1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 6 Inventories

2 TYPES OF INVENTORY Inventories differ between merchandisers and manufacturers Merchandisers Hold inventory for resale Do not make goods Inventories differ between merchandisers and manufacturers Merchandisers Hold inventory for resale Do not make goods LG 1

3 MANUFACTURING INVENTORIES Materials inventory Raw material used to make product Work-in-process inventory Cost of partially completed products Finished goods inventory Total costs of completed goods Materials Labor Factory overhead Materials inventory Raw material used to make product Work-in-process inventory Cost of partially completed products Finished goods inventory Total costs of completed goods Materials Labor Factory overhead LG 2

4 COST? How is cost of inventory determined? LG 3

5 COST FLOW ASSUMPTIONS 3 methods to calculate cost –First-in-first-out (FIFO) –Last-in-last-out (LIFO) –Average 3 methods to calculate cost –First-in-first-out (FIFO) –Last-in-last-out (LIFO) –Average LG 3

6 FIFO Under FIFO, the first goods purchased are assumed to be the first goods sold LG 3

7 EXERCISE 6-10a Press “Enter” or click left mouse button for answer. Ending inventory is 11 units. 1/1 Inventory 2/4 Purchase 7/20 Purchase 12/30 Purchase Calculate the cost of ending inventory using FIFO. 6 $28 12 $30 14 $32 8 $33 LG 3 a = $360

8 LIFO Under LIFO, the last goods purchased are assumed to be the first goods sold LG 3

9 EXERCISE 6-10b Press “Enter” or click left mouse button for answer. Ending inventory is 11 units. 1/1 Inventory 2/4 Purchase 7/20 Purchase 12/30 Purchase Calculate the cost of ending inventory using LIFO. 6 $28 12 $30 14 $32 8 $33 LG 3 a = $318

10 AVERAGE With Average cost, the average purchase cost is cost of merchandise sold. LG 3

11 EXERCISE 6-10b Press “Enter” or click left mouse button for answer. Ending inventory is 11 units. 1/1 Inventory 2/4 Purchase 7/20 Purchase 12/30 Purchase Calculate the cost of ending inventory using AVERAGE. 6 $28 12 $30 14 $32 8 $33 LG 3 a = $341

12 PERPETUAL INVENTORY JANITEM 127BUNITSCOST 1Inventory10$20 4Sale7 10Purchase821 22Sale4 28Sale2 30Purchase1022 LG 4 1/31 Ending Inventory: 28 – 13 = 15

13 FIFO CMS: Income Statement JAN SOLD UNITS COSTTOTAL 4720$ CMS$263 LG 4 I/S

14 FIFO INVENTORY: Balance Sheet Ending Inventory COSTTOTAL 521$ $325 LG 4 B/S

15 LIFO CMS: Income Statement JAN SOLD UNITS COSTTOTAL 4720$ CMS$266 LG 4 I/S

16 LIFO INVENTORY: Balance Sheet Ending Inventory COSTTOTAL 320$ $322 LG 4 B/S

17 PERIODIC INVENTORY SYSTEM Only revenue is recorded at point of sale Cost of merchandise sold (CMS) is calculated at the end of the period using –FIFO –LIFO –Average Only revenue is recorded at point of sale Cost of merchandise sold (CMS) is calculated at the end of the period using –FIFO –LIFO –Average LG 5

18 LEARNING GOALS 6 Compare 3 inventory methods.

19 INVENTORY RECORDS UnitsCostTotal 1/1Inventory200$9$1,800 3/10Purchase300103,000 9/21Purchase400114,400 11/18Purchase100121,200 Available for sale 1,000$10,400 LG 6

20 COMPARING METHODS Sales = $15,000 Merchandise available for sale = $10,400 3 cost methods –FIFO –LIFO –Average Sales = $15,000 Merchandise available for sale = $10,400 3 cost methods –FIFO –LIFO –Average LG 6

21 FIFO Sales$15,000 - Cost of Merchandise sold7,000 LG 6 Gross Profit $8,000

22 LIFO Sales$15,000 - Cost of Merchandise sold7,600 LG 6 Gross Profit $7,400

23 AVERAGE Sales$15,000 -Cost of Merchandise sold7,280 LG 6 Gross Profit $7,720

24 LEARNING GOALS 7 Determine lower-of- cost-or-market for inventory.

25 INVENTORY VALUATION: Other Than Cost Used to ensure inventory not reported at a cost higher than its replacement cost LG 7

26 LOWER-OF-COST-OR MARKET (Slide 1 of 3) ItemQuantity Unit Cost Unit Market A400$10.25$ 9.50 B C D LG 7 Basic Information

27 LOWER-OF-COST-OR MARKET (Slide 2 of 3) ItemCostMarketLCM A$4,100$3,800 B2,7002,8922,700 C4,8004,650 D3,9204,1303,920 LG 7

28 Calculation: $3,800 + $2,700 + $4,650 + $3,920 Ending Inventory = $15,070 Calculation: $3,800 + $2,700 + $4,650 + $3,920 Ending Inventory = $15,070 LOWER-OF-COST-OR MARKET (Slide 3 of 3)

29 INVENTORY RATIOS Measures efficiency, effectiveness of inventory level –Inventory turnover –Days sales in inventory

30 INVENTORY RATIOS: Formulas –Inventory turnover Cost Merchandise Sold/ Average Inventory –Days sales in inventory Ave Inventory/ Ave. Daily CMS

31 INVENTORY TURNOVER Best BuyCircuit City CMS$18,350$7,904 Ave Inventory$2,342$1,488 Inventory turnover Measures number of times inventory turns over during year.

32 ANALYSIS: Inventory Turnover Best Buy turns its inventory almost 8 times in a year Circuit City turns its inventory slightly more than 5 times in a year Best Buy turns its inventory almost 8 times in a year Circuit City turns its inventory slightly more than 5 times in a year

33 DAYS IN SALES Best Buy Circuit City Ave. Daily CMS$50.27$21.65 Ave. Inventory$2,342$1,488 Days in Sales47 days69 days Measures number of days inventory stays on shelves

34 ANALYSIS: Days in Sales Best Buy sells through its inventory every 47 days on average Circuit City sells through its inventory every 69 days on average Best Buy sells through its inventory every 47 days on average Circuit City sells through its inventory every 69 days on average

35 My inferiority complex is not as good as yours. You don’t stop laughing because you grow old, you grow old because you stopped laughing.