1. Previous Lecture Uncollectible Accounts Reflecting Uncollectible Accounts in the Financial Statements The Allowance for Doubtful Accounts Writing Off an Uncollectible Account Receivable Recovery of an Account Receivable Previously Written Off 1

2. Previous Lecture Monthly Estimates of Credit Losses Estimating Credit Losses — The “Balance Sheet” Approach An Alternative Approach to Estimating Credit Losses Direct Write-Off Method Income Tax Regulations and Financial Reporting 2

3. Previous Lecture Internal Controls for Receivable Management of Accounts Receivable Ways to Minimize Amounts in Accounts Receivable Evaluating the Quality of Accounts Receivable 3

4. SAFWAY, INC Having the right merchandise available at the right time and in the right place is critically important to all companies that sell products to their customers. These business include chain stores such as grocery store, drugstores, and department stores. 4

5. Consider Safeway Having 1700 stores nationwide When Customer shop at Safeway, they expect to find the items they want in stock and ready to purchase. If not, then they will find other place for shop. For this purpose Safeway store must stock more than 10,000 products Controlling such a diverse selection is big challenge in highly competitive environment 5

6. INVENTORIES AND THE COST OF GOODS SOLD Chapter 8 6

7. Inventory Goods owned and held for sale to customers Current asset Current asset Inventory Defined 7

8. INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income As purchase costs (or manufacturing costs) are incurred as goods are sold BALANCE SHEET Current assets: Inventory $$ $ The Flow of Inventory Costs 8

9. In a perpetual inventory system, inventory entries parallel the flow of costs. The Flow of Inventory Costs 9

10. When identical units of inventory have different unit costs, a question naturally arises as to which of these costs should be used in recording a sale of inventory. Which Unit Did We Sell? 10

11. Inventory Subsidiary Ledger A separate subsidiary account is maintained for each item in inventory. How can we determine the unit cost for the Sept. 10 sale? 11

12. Specific identification LIFO Average cost FIFO We use one of these inventory valuation methods to determine cost of inventory sold. Inventory Cost Flows 12

13. The Bike Company (TBC) Information for the Following Inventory Examples 13

14. Specific Identification When a unit is sold, the specific cost of the unit sold is added to cost of goods sold. 14

15. On August 14, TBC sold 20 bikes for $130 each. Nine bikes originally cost $91 and 11 bikes originally cost $106. On August 14, TBC sold 20 bikes for $130 each. Nine bikes originally cost $91 and 11 bikes originally cost $106. Continue Specific Identification – Example 15

16. The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in inventory. Continue Let’s look at the entries for the Aug. 14 sale. Specific Identification – Example 16

17. Continue Retail Cost A similar entry is made after each sale. Specific Identification – Example 17

18. Additional purchases were made on August 17 and 28. Costs associated with sales on August 31 were as follows: 1 @ $91, 3 @ $106, 15 @ $115, & 4 @ $119. Additional purchases were made on August 17 and 28. Costs associated with sales on August 31 were as follows: 1 @ $91, 3 @ $106, 15 @ $115, & 4 @ $119. Continue Specific Identification – Example Cost of Goods Sold for August 31 = $2,610 18

19. Balance Sheet Inventory = $1,395 Income Statement COGS = $4,595 Specific Identification – Example 19

20. Since specific identification is so easy, can’t we use it all the time? Not really. Specific identification is hard to use when we sell a lot of inventory that has lots of different costs. 20

21. Cost of Goods Available for Sale Units on hand on the date of sale ÷ Average-Cost Method When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. 21

22. On August 14, TBC sold 20 bikes for $130 each. Continue The average cost per unit must be computed prior to each sale. Average-Cost Method – Example $100 = $2,500  25 22

23. Continue The average cost per unit is $100. Let’s look at the entries for the Aug. 14 sale. Average-Cost Method – Example $100 = $2,500  25 23

24. Continue Retail Cost A similar entry is made after each sale. Average-Cost Method – Example 24

25. Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold. Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold. Continue Average-Cost Method – Example 25

26. $114 = $3,990  35 Average-Cost Method – Example 26

27. $114 = $3,990  35 The average cost per unit is $114. Average-Cost Method – Example 27

28. Income Statement COGS = $4,622 Balance Sheet Inventory = $1,368 $114 × 12 = $1,368 Average-Cost Method – Example 28

29. Costs of Goods Sold Ending Inventory Oldest Costs Recent Costs First-In, First-Out Method (FIFO) 29

30. On August 14, TBC sold 20 bikes for $130 each. Continue The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory. FIFO – Example 30

31. Retail Cost Continue A similar entry is made after each sale. FIFO – Example 31

32. Additional purchases were made on Aug. 17 and Aug. 28. On August 31, an additional 23 units were sold. Additional purchases were made on Aug. 17 and Aug. 28. On August 31, an additional 23 units were sold. Continue FIFO – Example Cost of Goods Sold for August 31 = $2,600 32

33. Balance Sheet Inventory = $1,420 Income Statement COGS = $4,570 FIFO – Example 33

34. Costs of Goods Sold Ending Inventory Recent Costs Oldest Costs Last-In, First-Out Method (LIFO) 34

35. On August 14, TBC sold 20 bikes for $130 each. Continue LIFO – Example The Cost of Goods Sold for the August 14 sale is $2,045, leaving $455 and 5 units in inventory. 35

36. Continue Retail Cost A similar entry is made after each sale. LIFO – Example 36

37. Continue LIFO – Example Additional purchases were made on Aug. 17 and Aug. 28. On Aug. 31, an additional 23 units were sold. Additional purchases were made on Aug. 17 and Aug. 28. On Aug. 31, an additional 23 units were sold. Cost of Goods Sold for August 31 = $2,685 37

38. Balance Sheet Inventory = $1,260 Income Statement COGS = $4,730 LIFO – Example 38

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40. Allah Hafiz End of Today's Session Allah Hafiz 40