOLD Beginning bal. Ending balance

41 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Textbook Exhibit 6-2 details adjusting entries used to update account balances INVENTORY PURCHASES Ending Beginning Net purchases balancebalance during period COST OF GOODS SOLD Beginning bal. Ending balance Net purchases

42 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Entries Under the Periodic System Textbook Exhibit 6-2 details adjusting entries used to update account balances INVENTORY PURCHASES Ending Beginning Net purchases balancebalance during period COST OF GOODS SOLD Beginning bal. Ending balance Net purchases Cost of goods sold

43 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Cost of Goods Sold (Cost of Sales) Represents net purchase costs of inventory sold to customers during accounting period Cost of goods sold = beginning inventory + net purchases - ending inventory

44 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren How do product managers and corporate buyers at Pier 1 Imports, Sears, or Williams-Sonoma decide how much inventory to buy for the upcoming year? Want to have enough product on hand to meet customer demand But not TOO much inventory - requiring company to discount sales prices to rid itself of excess merchandise! Managers Use of the Cost of Goods Sold Model

45 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rearranging model allows managers to determine appropriate amount of inventory purchases Budgeted Cost of Goods Sold - budgeted ending inventory = cost of goods available for sale - actual beginning inventory = budgeted purchases Managers Use of the Cost of Goods Sold Model

46 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross Margin (Gross Profit) Difference between sales revenue and cost of sales

47 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross Margin (Gross Profit) Difference between sales revenue and cost of sales Revenues = $700,000

48 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross Margin (Gross Profit) Difference between sales revenue and cost of sales Revenues = $700,000 Cost of sales = $450,000

49 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross Margin (Gross Profit) Difference between sales revenue and cost of sales Revenues = $700,000 Cost of sales = $450,000 Gross margin = $250,000

50 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross Margin (Gross Profit) Difference between sales revenue and cost of sales Revenues = $700,000 Cost of sales = 450,000 Gross margin = 250,000 What is the significance of the gross margin?

51 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Low gross margin % indicates possible difficulties in covering all other company operating expenses And being able to earn a profit ILLUSTRATION: Huntington Galleries gross margin is $75,100,000 ($165,900, ,800,000). Can the company cover its operating costs and still earn profits acceptable to its shareholders? Gross Margin (Gross Profit)

52 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Information taken from textbook Chapter 6 opening pages Net sales $165,900,000 Cost of sales 90,800,000 Gross margin 75,100,000 All other expenses 40,000,000 Net income $35,100,000 Gross Margin (Gross Profit)

53 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Information taken from textbook Chapter 6 opening pages Net sales $165,900,000 Cost of sales 90,800,000 Gross margin 75,100,000 All other expenses 40,000,000 Net income $35,100,000 Huntingtons gross margin seems sufficient Gross Margin (Gross Profit)

54 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Information taken from textbook Chapter 6 opening pages Net sales $165,900,000 Cost of sales 90,800,000 Gross margin 75,100,000 All other expenses 40,000,000 Net income 35,100,000 Huntingtons gross margin seems sufficient Company generated a 21% return on sales Gross Margin (Gross Profit)

55 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Computing the Cost of Inventory Inventory cost calculation Inventory quantities in units x Unit cost

56 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Determining Inventory Quantities Physical count of merchandise owned taken on last day of fiscal year - regardless of method Sometimes taken monthly or quarterly for interim financial reports Complicating factors Who owns merchandise in transit between vendor and company? Who owns goods on consignment?

57 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Goods in Transit Inventory has left suppliers place of business Topeka, Kansas

58 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Goods in Transit Inventory has left suppliers place of business Topeka, Kansas

59 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Goods in Transit At accounting period end, goods still in transit Havent yet reached their destination Las Cruces, New Mexico

60 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Goods in Transit At accounting period end, goods still in transit Havent yet reached their destination Las Cruces, New Mexico

61 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Goods in Transit Who owns/records inventory at period end? Supplier? Buyer? At accounting period end, goods still in transit Havent yet reached their destination Las Cruces, New Mexico

62 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Goods in Transit Entity possessing legal title to inventory Generally based on shipping terms FOB shipping point Title passes at sellers place of business Cost/units reflected in buyers inventory FOB destination Title passes at buyers business location Seller retains cost/units in its accounting records

63 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Consigned Goods Inventory stored/sold on company premises but not owned by entity Antiques store or used clothing store accepts inventory owned by others Tries to sell it for owners Earns commission on each piece of furniture or clothing sold

64 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Consigned Goods Consigned goods included in inventory of owner Excluded from inventory of antiques store or used clothing store Not assets of the store

65 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Unit Cost of Inventory Amount paid to

66 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Unit Cost of Inventory Amount paid to purchase

67 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Unit Cost of Inventory Amount paid to purchase transport

68 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Unit Cost of Inventory Amount paid to purchase transport store

69 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Unit Cost of Inventory Amount paid to purchase transport store insure inventory held for sale to customers

70 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Unit Cost of Inventory Amount paid to purchase transport store insure inventory held for sale to customers Several cost methods exist...

71 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Objective 2 Apply the inventory costing methods: specific unit cost, weighted-average cost, FIFO, and LIFO

72 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Costing Methods Specific Unit Cost

73 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Costing Methods Specific Unit Cost Weighted-Average Cost

74 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Costing Methods Specific Unit Cost Weighted-Average Cost First-In-First-Out (FIFO)

75 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Costing Methods Specific Unit Cost Weighted-Average Cost First-In-First-Out (FIFO) Last-In-First-Out (LIFO)

76 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Costing Methods Business free to use any inventory method

77 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Costing Methods Business free to use any inventory method Inventory cost flow doesnt necessarily match PHYSICAL flow of goods

78 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Costing Methods Business free to use any inventory method Inventory cost flow doesnt necessarily match PHYSICAL flow of goods Assigns value to Cost of goods sold Ending inventory

79 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Assume following data for Asian Art, Inc. Purchases of silk and paper lanterns during 19x1 1/5/x1 20 $20 5/19/x1 25 $30 10/23/x1 40 $31 Total purchases in units 85 Units sold during 19x1 70 Ending inventory in units 15 Inventory Costing Methods

80 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory Costing Methods - Sales Information Sales in units 1/8/x1 = 17 5/21/x1 = 18 10/28/x1 = 35 Total sales = 70 units

81 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren $20 Specific Identification COST OF GOODS SOLD JAN 8 $340

82 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren $20 3 $20 Specific Identification COST OF GOODS SOLD JAN 8 $340 ENDING INVENTORY $60

83 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren $30 17 $20 3 $20 COST OF GOODS SOLD MAY 21 $540 JAN 8 $340 ENDING INVENTORY $60 Specific Identification

84 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren ENDING INVENTORY $210 $60 18 $30 7 $30 17 $20 3 $20 COST OF GOODS SOLD MAY 21 $540 JAN 8 $340 Specific Identification

85 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren $31 18 $30 7 $30 17 $20 3 $20 COST OF GOODS SOLD OCT 28 $1085 MAY 21 $540 JAN 8 $340 $1965 ENDING INVENTORY $210 $60 Specific Identification

86 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren $31 5 $31 18 $30 7 $30 17 $20 3 $20 COST OF GOODS SOLD OCT 28 $1085 MAY 21 $540 JAN 8 $340 $1965 ENDING INVENTORY $155 $210 $60 $425 Specific Identification

87 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren First-In-First-Out (FIFO) COST OF GOODS SOLD $ $31 25 $31 25 $30 20 $20

88 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren COST OF GOODS SOLD $750 $ $31 25 $31 25 $30 20 $20 First-In-First-Out (FIFO)

89 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren COST OF GOODS SOLD $775 $750 $400 $ $31 25 $31 25 $30 20 $20 First-In-First-Out (FIFO)

90 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren COST OF GOODS SOLD $775 $750 $400 $1925 ENDING INVENTORY $ $31 25 $31 25 $30 20 $20 First-In-First-Out (FIFO)

91 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Last-In-First-Out (LIFO) COST OF GOODS SOLD $ $31 25 $30 5 $20 15 $20

92 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Last-In-First-Out (LIFO) COST OF GOODS SOLD $ 1240 $ $31 25 $30 5 $20 15 $20

93 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Last-In-First-Out (LIFO) COST OF GOODS SOLD $ 1240 $ 750 $ 100 $ $31 25 $30 5 $20 15 $20

94 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Last-In-First-Out (LIFO) COST OF GOODS SOLD $ 1240 $ 750 $ 100 $ $31 25 $30 5 $20 15 $20 ENDING INVENTORY $300

95 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Weighted-Average Cost 40 $ $ $ 20 $2390 total cost goods available for sale

96 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Weighted-Average Cost 40 $ $ $ 20 $2390 total cost goods available for sale 85 units available for sale

97 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Weighted-Average Cost 40 $ $ $ 20 $2390 total cost goods available for sale 85 units available for sale $28.12 cost per unit

98 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Weighted-Average Cost 40 $ $ $ 20 $2390 total cost goods available for sale 85 units available for sale $28.12 cost per unit $28.12 x 70 units sold in 19x1 = $1968 cost of goods sold

99 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Weighted-Average Cost 40 $ $ $ 20 $2390 total cost goods available for sale 85 units available for sale $28.12 cost per unit $28.12 x 70 units sold in 19x1 = $1968 cost of goods sold $28.12 x 15 units on hand = $422 ending inventory

100 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Objective 3 Identify the income effects and the tax effects of the inventory costing methods

101 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Effects of Each Method SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO

102 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Effects of Each Method SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO SALES $3,000 $3,000 $3,000 $3,000

103 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Effects of Each Method SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO SALES $3,000 $3,000 $3,000 $3,000 COST OF GOODS SOLD BEGINNING INVENTORY

104 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Effects of Each Method SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO SALES $3,000 $3,000 $3,000 $3,000 COST OF GOODS SOLD BEGINNING INVENTORY PURCHASES 2,390 2,390 2,390 2,390

105 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Effects of Each Method SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO SALES $3,000 $3,000 $3,000 $3,000 COST OF GOODS SOLD BEGINNING INVENTORY PURCHASES 2,390 2,390 2,390 2,390 COST OF GOODS AVAILABLE FOR SALE 2,390 2,390 2,390 2,390

106 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Effects of Each Method SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO SALES $3,000 $3,000 $3,000 $3,000 COST OF GOODS SOLD BEGINNING INVENTORY PURCHASES 2,390 2,390 2,390 2,390 COST OF GOODS AVAILABLE FOR SALE 2,390 2,390 2,390 2,390 LESS ENDING INVENTORY

107 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Effects of Each Method SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO SALES $3,000 $3,000 $3,000 $3,000 COST OF GOODS SOLD BEGINNING INVENTORY PURCHASES 2,390 2,390 2,390 2,390 COST OF GOODS AVAILABLE FOR SALE 2,390 2,390 2,390 2,390 LESS ENDING INVENTORY COST OF GOODS SOLD 1,965 1,968 1,925 2,090

108 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO SALES $3,000 $3,000 $3,000 $3,000 COST OF GOODS SOLD BEGINNING INVENTORY PURCHASES 2,390 2,390 2,390 2,390 COST OF GOODS AVAILABLE FOR SALE 2,390 2,390 2,390 2,390 LESS ENDING INVENTORY COST OF GOODS SOLD 1,965 1,968 1,925 2,090 GROSS MARGIN $1,035 $1,032 $1,075 $910 Income Effects of Each Method

109 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO GROSS MARGIN $1,035 $1,032 $1,075 $910 In times of rising prices, LIFO yields lowest gross margin (net income) Income Effects of Each Method

110 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren SPECIF. WEIGHTED IDENTIFIC. AVERAGE FIFO LIFO GROSS MARGIN $1,035 $1,032 $1,075 $910 FIFO yields highest gross margin Income Effects of Each Method

111 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Tax Advantage of LIFO When income is lower, taxes are lower Most attractive aspect of LIFO Recall the textbook opening vignette... Huntington Galleries saved nearly $1.3-million in taxes by using LIFO! TAXES

112 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Income Tax Advantages of LIFO Why would a company use FIFO?

113 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Incentives for Using FIFO Higher net income results in larger bonuses Industries experiencing falling costs end up with lower net income - still save on taxes Higher net income looks better to creditors/investors

114 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Accounting Principles and Their Relevance to Inventory CONSISTENCY Entity employs same methods of accounting from period to period Enhances users ability to compare financial statements for company over time Trend analysis Forecasts

115 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Accounting Principles and Their Relevance to Inventory CONSISTENCY Entity employs same methods of accounting from period to period Enhances users ability to compare financial statements for company over time Trend analysis Forecasts FULL DISCLOSURE Entity reports sufficient quantity and quality of information for users

116 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Accounting Principles and Their Relevance to Inventory CONSISTENCY Entity employs same methods of accounting from period to period Enhances users ability to compare financial statements for company over time Trend analysis Forecasts FULL DISCLOSURE Entity reports sufficient quantity and quality of information for users Failure to disclose important data can result in financial reports which mislead readers Impacts their decision-making activities

117 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Consistency and Disclosure Company can change inventory methods, but must disclose impact of change on net income Financials should provide investors/creditors with adequate information on which to base their actions Relevant Reliable Comparable

118 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Accounting Principles and Their Relevance to Inventory MATERIALITY Information is material if its omission from financial statements would cause users to alter their decisions Measured in relation to other information provided on financial statements CONSERVATISM Statement preparers use accounting methods and principles which Least overstate net assets Least overstate net income

119 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Objective 4 Apply the lower-of-cost-or-market rule to inventory

120 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Lower-of-Cost-or-Market Rule Inventory reported on balance sheet at lower of original cost or current replacement (market) value Communicates to statement users the decline in value of inventory

121 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Suppose a retailer sells laptop computers... Laptop original cost/unit = $1,200 Laptop replacement cost/unit = $900 Retailer would reduce ending inventory value by $300 per unit Rapid changes in technology quickly diminishes utility of this inventory item Lower-of-Cost-or-Market Rule

122 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Doesnt this violate historical cost principle? Yes, but... Other principles provide more compelling reasons to depart from historical cost Conservatism Full disclosure Materiality Lower-of-Cost-or-Market Rule

123 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Objective 5 Compute the effects of inventory errors on cost of goods sold and net income

124 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Effects of Inventory Errors Textbook Exhibits 6-9 and 6-10 demonstrate the carry-forward effects of errors related to ending inventory How many periods financial statements will be affected by an error in ending inventory?

125 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Effects of Inventory Errors Textbook Exhibits 6-9 and 6-10 demonstrate the carry-forward effects of errors related to ending inventory How many periods financial statements are affected by an error in ending inventory? 1? 1?

126 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Effects of Inventory Errors Textbook Exhibits 6-9 and 6-10 demonstrate the carry-forward effects of errors related to ending inventory How many periods financial statements are affected by an error in ending inventory? 1? 2? 1? 2?

127 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Effects of Inventory Errors Textbook Exhibits 6-9 and 6-10 demonstrate the carry-forward effects of errors related to ending inventory How many periods financial statements are affected by an error in ending inventory? 1? 2? 1? 2? More? More?

128 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Ending inventory errors impact TWO periods financial statements Effects of Inventory Errors

129 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Ending inventory errors impact TWO periods financial statements Current period Ending inventory Effects of Inventory Errors 1998

130 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Ending inventory errors impact TWO periods financial statements Current period Ending inventory Next period Beginning inventory Effects of Inventory Errors 1998

131 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Ending inventory errors impact TWO periods financial statements Current period Ending inventory Next period Beginning inventory Error counterbalanced by end of second period Effects of Inventory Errors 1998

132 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren How do errors in ending inventory impact... Cost of sales? Gross margin? Net income? Effect of Inventory Errors on Cost of Sales and Net Income

133 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY Effect of Inventory Errors on Cost of Sales and Net Income

134 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES Effect of Inventory Errors on Cost of Sales and Net Income

135 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES GOODS AVAILABLE FOR SALE Effect of Inventory Errors on Cost of Sales and Net Income

136 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES GOODS AVAILABLE FOR SALE ENDING INVENTORY Errors during physical count! Effect of Inventory Errors on Cost of Sales and Net Income

137 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES GOODS AVAILABLE FOR SALE ENDING INVENTORY COST OF GOODS SOLD Effect of Inventory Errors on Cost of Sales and Net Income OVER- STATED UNDER- STATED

138 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES GOODS AVAILABLE FOR SALE ENDING INVENTORY COST OF GOODS SOLD INCOME STATEMENT NET SALES Effect of Inventory Errors on Cost of Sales and Net Income

139 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES GOODS AVAILABLE FOR SALE ENDING INVENTORY COST OF GOODS SOLD INCOME STATEMENT NET SALES COST OF GOODS SOLD Effect of Inventory Errors on Cost of Sales and Net Income

140 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES GOODS AVAILABLE FOR SALE ENDING INVENTORY COST OF GOODS SOLD INCOME STATEMENT NET SALES COST OF GOODS SOLD GROSS MARGIN Effect of Inventory Errors on Cost of Sales and Net Income

141 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES GOODS AVAILABLE FOR SALE ENDING INVENTORY COST OF GOODS SOLD INCOME STATEMENT NET SALES COST OF GOODS SOLD GROSS MARGIN OPERATING EXPENSES Effect of Inventory Errors on Cost of Sales and Net Income

142 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren UNDER OVER CORRECT STATED STATED COST OF GOODS SOLD BEGINNING INVENTORY NET PURCHASES GOODS AVAILABLE FOR SALE ENDING INVENTORY COST OF GOODS SOLD INCOME STATEMENT NET SALES COST OF GOODS SOLD GROSS MARGIN OPERATING EXPENSES NET INCOME Effect of Inventory Errors on Cost of Sales and Net Income OVER- STATED UNDER- STATED

143 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Ethical Issues in Inventory Accounting Pressure to report positive earnings picture Bonuses linked to gross margin or net income Stockholders expectations Creditor or analyst forecasts

144 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Objective 6 Estimate inventory by the gross margin method

145 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Estimating Inventory Sometimes necessary to estimate ending inventory Why?

146 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Estimating Inventory Sometimes necessary to estimate ending inventory Why? Not practical to perform physical count every month

147 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Estimating Inventory Sometimes necessary to estimate ending inventory Why? Not practical to perform physical count every month Losses related to fire, natural disaster, theft, or other causes

148 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross Margin (Gross Profit) Method Relying on income statement information, can use gross margin % to estimate cost of sales Rearrange cost of goods sold model to solve for the unknown variable, ending inventory Beginning inventory + net purchases - cost of sales = ending inventory

149 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rays Seafood Shack lost all of its inventory due to coastal flooding: Whats the amount of the loss to be filed with the insurance company? Period net sales = $150,000 Gross margin = 31.5% Beginning inventory = $18,500 Period purchases = $110,500 Gross Margin (Gross Profit) Method

150 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rays Seafood Shack lost all of its inventory due to coastal flooding: Whats the amount of the loss to be filed with the insurance company? Period net sales = $150,000 Gross margin = 31.5% Beginning inventory = $18,500 Period purchases = $110,500 Net sales x Gross margin % $150,000 x.315 = $47,250 Gross margin Gross Margin (Gross Profit) Method

151 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rays Seafood Shack lost all of its inventory due to coastal flooding: Whats the amount of the loss to be filed with the insurance company? Period net sales = $150,000 Gross margin = 31.5% Beginning inventory = $18,500 Period purchases = $110,500 Net sales x Gross margin % $150,000 x.315 = $47,250 Gross margin Net sales - gross margin $150,000 - $47,250 = $102,750 Cost of sales Gross Margin (Gross Profit) Method

152 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rays Seafood Shack lost all of its inventory due to coastal flooding: Whats the amount of the loss to be filed with the insurance company? Period net sales = $150,000 Gross margin = 31.5% Beginning inventory = $18,500 Period purchases = $110,500 Beg. inventory $ 18,500 Gross Margin (Gross Profit) Method

153 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rays Seafood Shack lost all of its inventory due to coastal flooding: Whats the amount of the loss to be filed with the insurance company? Period net sales = $150,000 Gross margin = 31.5% Beginning inventory = $18,500 Period purchases = $110,500 Beg. inventory $ 18,500 Purchases 110,500 Gross Margin (Gross Profit) Method

154 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rays Seafood Shack lost all of its inventory due to coastal flooding: Whats the amount of the loss to be filed with the insurance company? Period net sales = $150,000 Gross margin = 31.5% Beginning inventory = $18,500 Period purchases = $110,500 Beg. inventory $ 18,500 Purchases 110,500 Available for sale $ 129,000 Gross Margin (Gross Profit) Method

155 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rays Seafood Shack lost all of its inventory due to coastal flooding: Whats the amount of the loss to be filed with the insurance company? Period net sales = $150,000 Gross margin = 31.5% Beginning inventory = $18,500 Period purchases = $110,500 Beg. inventory $ 18,500 Purchases 110,500 Available for sale $ 129,000 Cost of sales (102,750) Gross Margin (Gross Profit) Method

156 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Rays Seafood Shack lost all of its inventory due to coastal flooding: Whats the amount of the loss to be filed with the insurance company? Period net sales = $150,000 Gross margin = 31.5% Beginning inventory = $18,500 Period purchases = $110,500 Beg. inventory $ 18,500 Purchases 110,500 Available for sale $ 129,000 Cost of sales (102,750) Estimated ending inventory lost in flood $ 26,250 Gross Margin (Gross Profit) Method

157 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Chapter Objective 7 Use the gross margin percentage and the inventory turnover ratio to evaluate a business

158 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Analyzing Financial Statements Two important ratios used to measure merchandisers success

159 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Analyzing Financial Statements Gross margin percentage 1

160 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Analyzing Financial Statements Inventory turnover 2

161 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross margin percentage measures average percentage of gross profit generated by one dollar of sales Changes in gross margin alert users to possible shifts in profitability Examine Lands Ends gross margin % Analyzing Financial Statements

162 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross margin percentage measures average percentage of gross profit generated by one dollar of sales Changes in gross margin alert users to possible shifts in profitability Examine Lands Ends gross margin % Analyzing Financial Statements Gross Margin Net Sales

163 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross margin percentage measures average percentage of gross profit generated by one dollar of sales Changes in gross margin alert users to possible shifts in profitability Examine Lands Ends gross margin % Analyzing Financial Statements Gross Margin Net Sales $443,531,000 $1,031,548,000

164 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Gross margin percentage measures average percentage of gross profit generated by one dollar of sales Changes in gross margin alert users to possible shifts in profitability Examine Lands Ends gross margin % Analyzing Financial Statements Gross Margin Net Sales $443,531,000 $1,031,548,000 = 43% Every sales dollar generates 43 cents profit before all other expenses

165 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Inventory turnover indicates number of times per year, on average, inventory is sold Quicker turnover generally indicates more profitable entity Allows business to invest current assets in more productive resources Analyzing Financial Statements

166 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Analyzing Financial Statements Cost of Goods Sold Average Inventory Inventory turnover indicates number of times per year, on average, inventory is sold Quicker turnover generally indicates more profitable entity Allows business to invest current assets in more productive resources

167 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Analyzing Financial Statements Cost of Goods Sold Average Inventory Lands Ends turnover ratio: $588,017,000 $166,734,000 Inventory turnover indicates number of times per year, on average, inventory is sold Quicker turnover generally indicates more profitable entity Allows business to invest current assets in more productive resources

168 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Analyzing Financial Statements Inventory turnover indicates number of times per year, on average, inventory is sold Quicker turnover generally indicates more profitable entity Allows business to invest current assets in more productive resources Cost of Goods Sold Average Inventory Lands Ends turnover ratio: $588,017,000 $166,734, times

169 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Periodic physical count Effective purchasing, receiving, and shipping procedures Limited/restricted access to inventory storage locations Computerization/perpetual recordkeeping for high cost inventory Adequate stock of on-hand inventory to prevent shortages/stockouts Automatic reorder points/EOQ models to minimize investment Internal Control Over Inventory

170 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren Reporting Inventory Transactions on the Statement of Cash Flows Inventory purchases and sales of inventory to customers reflected in cash flows from operating activities section of statement Refer to textbook Exhibit 6-15 to view the statement of cash flows for Huntington Galleries

171 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren World Wide Web Sites Black and Decker Wendys

172 (c) 1997 Prentice Hall Business Publishing Financial Accounting, 3/e Harrison and Horngren THE END


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