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MARKET PULSE SEC alleges Office Depot made selective disclosure Oct. 21, 2010, 3:10 p.m. EDT By Ronald D. Orol WASHINGTON (MarketWatch) -- Office Depot.

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Presentation on theme: "MARKET PULSE SEC alleges Office Depot made selective disclosure Oct. 21, 2010, 3:10 p.m. EDT By Ronald D. Orol WASHINGTON (MarketWatch) -- Office Depot."— Presentation transcript:

1 MARKET PULSE SEC alleges Office Depot made selective disclosure Oct. 21, 2010, 3:10 p.m. EDT By Ronald D. Orol WASHINGTON (MarketWatch) -- Office Depot Inc. executives selectively shared information with analysts and its largest shareholders, giving some an unfair advantage, the Securities and Exchange Commission said Thursday after launching enforcement actions against the retailer and CEO Stephen A. Odland and then-CFO Patricia A. McKay for violating fair disclosure regulations. Office Depot executives selectively shared information with analysts and the company's largest shareholders in order to manage earnings expectations, said SEC Division of Enforcement Director Robert Khuzami. This gave an unfair advantage to favored investors at the expense of other investors and, as today's action shows, is illegal. The SEC alleged the pair directed investor relations officials to manage down their guidance for the second quarter of 2007.

2 Reporting and Interpreting Cost of Goods Sold and Inventory Chapter 7

3 Ch 7 -- Not tested Cash flows (pp ) Converting Income Statement and Balance Sheet to FIFO (pp ) Errors in measuring ending inventory (pp ) LIFO liquidations (pp ) Changes in estimates (pp )

4 Practice Problem Perpetual Inventory In a perpetual inventory system, a detailed inventory record is maintained, recording each purchase and sale during the accounting period. This up-to-date record is maintained on a transaction-by-transaction basis. To this point in the text, all journal entries for purchase and sale transactions have been recorded using a perpetual inventory system. In a perpetual inventory system, purchase transactions are recorded directly in an inventory account. When each sale is recorded, a companion cost of goods sold entry is made, decreasing inventory and recording cost of goods sold. As a result, information on cost of goods sold and ending inventory is available on a continuous (perpetual) basis.a companion cost of goods sold entry is made, decreasing inventory and recording cost of goods sold

5 Practice Problem Perpetual Inventory Sept 30 Made catalog sales during the remainder of the month, as follows: Apparel Gift $2,980 $900 The cost of the merchandise was $1,240 and $635, respectively. All catalog sales were made on credit.

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8 EXTREMELY IMPORTANT FORMULAE Cost of Goods Sold calculation Income from Operations calculation Beginning inventory Net sales** + Net purchases* - Cost of goods sold Goods available for sale Gross margin (AKA Gross profit) - Ending inventory - Operating expenses Cost of goods sold Income from operations * Net purchases = Gross purchases – Purchase returns, allowances, and discounts + Transportation, insurance, storage, taxes, etc. ** Net sales = Gross sales – Sales returns, allowances, and discounts

9 7-9 Costs Included in Inventory Purchases cost principle The cost principle requires that inventory be recorded at the price paid or the consideration given. Invoice Price Freight Inspection Costs Preparation Costs

10 7-10 Supplement B: Additional Issues in Measuring Purchases Purchase returns and allowances are a reduction in the cost of purchases associated with unsatisfactory goods. A purchase discount is a cash discount received for prompt payment of an account.

11 7-11 Supplement B: Additional Issues in Measuring Purchases Terms Time Due Discount Period Full amount less discount Credit Period Full amount due Purchase or Sale 2/10,n/30 Discount Percent Number of Days Discount Is Available Credit Period

12 Purchase Discounts Accounts Payable 500 Cash 495 Purchase Discounts 5 To record payment within discount period to supplier who offers 1% purchase discount. ($ 500 × 1% = $5 discount)

13 Shipping Terms When are goods in transit included in the inventory of the Seller? Purchaser?

14 FOB Shipping Point (p. 284) Both sale and purchase recorded upon shipment Buyer responsible for (i.e., owns) inventory while in transit Seller Buyer Title passes when shipped

15 FOB Destination (p. 284) Both sale and purchase recorded when inventory delivered at destination Seller responsible for (i.e., owns) inventory while in transit Seller Buyer Title passes at destination

16 FOB Shipping Point Aggie sold goods costing $35,000 to Texas Company FOB Shipping Point on September 1. The goods arrived at Texas Company on September 15. When would Aggie record sales revenue? Who pays for shipping?

17 FOB Destination Aggie sold goods costing $40,000 to Waco Company FOB destination on September 30. The goods were received by Waco Company on October 8. When would Aggie record sales revenue? Who pays for shipping?

18 EXTREMELY IMPORTANT FORMULAE Cost of Goods Sold calculation Income from Operations calculation Beginning inventory Net sales** + Net purchases* - Cost of goods sold Goods available for sale Gross margin (AKA Gross profit) - Ending inventory - Operating expenses Cost of goods sold Income from operations * Net purchases = Gross purchases – Purchase returns, allowances, and discounts + Transportation, insurance, storage, taxes, etc. ** Net sales = Gross sales – Sales returns, allowances, and discounts

19 7-19 Flow of Inventory Costs Merchandise Purchases Cost of Goods Sold Merchandise Inventory Merchandiser

20 7-20 Nature of Cost of Goods Sold Beginning Inventory Purchases for the Period Ending Inventory (Balance Sheet) Goods available for Sale Cost of Goods Sold (Income Statement) Beginning inventory + Purchases = Goods Available for Sale Goods Available for Sale – Ending inventory = Cost of goods sold Beginning inventory + Purchases = Goods Available for Sale Goods Available for Sale – Ending inventory = Cost of goods sold

21 EXTREMELY IMPORTANT FORMULAE Cost of Goods Sold calculation Income from Operations calculation Beginning inventory Net sales** + Net purchases* - Cost of goods sold Goods available for sale Gross margin (AKA Gross profit) - Ending inventory - Operating expenses Cost of goods sold Income from operations * Net purchases = Gross purchases – Purchase returns, allowances, and discounts + Transportation, insurance, storage, taxes, etc. ** Net sales = Gross sales – Sales returns, allowances, and discounts

22 QUIZ #2, Ch 6 - WEDNESDAY (10/24) Quiz # 3, Ch 7 - FRIDAY (10/26)

23 7-23 Inventory Costing Methods Total Dollar Amount of Goods Available for Sale Ending Inventory Cost of Goods Sold Inventory Costing Method Inventory Costing Methods 1.Specific Identification 2.First-in, First-out 3.Last-in, First-out 4.Weighted Average

24 7-24 Specific Identification When units are sold, the specific cost of the unit sold is added to cost of goods sold.

25 7-25 Cost Flow Assumptions The choice of an inventory costing method is not based on the physical flow of goods on and off the shelves. LIFO FIFO Weighted Average

26 7-26 First-In, First-Out Method Cost of Goods Sold Oldest Costs Ending Inventory Recent Costs

27 7-27 First-In, First-Out Remember: The costs of most recent purchases are in ending inventory. Start with 11/29 and add units purchased until you reach the number in ending inventory.

28 7-28 First-In, First-Out Now, we have allocated the cost to all 1,200 units in ending inventory.

29 7-29 First-In, First-Out Now, we have allocated the cost to all 1,050 units sold.

30 7-30 First-In, First-Out Here is the cost of ending inventory and cost of goods sold using FIFO.

31 7-31 Last-In, First-Out Method Ending Inventory Cost of Goods Sold Oldest Costs Recent Costs

32 7-32 Last-In, First-Out Remember: The costs of the oldest purchases are in ending inventory. Start with beginning inventory and add units purchased until you reach the number in ending inventory.

33 7-33 Last-In, First-Out Now, we have allocated the cost to all 1,200 units in ending inventory.

34 7-34 Last-In, First-Out Now, we have allocated the cost to all 1,050 units sold.

35 7-35 Last-In, First-Out Here is the cost of ending inventory and cost of goods sold using LIFO.

36 7-36 Weighted Average (AKA Average Cost) Method When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Goods Available for Sale Units Available for Sale ÷

37 7-37 Average Cost Method

38 7-38 Comparison of Methods

39 7-39 Financial Statement Effects of Costing Methods Advantages of Methods Better matches current costs in cost of goods sold with revenues. Ending inventory approximates current replacement cost. First-In, First-Out Last-In, First-Out Smoothes out price changes. Weighted Average

40 7-40 Managers Choice of Inventory Methods Net Income Effects Managers prefer to report higher earnings for their companies. Income Tax Effects Managers prefer to pay the least amount of taxes allowed by law as late as possible. LIFO Conformity Rule If last-in, first-out is used on the income tax return, it must also be used to calculate inventory and cost of goods sold for financial statements.

41 7-41 LIFO and International Accounting LIFO Permitted? Yes No China Singapore Canada Great Britain Australia

42 7-42 Internal Control of Inventory Separation of inventory accounting and physical handling of inventory. Storage in a manner that protects from theft and damage. Limiting access to authorized employees. Maintaining perpetual inventory records. Comparing perpetual records to periodic physical counts.

43 7-43 Perpetual and Periodic Inventory Systems Provides up-to-date inventory records. Provides up-to-date cost of sales records. PerpetualSystemPerpetualSystem In a periodic inventory system, ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical count.

44 7-44 Perpetual and Periodic Inventory Systems

45 7-45 Supplement C: Comparison of Perpetual and Periodic Inventory Systems Perpetual Inventory System

46 7-46 Supplement C: Comparison of Perpetual and Periodic Inventory Systems Periodic Inventory System

47 7-47 Errors in Measuring Ending Inventory

48 7-48 Valuation at Lower of Cost or Market Ending inventory is reported at the lower of cost or market (LCM). Replacement Cost The current purchase price for identical goods. The company will recognize a holding loss in the current period rather than the period in which the item is sold. This practice is conservative.

49 7-49 Valuation at Lower of Cost or Market

50 7-50 Inventory Turnover Cost of Goods Sold = Average Inventory Inventory Turnover Average Inventory is... (Beginning Inventory + Ending Inventory) ÷ 2 Average Inventory is... (Beginning Inventory + Ending Inventory) ÷ 2 This ratio reflects how many times average inventory was produced and sold during the period. A higher ratio indicates that inventory moves more quickly thus reducing storage and obsolescence costs.

51 HOMEWORK #3

52 INVENTORY & COST OF GOODS SOLD

53 BANK RECONCILIATION

54 Ch 7 -- Not tested Cash flows (pp ) Converting Income Statement and Balance Sheet to FIFO (pp ) Errors in measuring ending inventory (pp ) LIFO liquidations (pp ) Changes in estimates (pp )

55 End of Chapter 7


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