Presentation on theme: "HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT"— Presentation transcript:
1 HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT Retail InventoryChapter 9HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT
2 Objectives1 Account for inventory by the physical and perpetual systems.2. Apply the inventory costing methods: specific unit cost, weighted average cost, FIFO and LIFO3. Identify the profit effects of the inventory costing methods
3 Objectives4. Apply the lower-of-cost-and-net-reliable-value rule to inventory5. Determine the effects of inventory errors on cost of goods sold and net profits6. Estimate ending inventory by the gross profit and retail inventory method
4 Objective 1Account for inventoryby the periodic andperpetual systems
5 Inventory Accounting Systems Perpetual systems maintain a running recordto show the inventory on hand at all times.Periodic systems do not keep acontinuous record of inventory on hand.
6 Perpetual System Debit Inventory Credit Cash or Accounts Payable Debit Cash or Accounts ReceivableCredit Sales RevenueDebit Cost of Goods SoldCredit Inventory
7 Perpetual System (see page 369 text) Item: SandalsQuantity Quantity QuantityDate Received Sold on HandNov. 157122630Totals2550613214010429164120
8 Periodic System Cost of Goods Sold BeginningInventory$100,000NetPurchases$560,000+=Cost of GoodsAvailable forSale $660,000EndingInventory$120,000Cost of GoodsSold$540,000–=
10 Cost-of-Goods-Sold Model Budgeted Cost of Goods Sold+Budgeted Ending Inventory=Budgeted Cost of Goods Available for Sale–Actual Beginning Inventory=Purchases
11 Calculating the Cost of Inventory Cost of inventory on hand = Quantity × unit costPhysical count is made at least once a year, even with a perpetual system.Consigned goods are excluded.
12 Periodic SystemAt the end of the period make a physical count and apply unit cost to determine ending inventory.Inventory purchases are debited to the purchases account.The inventory account carries the beginning inventory balance until adjusted at period end.
13 Periodic System Inventory Purchases Cost of Goods Sold 100,000BeginningBalance100,000BeginningBalance560,000Purchases560,000Purchases120,000EndingBalanceCost of Goods Sold100,000560,000540,000120,000EndingBalanceAccounts Payable560,000Purchases
14 Apply the inventory costing methods: specific unit cost, Objective 2Apply the inventory costingmethods: specific unit cost,weighted-average cost,FIFO and LIFO
15 Units Purchased in 2004 January 8 20 units @ $20 = $ 400 May $30 = $1,650October $31 = $ 775Total units 100Units sold 70Units left 30
16 Units Sold and in Ending Inventory Units sold by date:JanMayOctTotal sales 7030 units left in inventory
17 Specific Identification 20 $315 $31Cost of Goods SoldOct 23 $ 620MayJanTotal $1,95033 $3022 $3017 $203 $20
19 Weighted Average 25 Units @ $31 (Oct) = $ 775 = 1,650 = $ 775= 1,650== $2,825 Total Cost55 $30 (May)20 $20 (Jan)100 Total Units
20 Weighted Average $2,825 total cost/100 units = $28.25/unit Cost of goods sold = 70 × $28.25 = $Ending inventory = 30 × $28.25 = $847.50
21 First-In, First-Out 25 Units @ $31 (Oct) Cost of Goods Sold Jan $ 400 May 1,500Total $1,9005 $30 (May)50 $3020 $20 (Jan)
22 First-In, First-Out 25 Units @ $31 (Oct) Ending Inventory Oct $775 MayTotal $9255 $30 (May)50 $3020 $20 (Jan)
23 Last-In, First-Out 25 Units @ $31 (Oct) Cost of Goods Sold Oct $ 775 May 1,350Total $2,12545 $30 (May)10 $3020 $20 (Jan)
24 Last-In, First-Out 25 Units @ $31 (Oct) Ending Inventory Oct $300 MayTotal $70045 $30 (May)10 $3020 $20 (Jan)
25 Comparison of Methods Ending Inventory Specific identification $875.00 FIFO $925.00LIFO $700.00Weighted-average $847.50
26 Comparison of Methods Cost of Goods Sold Specific identification $1,965.00FIFO $1,900.00LIFO $2,125.00Weighted-average $1,977.50
27 Comparison of Methods Gross Profit from Sales: Specific identification $1,035.00FIFO $1,100.00LIFO $Weighted-average $1,022.50When prices are rising LIFO producesthe lowest income and lowest income tax.
28 Identify the profit effects inventory costing methods Objective 3Identify the profit effectsof theinventory costing methods
29 The Income Tax Advantage of LIFO During periods of inflation, LIFO’s income is the lowest.The most attractive feature of LIFO is reduced income tax payments.That is probably why it cannot be used not tax (and financial reporting purposes) in Australia!
30 Perpetual System FIFO Example Many companies keep their perpetual inventory records in quantities only.Other companies keep perpetual records in both quantities and dollar cost.
31 Perpetual System FIFO Example (see page 379 text Deckers OutdoorItem: Wambat SandalsReceived Sold Balance on HandUnit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov $30 $300$30 $$31 $
32 Perpetual System FIFO Example Deckers OutdoorItem: Teva SandalsReceived Sold Balance on HandUnit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov $32 $ $31 $496$Totals $1, $1, $32 $640
33 Accounting Principles: Comparability The business should use the same accountingmethods and procedures from one period to the next.A company may change inventory methods, but itmust disclose the effects of the change on net profits.
34 Accounting Principles: Relevance The financial statementsshould report sufficientinformation to enablean outsider to makeknowledgeable decisionsabout the company.
35 Accounting Principles: Materiality An item is material if it has the potentialto alter a statement user’s decision.Materiality is specific tothe entity being evaluated.
36 Accounting Principles: Conservatism Err on the sideof caution whenreporting any item inthe financial statements.
37 Apply the lower-of-cost- and-net-realisable-value Objective 4Apply the lower-of-cost-and-net-realisable-valuerule to inventory
38 Lower-of-Cost-and-N-R-V An asset is reported at the lower of its historical cost or market (replacement) value.If the replacement cost falls below its historical cost, the business must write down the value of its inventory.
39 Lower-of-Cost-and-N-R-V Example Cost of inventory: $3,000Market value at balance sheet date: $2,200What is the journal entry?June 30Loss on Inventory (or COGS)InventoryWrite down inventory to LCNRV
40 Determine the effects of inventory errors on cost of Objective 5Determine the effects ofinventory errors on cost ofgoods sold and net profit
41 Inventory ErrorsIf inventory is calculated incorrectly, how many years of financial statements will it affect?Two yearsThe current year’s ending inventory is next year’s beginning inventory.
43 Gross Profit Method Example Net Sales $150,000Gross Profit Margin %Beginning Inventory $ 18,500Net Purchases $110,500Net Sales $150,000– Gross Profit of 31.5% ,250= Cost of Goods Sold $102,750
44 Gross Profit Method Example BeginningInventory$18,500NetPurchases$110,500+=Cost of GoodsAvailable forSale $129,000Cost of GoodsSold$102,750EndingInventory$26,250–=
45 Retail Inventory Method Businesses with high turnover, low cost inventory, AASB 1019 allows the use of the retail inventory method.Like the gross profit method it is based on the COGS model.Requires the recording of inventory purchases at cost and at retail (selling) price.See exhibit 9-13 page 385 of you text book.
46 Internal Control over Inventory Physically counting inventory (stocktake)Safe storageSeparate inventory and accounting recordsKeeping perpetual inventory recordsSufficient inventory to prevent stock-outsNot too much inventory – avoid obsolesceEconomic order quantitiesInvestigate just-in-time inventory systems.