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Chapter 9 Inventories Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine.

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Presentation on theme: "Chapter 9 Inventories Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine."— Presentation transcript:

1 Chapter 9 Inventories Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

2 Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3 1.Summarize and provide examples of internal control procedures that apply to inventories. 2.Describe the effect of inventory errors on the financial statement. 3.Describe the three inventory cost flow assumptions and how they impact the income statement and balance sheet. 4.Compute the cost of inventory under the perpetual inventory system, using the following cost methods: first-in, first-out; last- in, first-out; average cost. ObjectivesObjectives After studying this chapter, you should be able to:

4 5.Compute the cost of inventory under the periodic inventory system, using the following costing methods: first-in, first-out; last-in, first-out; average cost. 6.Compare and contrast the use of the three inventory costing methods. 7.Compute the proper valuation of inventory at other than cost, using the lower-of-cost-or- market and net realization value concepts. 8.Prepare a balance sheet presentation of merchandise inventory. ObjectivesObjectives

5 9.Estimate the cost of inventory, using the retail method and the gross profit method. 10.Compute the interpret the inventory turnover ratio and number of days’ sales in inventory. ObjectivesObjectives

6 Why is Inventory Control Important Why is Inventory Control Important? Inventory is a significant asset and for many companies the largest asset. Inventory is central to the main activity of merchandising and manufacturing companies. Mistakes in determining inventory cost can cause critical errors in financial statements. Inventory must be protected from external risks ( such as fire and theft) and internal fraud by employees.

7 Receiving report Purchase order Invoice AGREE AGREE AGREE JOURNAL Description Nov. 9 Post. Ref. Date Inventory Accounts Payable--XYZ Co Purchased merchandise on account.

8 LIABILITIES OWNER’S EQUITY REVENUES ASSETS COSTS & EXPENSES Effect of Inventory Errors on Financial Statements MerchandiseInventory Cost of Merchandise Sold If merchandise inventory is Cost of merchandise sold is Gross profit and net income are... Ending owner’s equity is If merchandise inventory is Cost of merchandise sold is Gross profit and net income are... Ending owner’s equity is overstated understated overstated Net Income

9 If merchandise inventory is Cost of merchandise sold is Gross profit and net income are... Ending owner’s equity is If merchandise inventory is Cost of merchandise sold is Gross profit and net income are... Ending owner’s equity is understated overstated understated Effect of Inventory Errors on Financial Statements

10 Purchased goods Sold goods Inventory Cost Flow Assumptions

11 Purchased goods Sold goods Inventory Cost Flow Assumptions

12 Purchased goods Sold goods Inventory Cost Flow Assumptions

13 Inventory Costing Methods 40% 30% 20% 10% 0% 43% 34% 19% 4% FifoLifoAverageOther

14 Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022

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16 Item 127B FIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.

17 Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 FIFO Perpetual Inventory Account On January 4, 7 units of Item 127B are sold at $30 each.

18 Item 127B FIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost The sale of 7 units leaves a balance of 3 units. Jan Jan On January 4, 7 units of Item 127B are sold at $30 each.

19 Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 FIFO Perpetual Inventory Account On January 10, the firm purchased eight units at $21 each.

20 Item 127B FIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan On January 10, the firm purchased eight units at $21 each. Because the purchase price of $21 is different than the cost of the previous 3 units on hand, the inventory balance of 11 units is accounted for separately.

21 Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 FIFO Perpetual Inventory Account On January 22, the firm sold four units for $31 each.

22 Item 127B PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan FIFO Perpetual Inventory Account Of the four units sold, three are from the first units in (fifo) at a cost of $20. On January 22, the firm sold four units for $31 each.

23 FIFO Perpetual Inventory Account On January 28, the firm sold two units at $32. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022

24 Item 127B PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan FIFO Perpetual Inventory Account On January 28, the firm sold two units at $32.

25 FIFO Perpetual Inventory Account On January 30, purchased ten additional units of Item 127B at $22 each. Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022 Item 127B Units Cost Price Jan. 1Inventory10$20 4Sale7$30 10Purchase821 22Sale431 28Sale232 30Purchase1022

26 Item 127B PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan FIFO Perpetual Inventory Account Totals18$38813$26315$325 On January 30, purchased ten additional units of Item 127B at $22 each.

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28 Item 127B LIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan The firm begins the year with 10 units of Item 127B on hand at a total cost of $200.

29 Item 127B LIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan On January 4, the firm sold 7 units at $30 each.

30 Item 127B LIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan On January 10, the firm purchased eight units at $21 each. Note that a new layer is formed.

31 Item 127B LIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan On January 22, the firm sells four units at $31 each Of the 4 units sold, all come from the most recent purchase at a cost of $21 each.

32 Item 127B LIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan On January 28, sold two units at $32 each

33 Item 127B LIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan On January 30, purchase 10 units at $22 each

34 Item 127B LIFO Perpetual Inventory Account PurchasesCost of Mdse. SoldInventory Balance UnitTotalUnitTotalUnitTotal Date Qty.Cost Cost Qty.CostCost Qty.CostCost Jan Totals18$38813$26615$322

35 Fifo Periodic

36 Jan. 1Beginning Inventory 200 $9 Mar. 10 Purchase 300 $ $11 Sept. 21 Purchase 100 $12 Nov. 18 Purchase 1,000 units available for sale during year Fifo Periodic

37 200 $9 300 $ $ $12 1,000 units available for sale during year $10,400 =$1,800Jan. 1 = 3,000Mar. 10 =4,400Sept. 21 =1,200Nov. 18 Cost of merchandise available for sale

38 Fifo Periodic A physical count on December 31 reveals that 700 of the 1,000 units have been sold. Using fifo, the first units purchased are theoretically the first units sold. We begin the count with January 1.

39 Fifo Periodic 200 $9 300 $ $ $12 1,000 units available for sale during year $10,400 =$1,800Jan. 1 = 3,000Mar. 10 =4,400Sept. 21 =1,200Nov. 18 Sold these 200 Sold these 300 Sold 200 of these 200 $11 =$ 0Jan. 1 = 0Mar. 10 =2,200Sept. 21 $ 3,400 Ending inventory

40 Cost of merchandise available for sale$10,400 Less ending inventory 3,400 Cost of merchandise sold$ 7,000 Cost of merchandise available for sale$10,400 Less ending inventory 3,400 Cost of merchandise sold$ 7,000 Fifo Periodic

41 Jan units at $9 Summary of Fifo Periodic Mar units at $10 Sep units at $11 Nov units at $12 $1,800 $3,000 $4,400 $1,200 Purchases Merchandise Available for Sale $1,800 $3,000 $2,200 Cost of Merchandise Sold 200 units at $9 $10,400 $2,200 $1,200 $7,000 Merchandise Inventory $3, units at $ units at $ units at $12 1,000 units 700 units 300 units

42 Lifo Periodic

43 Jan. 1Beginning Inventory 200 $9 Mar. 10 Purchase 300 $ $11 Sept. 21 Purchase 100 $12 Nov. 18 Purchase 1,000 units available for sale during year Lifo Periodic Using lifo, the most recent batch purchased is considered the first batch of merchandise sold.

44 Jan. 1Beginning Inventory 200 $9 Mar. 10 Purchase 300 $ $11 Sept. 21 Purchase 100 $12 Nov. 18 Purchase 1,000 units available for sale during year Lifo Periodic Assume again that 700 units were sold during the year.

45 200 $9 300 $ $ $12 1,000 units available for sale during year Lifo Periodic Sold these 100 Sold these 400 Sold 200 of these 100 $10 =$1,800Jan. 1 = 3,000Mar. 10 =4,400Sept. 21 =1,200Nov. 18 $10, ,000 Ending Inventory $2,800

46 Cost of merchandise available for sale$10,400 Less ending inventory 2,800 Cost of merchandise sold$ 7,600 Cost of merchandise available for sale$10,400 Less ending inventory 2,800 Cost of merchandise sold$ 7,600 Lifo Periodic

47 Jan units at $9 Summary of Lifo Periodic Mar units at $10 Sep units at $11 Nov units at $12 $1,800 $3,000 $4,400 $1,200 $1,800 $1,000 Cost of Merchandise Sold 200 units at $9 $10,400 $4,400 $1,200 $2,800 $7, units at $ units at $ units at $ units at $12 $2, units 1,000 units 300 units Purchases Merchandise Available for Sale $1,800 Cost of Merchandise Sold

48 Jan. 1Beginning Inventory 200 $9 Mar. 10 Purchase 300 $ $ $11 Sept. 21 Purchase 100 $ $12 Nov. 18 Purchase 1,000 units available for sale during year The average cost periodic method is based on the average cost of identical units. Average Cost Periodic

49 200 $9 = $ 1,800 1,000 units available for sale during year 300 $10 = $ 3, $11 = $ 4, $11 = $ 1,200 $10,400 Cost of merchandise available for sale

50 Cost of Merchandise Available for Sale Units Available for Sale During Year = Average Unit Cost $10,400 1,000 Units = $10.40 per Unit Average Cost Periodic

51 Cost of merchandise available for sale$10,400 Less ending inventory ($10.40 x 300) 3,120 Cost of merchandise sold$ 7,280 Cost of merchandise available for sale$10,400 Less ending inventory ($10.40 x 300) 3,120 Cost of merchandise sold$ 7,280 To verify this amount, multiply 700 units sold times $10.40 to get the same $7,280. Average Cost Periodic

52 $ 3,800 2,700 4,650 3,920 Total $15,520$15,472$15,070 Valuation of Inventory at Lower-of-Cost-or-Market A400$10.25$ 9.50$ 4,100$ 3,800 B ,7002,892 C ,8004,650 D ,9204,130 Unit InventoryCostMarketTotalTotal Lower ItemQuantityPricePriceCostMarketC or M The market decline based on individual items ($15,520 – $15,070) = $450

53 Assets Current assets: Cash$ Accounts receivable$ Less allowance for doubtful accounts Merchandise inventory at lower of cost (first-in, first-out method) or market Metro-Arts Balance Sheet December 31, 2007 Presentation of Merchandise Inventory on the Balance Sheet

54 Estimating Inventory Cost

55 Retail Method of Estimating Inventory Cost  Retail method is based on relationship between cost of merchandise available for sale and the retail price.  Retail prices of all merchandise must be accumulated and totaled.  Inventory at retail is calculated at retail price of merchandise available for sale less net sales at retail.  Ratio is calculated as cost divided by retail price.  Inventory at retail price times cost ratio equals estimated cost of inventory.

56 Retail Inventory Method Step 1: Determine the ratio of cost to the retail price. Cost Retail Merchandise inventory, Jan. 1$19,400$ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale$62,000 $100,000 Ratio of cost to retail price = $62,000 $100,000 = 62%

57 Retail Inventory Method Step 2: Determine the ending inventory at retail. Sales for January (net) 70,000 Merchandise inventory, January 31, at retail$ 30,000 Cost Retail Merchandise inventory, Jan. 1$19,400$ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale$62,000 $100,000

58 Retail Inventory Method Step 3: Calculate the estimated inventory at cost. Merchandise inventory, January 31, at cost ($30,000 x 62%)$18,600 Sales for January (net) 70,000 Merchandise inventory, January 31, at retail$ 30,000 Cost Retail Merchandise inventory, Jan. 1$19,400$ 36,000 Purchases in January (net) 42,600 64,000 Merchandise available for sale$62,000 $100,000

59 Gross Profit Method of Estimating Inventory Cost Gross Profit Method of Estimating Inventory Cost 1.A gross profit percentage rate is estimated based on previous experience adjusted for known changes. 2.Estimated gross profit is calculated by multiplying the estimated gross profit rate times the actual net sales. 3.Estimated cost of merchandise sold is calculated by subtracting the gross profit from actual sales. 4.The cost of merchandise sold estimate is deducted from actual merchandise available for sale to determine the estimated cost of merchandise inventory.

60 Merchandise inventory, January 1 $ 57,000 Purchases in January (net)180,000 Merchandise available for sale Sales in January (net)$250,000 Less: Estimated gross profit Estimated cost of merchandise sold Estimated merchandise inventory, January 31 ($250,000 x 30%) 75, ,000 $ 62,000 Gross Profit Method The gross profit method is useful for estimating inventories for monthly or quarterly financial statements in a periodic inventory system. $237,000

61 Inventory Turnover SUPERVALU Zale Cost of merchandise sold$15,620,127,000$ 737,188,000 Inventories: Beginning of year$1,115,529,000$478,467,000 End of year 1,067,837,000571,669,000 Total$2,183,366,000$1,050,136,000 Average$1,091,683,000$525,068,000 Inventory turnover14.3 times1.4 times Use:Inventory turnover measures the relationship between the volume of goods sold and the amount of inventory carried during the period.

62 Average daily cost of merchandise sold: $15,620,127,000/365$42,794,868 $737,188,000/365$2,019,693 Ending inventory$1,067,837,000$571,669,000 Number of Days’ Sales in Inventory SUPERVALU Zale Average selling period25 days283 days Use:To assess the efficiency in the management of inventory

63 The End Chapter 9


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