Accounting for Inventories

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Accounting for Inventories. Inventory Costs All expenditures incurred.

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Presentation transcript:

Accounting for Inventories www.AssignmentPoint.com

All expenditures incurred Inventory Costs All expenditures incurred www.AssignmentPoint.com

All expenditures incurred to bring the item to its Inventory Costs All expenditures incurred to bring the item to its www.AssignmentPoint.com

Inventory Costs All expenditures incurred to bring the item to its existing condition and location www.AssignmentPoint.com

Costs include Invoice cost Shipping Cash discounts Purchases allowances www.AssignmentPoint.com

Inventory Systems - Periodic Compute inventory balance at end of each accounting period Compute cost of goods sold at accounting period end www.AssignmentPoint.com

Inventory Systems - Perpetual Compute cost of goods sold at each sale Compute new inventory balance at each sale www.AssignmentPoint.com

Cost Flow Assumptions Only with specific identification do we attempt to match the actual movement of product through the business with the movement of costs through the accounting system www.AssignmentPoint.com

Cost Flow Assumptions With other inventory cost methods, we make an assumption of the movement of costs through the accounting system. This "flow" of costs through the system need not match the movement of product through the business. www.AssignmentPoint.com

Cost Flow Assumptions First-In, First-Out www.AssignmentPoint.com

Cost Flow Assumptions First-In, First-Out Earliest goods assumed to be first units sold www.AssignmentPoint.com

Cost Flow Assumptions First-In, First-Out Earliest goods assumed to be first units sold Inventory made up of latest goods acquired www.AssignmentPoint.com

Cost Flow Assumptions Last-In, First-Out www.AssignmentPoint.com

Cost Flow Assumptions Last-In, First-Out Newest goods assumed to be first units sold www.AssignmentPoint.com

Cost Flow Assumptions Last-In, First-Out Newest goods assumed to be first units sold Inventory made up of earliest goods acquired www.AssignmentPoint.com

Cost Flow Assumptions Average cost www.AssignmentPoint.com

Cost Flow Assumptions Average cost Cost of items sold is the weighted average of costs incurred www.AssignmentPoint.com

Cost Flow Assumptions Average cost Cost of items sold is the weighted average of costs incurred Inventory is the weighted average of costs incurred www.AssignmentPoint.com

Inventory Example Data Jan. 1 Beg Inven. 200 $4.00 $ 800.00 Apr. 10 Purchase 700 5.00 3,500.00 Oct. 23 Purchase 400 6.00 2,400.00 Available 1,300 $6,700.00 Merchandise Sales May 5 500 Dec. 19 300 Total 800 www.AssignmentPoint.com

First-In First-Out Newest layer $6.00 www.AssignmentPoint.com

First-In First-Out Newest layer 400 units @ $6.00 $2,400 www.AssignmentPoint.com

First-In First-Out Newest layer 400 units @ $6.00 $2,400 Next newest layer $5.00 www.AssignmentPoint.com

First-In First-Out Newest layer 400 units @ $6.00 $2,400 Next newest layer 100 units @ $5.00 500 www.AssignmentPoint.com

First-In First-Out Newest layer 400 units @ $6.00 $2,400 Next newest layer 100 units @ $5.00 500 Total cost $2,900 www.AssignmentPoint.com

First-In First-Out Cost of Goods Sold Beginning Inventory $ 800 www.AssignmentPoint.com

First-In First-Out Cost of Goods Sold Beginning Inventory $ 800 Purchases 5,900 Cost of goods available for sale $6,700 www.AssignmentPoint.com

First-In First-Out Cost of Goods Sold Beginning Inventory $ 800 Purchases 5,900 Cost of goods available for sale $6,700 Deduct: Ending Inventory 2,900 Cost of goods sold $3,800 www.AssignmentPoint.com

First-In First-Out Oldest cost layer 200 units @ $4.00 $ 800 Proof of cost of goods sold: Oldest cost layer 200 units @ $4.00 $ 800 www.AssignmentPoint.com

First-In First-Out Oldest cost layer 200 units @ $4.00 $ 800 Proof of cost of goods sold: Oldest cost layer 200 units @ $4.00 $ 800 Next oldest layer 600 units @ $5.00 3,000 Total $3,800 www.AssignmentPoint.com

Last-In First-Out Oldest layer $4.00 www.AssignmentPoint.com

Last-In First-Out Oldest layer 200 units @ $4.00 $ 800 www.AssignmentPoint.com

Last-In First-Out Oldest layer 200 units @ $4.00 $ 800 Next oldest layer $5.00 www.AssignmentPoint.com

Last-In First-Out Oldest layer 200 units @ $4.00 $ 800 Next oldest layer 300 units @ $5.00 1,500 www.AssignmentPoint.com

Last-In First-Out Total cost $2,300 Oldest layer 200 units @ $4.00 $ 800 Next oldest layer 300 units @ $5.00 1,500 Total cost $2,300 www.AssignmentPoint.com

Last-In First-Out LIFO Periodic Inventory Cost of goods sold: Beginning inventory $ 800 www.AssignmentPoint.com

Last-In First-Out Cost of goods available $6,700 LIFO Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchase 5,900 Cost of goods available $6,700 www.AssignmentPoint.com

Last-In First-Out Cost of goods available $6,700 LIFO Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchase 5,900 Cost of goods available $6,700 Deduct: Ending inventory 2,300 Cost of goods sold $4,400 www.AssignmentPoint.com

Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold www.AssignmentPoint.com

Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold Newest cost layer 400 units @ $6.00 $2,400 www.AssignmentPoint.com

Last-In First-Out Total cost $4,400 LIFO Periodic Inventory Proof of Cost of Goods Sold Newest cost layer 400 units @ $6.00 $2,400 Next newest layer 400 units @ $5.00 2,000 Total cost $4,400 www.AssignmentPoint.com

Weighted Average Cost of goods available for sale $6,700 Periodic Inventory Weighted average cost equals Cost of goods available for sale $6,700 divided by Total units available 1,300 equals Weighted average cost per unit $5.1538 www.AssignmentPoint.com

Weighted Average Periodic Inventory December 31 Inventory 500 units x $5.1538 = $2,577 www.AssignmentPoint.com

Weighted Average Periodic Inventory Cost of goods sold: www.AssignmentPoint.com

Weighted Average Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchases 5,900 Cost of goods available $6,700 www.AssignmentPoint.com

Weighted Average Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchases 5,900 Cost of goods available $6,700 Deduct: Ending inventory 2,577 Cost of goods sold $4,123 www.AssignmentPoint.com

Weighted Average Periodic Inventory Proof of cost of goods sold 800 units x $5.1538 = $4,123 www.AssignmentPoint.com

Income Statement Comparison Periodic Inventory FIFO LIFO WA Sales $8,000 $8,000 $8,000 CGS 3,800 4,400 4,123 GM $4,200 $3,600 $3,877 Op. expense 1,000 1,000 1,000 Net income $3,200 $2,600 $2,877 www.AssignmentPoint.com

Last-In First-Out LIFO - Perpetual Inventory 200 x $4 $800 www.AssignmentPoint.com

Last-In First-Out LIFO - Perpetual Inventory 4/4 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300 www.AssignmentPoint.com

Last-In First-Out LIFO - Perpetual Inventory 4/4 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300 5/5 500 x $5 $2500 200 x $4 $800 200 x $5 1000 $1800 www.AssignmentPoint.com

Last-In First-Out LIFO - Perpetual Inventory 4/4 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300 5/5 500 x $5 $2500 200 x $4 $800 200 x $5 1000 $1800 10/23 400 x $6 $2400 200 x $4 $800 200 x $5 1000 400 x $6 2400 $4200 www.AssignmentPoint.com

Last-In First-Out LIFO - Perpetual Inventory 4/4 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300 5/5 500 x $5 $2500 200 x $4 $800 200 x $5 1000 $1800 10/23 400 x $6 $2400 200 x $4 $800 200 x $5 1000 400 x $6 2400 $4200 12/19 300x $6 $1800 200 x $4 $800 100 x $6 600 $2400 www.AssignmentPoint.com

Last-In First-Out LIFO - Perpetual Inventory 4/4 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300 5/5 500 x $5 $2500 200 x $4 $800 200 x $5 1000 $1800 10/23 400 x $6 $2400 200 x $4 $800 200 x $5 1000 400 x $6 2400 $4200 12/19 300x $6 $1800 200 x $4 $800 100 x $6 600 $2400 Cost of goods sold $4300 www.AssignmentPoint.com

Lower of Cost or Market Class A Cost Mkt LCM Item 1 $100 $120 Item 2 80 70 Class B Item 6 $50 $65 Item 7 40 20 www.AssignmentPoint.com

Lower of Cost or Market - By Item Class A Cost Mkt LCM Item 1 $100 $120 $100 www.AssignmentPoint.com

Lower of Cost or Market - By Item Class A Cost Mkt LCM Item 1 $100 $120 $100 Item 2 80 70 70 www.AssignmentPoint.com

Lower of Cost or Market - By Item Class A Cost Mkt LCM Item 1 $100 $120 $100 Item 2 80 70 70 Class B Item 6 $50 $65 50 www.AssignmentPoint.com

Lower of Cost or Market - By Item Class A Cost Mkt LCM Item 1 $100 $120 $100 Item 2 80 70 70 Class B Item 6 $50 $65 50 Item 7 40 20 20 Total $240 www.AssignmentPoint.com

Lower of Cost or Market - By Class Class A Cost Mkt LCM Item 1 $100 $120 Item 2 80 70 Total $180 $190 $180 www.AssignmentPoint.com

Lower of Cost or Market - By Class Class A Cost Mkt LCM Item 1 $100 $120 Item 2 80 70 Total $180 $190 $180 Class B Item 6 $50 $65 Item 7 40 20 Total $90 $85 85 Total $265 www.AssignmentPoint.com

Lower of Cost or Market- By Total Class A Cost Mkt LCM Item 1 $100 $120 Item 2 80 70 Class B Item 6 50 40 Item 7 40 20 Total $270 $275 $270 www.AssignmentPoint.com

Gross Margin Method Logic of Income Statement Net Sales $70 Cost of goods sold: Begin inv $ 5 Net purchases 50 Cost goods avail $55 End inv 10 45 Gross margin $25 www.AssignmentPoint.com

Gross Margin Method Inventory Estimation Cost of goods available: Begin inv $ 20,000 Net purchases 135,000 Cost of goods available $155,000 Deduct cost of goods sold: www.AssignmentPoint.com

Gross Margin Method Inventory Estimation Cost of goods available $155,000 Net sales $150,000 Multiply by (1 - Gross margin rate) (1 - 0.30) x 0.70 Est cost of goods sold 105,000 Est ending inventory $ 50,000 www.AssignmentPoint.com

Gross Margin Method Proof of Answer Net sales $150,000 Cost of goods sold Begin inv $ 20,000 Net purchases 135,000 CGAS $155,000 End inv 50,000 Cost of goods sold 105,000 Gross margin $ 45,000 www.AssignmentPoint.com

An error in the computation of inventory at the end of one period Inventory Errors An error in the computation of inventory at the end of one period www.AssignmentPoint.com

Inventory Errors An error in the computation of inventory at the end of one period causes an error in assets and owner’s equity at the end of that period www.AssignmentPoint.com

Inventory Errors An error in the computation of inventory at the end of one period causes an error in assets and owner’s equity at the end of that period and an error in income for two periods. www.AssignmentPoint.com

Effect of Inventory Errors Overstatement of inventory at end of period 1 Causes an overstatement of net income for period 1 www.AssignmentPoint.com

Effect of Inventory Errors Overstatement of inventory at end of period 1 Causes an overstatement of net income for period 1 and an overstatement of assets and owner's equity at period 1 end www.AssignmentPoint.com

Effect of Inventory Errors Overstatement of inventory at end of period 1 Causes an understatement of net income for period 2 www.AssignmentPoint.com

Effect of Inventory Errors Overstatement of inventory at end of period 1 Causes an understatement of net income for period 2 BUT assets and owner's equity at period 2 end will be correct www.AssignmentPoint.com

Effect of Inventory Errors Understatement of inventory at end of period 1 Causes an understatement of net income for period 1 www.AssignmentPoint.com

Effect of Inventory Errors Understatement of inventory at end of period 1 Causes an understatement of net income for period 1 and an understatement of assets and owner's equity at period 1 end www.AssignmentPoint.com

Effect of Inventory Errors Understatement of inventory at end of period 1 Causes an overstatement of net income for period 2 www.AssignmentPoint.com

Effect of Inventory Errors Understatement of inventory at end of period 1 Causes an overstatement of net income for period 2 BUT assets and owner's equity at period 2 end will be correct www.AssignmentPoint.com