ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT 2011 Reporting and Analyzing Inventories UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 5

ACCT 201 ACCT 201 ACCT 201 Day #2

TopicLOReadHW Inventory Items and Cost C1, C QS5, QS7 Other Inventory Valuations P2, P E7, E8, P3A Decision AnalysisA QS12, E9, E10 Chapter 5 - Day 2 - Agenda P5-2A due today!

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT 2014 Reporting and Analyzing Inventories Inventory Items and Costs Chapter 5

FOB Destination Point Public Carrier SellerBuyer Items in Merchandise Inventory Public Carrier SellerBuyer FOB Shipping Point Ownership passes to the buyer here.

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT 2016 Items in Merchandise Inventory Goods on Consignment Goods shipped by the owner (consignor) to another party (consignee). Merchandise is included in the inventory of the consignor.

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT 2017 Items in Merchandise Inventory Goods Damaged or Obsolete Damaged or obsolete goods are not counted in inventory. Cost should be reduced to net realizable value.

Include all expenditures necessary to bring an item to a salable condition and location. Invoice Price Import Duties Freight-inFreight-in StorageStorage InsuranceInsurance Cost of Merchandise Inventory

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT 2019 Physical Count of Merchandise Inventory Most companies take a physical count of inventory at least once each year. Quantity ___ Inventory Count Tag Counted by _______

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT Physical Count of Merchandise Inventory When the physical count does not match the Merchandise Inventory account, an adjustment must be made. Quantity ___ Inventory Count Tag Counted by _______

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT Reporting and Analyzing Inventories Other Inventory Valuations Chapter 5

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT Lower of Cost or Market Other Inventory Valuations

Lower of Cost or Market Inventory must be reported at market value when market is lower than cost. Market is defined as current replacement cost (not sales price). Consistent with the conservatism principle. ACCT 201 ACCT 201 ACCT 201

Dr. Fred BarbeeACCT Lower of Cost or Market Can be applied three ways: separately to each individual item. to major categories of assets. to the whole inventory.

A motorsports retailer has the following items in inventory (Exhibit 5.14) : Lower of Cost or Market

Here is how to compute lower of cost or market for individual inventory items. Lower of Cost or Market

Here is how to compute lower of cost or market for the two groups of inventory items.

Lower of Cost or Market Here is how to compute lower of cost or market for the entire inventory.

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT Retail Inventory Method Other Inventory Valuations

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT Retail Inventory Method Often used to estimate inventory for interim period reporting. Needed Information includes: Beginning inventory at cost and retail Net purchases at cost and retail Net sales

Retail Inventory Method Step 3 Cost to retail ratio Ending inventory at retail Estimated ending inventory at cost = × Step 2 Goods available for sale at retail Goods available for sale at cost = ÷ Cost to retail ratio Step 1 Net sales at retail Goods available for sale at retail – = Ending inventory at retail

Retail Inventory Method

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT Gross Profit Method Other Inventory Valuations

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT Gross Profit Method Estimate ending inventory by applying the gross profit ratio to net sales (at retail). Useful when inventory has been destroyed, lost, or stolen.

Gross Profit Method Step – the gross profit ratio Net sales at retail × = Estimated cost of goods sold Step 2 Estimated cost of goods sold Goods available for sale at cost – = Estimated ending inventory at cost

Gross Profit Method In March of 2002, Chemical Company’s inventory was destroyed by fire. Chemical’s normal gross profit ratio is 30% of net sales. At the time of the fire, Chemical showed the following balances: ACCT 201 ACCT 201 ACCT 201

Step 1 Gross Profit Method

Step 2 Gross Profit Method

ACCT 201 ACCT 201 ACCT 201 Dr. Fred BarbeeACCT Reporting and Analyzing Inventories Decision Analysis Chapter 5

Inventory Turnover Shows how many times a company turns over its inventory during a period. Indicator of how well management is controlling the amount of inventory available. Inventory Turnover = Cost of goods sold Avg. inventory

Days’ Sales in Inventory Reveals how much inventory is available in terms of the number of days’ sales. Days' Sales in Inventory = Ending Inventory Cost of goods sold × 365