6-1

6-2 One Classification:  Inventory Three Classifications:  Raw Materials  Work in Process  Finished Goods Merchandising Company Manufacturing Company Regardless of the classification, companies report all inventories under Current Assets on the balance sheet. Classifying Inventory

6-3 Physical Inventory taken for two reasons: Perpetual System 1.Check accuracy of inventory records. 2.Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft). Periodic System 1.Determine the inventory on hand. 2.Determine the cost of goods sold for the period.. Determining Inventory Quantities

6-4 Goods in Transit  Purchased goods not yet received.  Sold goods not yet delivered. Determining Ownership of Goods SO 1 Describe the steps in determining inventory quantities. Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of sale. Determining Inventory Quantities

6-5 Illustration 6-1 Terms of sale Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Ownership of the goods remains with the seller until the goods reach the buyer. Goods in Transit Determining Inventory Quantities

6-6 Goods in transit should be included in the inventory of the buyer when the: a.public carrier accepts the goods from the seller. b.goods reach the buyer. c.terms of sale are FOB destination. d.terms of sale are FOB shipping point. Question SO 1 Describe the steps in determining inventory quantities. Determining Inventory Quantities

6-7 Consigned Goods  Goods held for sale by one party (consignee).  Ownership of the goods is retained by another party (consignor). SO 1 Describe the steps in determining inventory quantities. Determining Inventory Quantities Determining Ownership of Goods

6-8 Unit costs can be applied to quantities on hand using the following costing methods:  Specific Identification  First-in, first-out (FIFO)  Last-in, first-out (LIFO)  Average-cost SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods. Cost Flow Assumptions Inventory Costing

6-9 Illustration: Assume that Crivitz TV Company purchases three identical 50-inch TVs on different dates at costs of $700, $750, and $800. During the year Crivitz sold two sets at $1,200 each. These facts are summarized below. Illustration 6-2 Inventory Costing SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-10 Specific Identification (uses actual purchase cost) If Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold is $1,500 ($700 + $800), and its ending inventory is $750. Illustration 6-3 Inventory Costing SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-11 Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.  Practice is relatively rare.  Most companies make assumptions (Cost Flow Assumptions) about which units were sold. Inventory Costing Specific Identification SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-12 Illustration 6-11 Use of cost flow methods in major U.S. companies Cost Flow Assumptions do not need to match the physical movement of goods Inventory Costing SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-13 Illustration: Data for Houston Electronics’ Astro condensers. Illustration 6-4 (Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold Inventory Costing SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-14  Earliest goods purchased are first to be sold.  Generally good business practice to sell oldest units first.  Assigns  the oldest cost to COGS  RECENT COSTS TO ENDING INVENTORY First-In-First-Out (FIFO) Inventory Costing SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-15 Illustration 6-5 SO 2 First-In-First-Out (FIFO) Inventory Costing

6-16 Illustration 6-5 Inventory Costing First-In-First-Out (FIFO) SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-17  Latest goods purchased are first to be sold.  Assigns  Most recent costs to COGS  Oldest costs to ending inventory Inventory Costing Last-In-First-Out (LIFO) SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-18 Illustration 6-7 Inventory Costing Last-In-First-Out (LIFO) SO 2

6-19 Illustration 6-7 Inventory Costing Last-In-First-Out (FIFO) SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-20  Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.  Assumes goods are similar in nature.  Applies an average cost of inventory available for sale to both COGS and Ending inventory. Inventory Costing Average Cost SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-21 Illustration 6-10 Inventory Costing Average Cost SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-22 Illustration 6-10 Inventory Costing Average Cost SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods.

6-23 SO 3 Explain the financial effects of the inventory cost flow assumptions. Financial Statement and Tax Effects Illustration 6-12 Inventory Costing

6-24 The cost flow method that often parallels the actual physical flow of merchandise is the: a.FIFO method. b.LIFO method. c.average cost method. d.gross profit method. Question Inventory Costing SO 3 Explain the financial effects of the inventory cost flow assumptions.

6-25 In a period of inflation, the cost flow method that results in the lowest income taxes is the: a.FIFO method. b.LIFO method. c.average cost method. d.gross profit method. Question Inventory Costing SO 3 Explain the financial effects of the inventory cost flow assumptions.

6-26 SO 5 Indicate the effects of inventory errors on the financial statements. Common Cause:  Failure to count or price inventory correctly.  Not properly recognizing the transfer of legal title to goods in transit.  Errors affect both the income statement and balance sheet. Inventory Errors

6-27 Inventory errors affect the computation of cost of goods sold and net income. Illustration 6-17 Illustration 6-16 SO 5 Indicate the effects of inventory errors on the financial statements. Inventory Costing Income Statement Effects

6-28 Inventory errors affect the computation of cost of goods sold and net income in two periods.  An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period.  Over the two years, the total net income is correct because the errors offset each other.  Ending inventory depends entirely on the accuracy of taking and costing the inventory. SO 5 Indicate the effects of inventory errors on the financial statements. Inventory Costing Income Statement Effects

6-29 ($3,000) Net Income understated $3,000 Net Income overstated Combined income for 2-year period is correct. Illustration 6-18 SO 5 Indicate the effects of inventory errors on the financial statements. Inventory Costing

6-30 Understating ending inventory will overstate: a.assets. b.cost of goods sold. c.net income. d.owner's equity. Question SO 5 Indicate the effects of inventory errors on the financial statements. Inventory Costing

6-31 SO 5 Indicate the effects of inventory errors on the financial statements. Effect of inventory errors on the balance sheet is determined by using the basic accounting equation:. Illustration 6-16 Illustration 6-19 Inventory Costing Balance Sheet Effects

6-32 Balance Sheet - Inventory classified as current asset. Income Statement - Cost of goods sold subtracted from sales. Statement Presentation and Analysis Presentation

6-33 Illustration: LO 7 Apply the inventory cost flow methods to perpetual inventory records. Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Average cost. Illustration 6A-1 APPENDIX 6A Cost Flow Methods Perpetual Inventory System HOUSTON ELECTRONICS Astro Condensers

6-34 LO 7 Apply the inventory cost flow methods to perpetual inventory records. First-In, First-Out (FIFO) Cost of Goods Sold Ending Inventory Illustration 6A-2 APPENDIX 6A Cost Flow Methods Perpetual Inventory System

6-35 LO 7 Apply the inventory cost flow methods to perpetual inventory records. Last-In, First-Out (LIFO) Cost of Goods Sold Ending Inventory Illustration 6A-3 APPENDIX 6A Cost Flow Methods Perpetual Inventory System

6-36 LO 7 Apply the inventory cost flow methods to perpetual inventory records. Average-Cost Illustration 6A-4 Cost of Goods Sold Ending Inventory APPENDIX 6A Cost Flow Methods Perpetual Inventory System

6-37 LO 8 Describe the two methods of estimating inventories. A method of estimating the cost of ending inventory by applying a gross profit rate to net sales. A company needs to know ► its net sales, cost of goods available for sale, and gross profit rate. Illustration 6B-1 APPENDIX 6B Estimating Inventories Gross Profit Method