Chapter 5 Inventories and Cost of Sales

Chapter 5 Inventories and Cost of Sales

Financial & Managerial Accounting Information for Decisions Seventh Edition Chapter 5 Inventories and Cost of Sales McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. Learning Objectives (1 of 2) CONCEPTUAL C1 Identify the items making up merchandise inventory. C2 Identify the costs of merchandise inventory. ANALYTICAL

A1 Analyze the effects of inventory methods for both financial and tax reporting. A2 Analyze the effects of inventory errors on current and future financial statements. A3 Assess inventory management using both inventory turnover and days sales in inventory. McGraw-Hill Education. 5-2 Learning Objectives (2 of 2) PROCEDURAL P1

Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average. P2 Compute the lower of cost or market amount of inventory. P3 Appendix 5ACompute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average. P4 Appendix 5BApply both the retail inventory and gross profit methods to estimate inventory. McGraw-Hill Education. 5-3

Learning Objective C1: Identify the items making up merchandise inventory. McGraw-Hill Education. 5-4 Determining Inventory Items Learning Objective C1: Identify the items making up merchandise inventory Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include:

Goods in Transit Goods on Consignment Goods Damaged or Obsolete McGraw-Hill Education. 5-5 Goods in Transit Learning Objective C1: Identify the items making up merchandise inventory McGraw-Hill Education. 5-6 Goods on Consignment Learning Objective C1: Identify the items making up merchandise inventory

Merchandise is included in the inventory of the consignor, the owner of the inventory. Consignee sells goods for the owner, consignor. Consignee never reports consigned goods in inventory. McGraw-Hill Education. 5-7 Goods Damaged or Obsolete Learning Objective C1: Identify the items making up merchandise inventory Damaged or obsolete goods are not reported in inventory if they cannot be sold.

Cost should be reduced to net realizable value if they can be sold. McGraw-Hill Education. 5-8 Learning Objective C2: Identify the costs of merchandise inventory. McGraw-Hill Education. 5-9 Determining Inventory Costs Learning Objective C2: Identify the costs of merchandise inventory Include all expenditures necessary to bring an item to a salable condition and location.

Invoice Cost Plus Shipping Plus Storage Plus Insurance Minus Discounts and Allowances McGraw-Hill Education. 5-10 Internal Controls and Taking a Physical Count (1 of 2) Learning Objective C2: Identify the costs of merchandise inventory

Most companies take a physical count of inventory at least once each year. When the physical count does not match the Merchandise Inventory account, an adjustment must be made. McGraw-Hill Education. 5-11 Internal Controls and Taking a Physical Count (2 of 2) Learning Objective C2: Identify the costs of merchandise inventory Good internal controls over count include: 1. Pre-numbered inventory tickets. 2. Counters have no inventory responsibility. 3. Counters confirm existence, amount, and quality of inventory item. 4. Second count is taken.

5. Manager confirms all items counted. McGraw-Hill Education. 5-12 NEED-TO-KNOW 5-1 (1 of 4) Learning Objective C1: Identify the items making up merchandise inventory Learning Objective C2: Identify the costs of merchandise inventory A master carver of wooden birds operates her business out of a garage. At the end of the current period, the carver has 17 units (carvings) in her garage, three of which were damaged by water and cannot be sold. The distributor also has another five units in her truck, ready to deliver per a customer order, terms FOB destination, and another 11 units out on consignment at several small retail stores. How many units does the carver include in the businesss period-end inventory? McGraw-Hill Education.

5-13 NEED-TO-KNOW 5-1 (2 of 4) Learning Objective C1: Identify the items making up merchandise inventory Learning Objective C2: Identify the costs of merchandise inventory Units in ending inventory Key point How many units does she own at year-end? Units in storage 17 Less damaged (unsalable) units (3) Plus units in transit (FOB Destination) 5

Plus units on consignment 11 Total units in ending inventory 30 McGraw-Hill Education. 5-14 NEED-TO-KNOW 5-1 (3 of 4) Learning Objective C1: Identify the items making up merchandise inventory Learning Objective C2: Identify the costs of merchandise inventory A distributor of artistic iron-based fixtures acquires a piece for $1,000, terms FOB shipping point. Additional costs in obtaining it and offering it for sale include $150 for transportation-in, $300 for import

duties, $100 for insurance during shipment, $200 for advertising, a $50 voluntary gratuity to the delivery person, $75 for enhanced store lighting, and $250 for sales staff salaries. For computing inventory, what cost is assigned to this artistic piece? McGraw-Hill Education. 5-15 NEED-TO-KNOW 5-1 (4 of 4) Learning Objective C1: Identify the items making up merchandise inventory Learning Objective C2: Identify the costs of merchandise inventory Cost of inventory Cost Key point What are the necessary costs to get the asset ready for its intended purpose? $ 1,000

Transportation-in (FOB shipping point) 150 Import duties 300 Insurance cost 100 Inventory cost $ 1,550 McGraw-Hill Education. 5-16 Inventory Costing under a Perpetual

System Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Inventory affects . . . Balance Sheet Income Statement The matching principle requires matching costs with sales. McGraw-Hill Education. 5-17 Inventory Costing Management Decisions (1 of 2) Learning Objective C2: Identify the costs of merchandise inventory

Management decisions in accounting for inventory involve the following: 1. Items included in inventory and their costs. 2. Costing method (specific identification, FIFO, LIFO, or weighted average). 3. Inventory system (perpetual or periodic). 4. Use of market values or other estimates. McGraw-Hill Education. 5-18 Inventory Costing Management Decisions (2 of 2) Learning Objective C2: Identify the costs of merchandise inventory McGraw-Hill Education. 5-19 Inventory Cost Flow Assumptions

(1 of 2) Learning Objective C2: Identify the costs of merchandise inventory Exhibit 5.2 McGraw-Hill Education. 5-20 Inventory Cost Flow Assumptions (2 of 2) Learning Objective C2: Identify the costs of merchandise inventory Beginning inventory + Net purchases = Merchandise available for sale Merchandise available for sale = Ending inventory + Cost of goods sold McGraw-Hill Education. 5-21

Learning Objective P1: Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO and Weighted Average. McGraw-Hill Education. 5-22 Exhibit 5.3 Inventory Costing Illustration Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Here is information about the mountain bike inventory of Trekking for the month of August. McGraw-Hill Education. 5-23

Exhibit 5.4 Specific Identification Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average *Identification of items sold (and their costs) is from internal documents that track each unit from its purchase to its sale. McGraw-Hill Education. 5-24 First-In, First-Out (FIFO) (1 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Oldest Costs Cost of Goods Sold Recent Costs Ending Inventory McGraw-Hill Education. 5-25

First-In, First-Out (FIFO) (2 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Exhibit 5.5 McGraw-Hill Education. 5-26 First-In, First-Out (FIFO) (3 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Aug. 14 For the 20 units sold on Aug. 14, the first 10 sold are assigned the earliest cost of $91 (from beg. bal.). The next 10 sold are assigned the next earliest cost of $ 106. Aug. 30 For the 23 units sold Aug. 30, the first 5 sold are assigned the earliest available cost of $106 (from

Aug. 3 purchase). The next 18 sold are assigned the next earliest cost of $115 (from Aug. 17 purchase). McGraw-Hill Education. 5-27 Last-In, First-Out (LIFO) (1 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Recent Costs Cost of Goods Sold Oldest Costs Ending Inventory McGraw-Hill Education. 5-28 Last-In, First-Out (LIFO) (2 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Exhibit 5.6

McGraw-Hill Education. 5-29 Last-In, First-Out (LIFO) (3 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Aug. 14 For the 20 units sold on Aug. 14, the first 15 sold are assigned the most recent cost of $106. The next 5 sold are assigned the most recent cost of $91. Aug. 30 For the 23 units sold on Aug. 30, the first 10 sold are assigned the most resent cost of $119. The next 13 sold are assigned the next most recent cost of $115. McGraw-Hill Education. 5-30

Weighted Average (1 of 10) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Goods Available for Sale Units on hand on the date of sale McGraw-Hill Education. 5-31 Weighted Average (2 of 10) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average On August 14, 20 bikes are sold. To determine the cost of the units sold, we first, need to compute the weighted average cost per unit of items in inventory.

McGraw-Hill Education. 5-32 Weighted Average (3 of 10) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Cost of goods available for sale Units available at time of sale Weighted average cost per unit $ 2,500 25 $ 100 The cost of goods sold for the August 14 sale is $2,000. After this sale, there are five $100 units in inventory totaling $500. McGraw-Hill Education.

5-33 Weighted Average (4 of 10) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average McGraw-Hill Education. 5-34 Weighted Average (5 of 10) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average August 17: Cost of goods available for sale Units available at time of sale 5 + 20 Weighted average cost per unit $ 2,800 25 $ 112

After the August 14 sale, there are 5 units in inventory totaling $500. On August 17, 20 units are purchased for $2,300. $2,300+500=$2,800 / 25 = $112 per unit. McGraw-Hill Education. 5-35 Weighted Average (6 of 10) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Aug. 14 For the 20 units sold on Aug. 14, the cost assigned is the $100 average cost per unit from the Inventory Balance column at the time of sale. McGraw-Hill Education. 5-36 Weighted Average (7 of 10)

Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average August 28: Cost of goods available for sale Units available at time of sale 5+20+10 Weighted average cost per unit $ 3,990 35 $ 114 After the August 28 purchase, there are 35 (5+20+10) units in inventory totaling ($2,800+1,190) $3,990. $3,900 / 35 = $114 per unit. McGraw-Hill Education. 5-37 Weighted Average (8 of 10) Learning Objective P1: Compute inventory in a perpetual system

using specific identification, FIFO, LIFO and weighted average Exhibit 5.7 Cost of goods sold for August 30 sale is = $2,622 Ending inventory is composed of 12 units @ an average cost of $114 each or $1,368. McGraw-Hill Education. 5-38 Weighted Average (9 of 10) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Exhibit 5.7 McGraw-Hill Education. 5-39 Weighted Average (10 of 10)

Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Aug. 14 For the 20 units sold on Aug. 14, the cost assigned is the $100 average cost per unit from the Inventory Balance column at the time of sale. Aug. 30 For the 23 units sold on Aug. 30, the cost assigned is the $114 average cost per unit from the Inventory Balance column at the time of sale. McGraw-Hill Education. 5-40 Learning Objective A1: Analyze the effects of inventory methods for both financial and tax reporting. McGraw-Hill Education.

5-41 Financial Statement Effects of Inventory Costing Methods Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Exhibit 5.8 Because prices change, inventory methods nearly always assign different cost amounts. McGraw-Hill Education. 5-42 Financial Statement Effects of Costing Methods (1 of 2) Learning Objective A1: Analyze the effects of inventory methods for both financial and tax reporting Because prices change, inventory methods nearly always assign different cost amounts.

McGraw-Hill Education. 5-43 Financial Statement Effects of Costing Methods (2 of 2) Learning Objective A1: Analyze the effects of inventory methods for both financial and tax reporting Advantages of Methods First-In, First-Out Ending inventory approximates current replacement cost. Last-In, First-Out Better matches current costs in cost of goods sold with revenues. Weighted Average Smoothes out price changes. McGraw-Hill Education.

5-44 Tax Effects of Costing Methods Learning Objective A1: Analyze the effects of inventory methods for both financial and tax reporting The Internal Revenue Service (IRS) identifies several acceptable inventory costing methods for reporting taxable income. If LIFO is used for tax purposes, the IRS requires it be used in financial statements. McGraw-Hill Education. 5-45 Consistency in Using Costing Methods Learning Objective A1: Analyze the effects of inventory methods

for both financial and tax reporting The consistency concept requires a company to use the same accounting methods period after period so that financial statements are comparable across periods. McGraw-Hill Education. 5-46 NEED-TO-KNOW 5-2 (1 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average A company reported the following December purchases and sales data for its only product. Date Activities Units Acquired at Cost

Dec. 01 Beginning inventory 5 units @ $3.00 Dec. 08 Purchase 10 units @ $4.50 = $45.00 Dec. 09 Sales Dec. 19 Purchase Dec. 24

Sales Dec. 30 Purchase Units Sold at Retail = $15.00 8 units @ $7.00 13 units @ $5.00 = $65.00 18 units @ $8.00 8 units @ $5.30 36 units = $42.40 $167.40 McGraw-Hill Education.

26 units 5-47 NEED-TO-KNOW 5-2 (2 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average The company uses a perpetual inventory system. Determine the cost assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) FIFO, (c) LIFO, and (d) weighted average. (Round per unit costs and inventory amounts to cents.) For specific identification, ending inventory consists of 10 units, where eight are from the December 30 purchase and two are from the December 8 purchase. McGraw-Hill Education. 5-48

NEED-TO-KNOW 5-2 (3 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Regardless of the method used, the cost of 26 units are included in Cost of Goods Sold, and the cost of 10 units are included in Ending Inventory McGraw-Hill Education. 5-49 NEED-TO-KNOW 5-2 SPECIFIC IDENTIFICATION (1 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average A company reported the following December purchases and sales data for its only product. Date

Activities Units Acquired at Cost Dec. 01 Beginning inventory 5 units @ $3.00 Dec. 08 Purchase 10 units @ $4.50 = $45.00 Dec. 09 Sales Dec. 19

Purchase Dec. 24 Sales Dec. 30 Purchase Units Sold at Retail = $15.00 8 units @ $7.00 13 units @ $5.00 = $65.00 18 units @ $8.00 8 units @ $5.30 = $42.40 36 units

McGraw-Hill Education. $167.40 26 units 5-50 NEED-TO-KNOW 5-2 SPECIFIC IDENTIFICATION (2 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average The company uses a perpetual inventory system. Determine the cost assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) FIFO, (c) LIFO, and (d) weighted average. (Round per unit costs and inventory amounts to cents.) For specific identification, ending inventory consists of 10 units, where eight are from the December 30 purchase and

two are from the December 8 purchase. McGraw-Hill Education. 5-51 NEED-TO-KNOW 5-2 SPECIFIC IDENTIFICATION (3 of 3) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Specific Identification Method Not an inventory assumption Actual Cost of Goods Sold represents the actual cost of the units selected by the customer. Ending Inventory represents the actual cost of the units that remain in ending inventory. McGraw-Hill Education. 5-52 NEED-TO-KNOW 5-2 SPECIFICATION

IDENTIFICATION SOLUTION (1 of 2) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Ending inventory consists of 10 units, where eight are from the December 30 purchase and two are from the December 8 purchase. McGraw-Hill Education. 5-53 NEED-TO-KNOW 5-2 SPECIFICATION IDENTIFICATION SOLUTION (2 of 2) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Specific Identification Cost of exact units sold are expensed as Cost of Goods Sold. Date Activities

Units Acquired at Cost Dec. 01 Beginning inventory 5 @ $3.00 = $15.00 5 @ $3.00 = $15.00 Dec. 08 Purchase 10 @ $4.50 = $45.00 8 @ $4.50 = $36.00 Dec. 19

Purchase 13 @ $5.00 = $65.00 13 @ $5.00 = $65.00 Dec. 30 Purchase 8 @ $5.30 = $42.40 36 units $167.40 Cost of Goods Sold Cost of Ending Inventory 2 @ $4.50 = $9.00 8 @ $5.30 = $42.40

26 units Cost of Goods Sold Ending inventory Goods available for sale McGraw-Hill Education. $116.00 10 units $51.40 $116.00 51.40 $167.40 5-54 NEED-TO-KNOW 5-2 FIFO SOLUTION (1 of 2) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average

Perpetual FIFO Cost of Goods Sold is calculated at the time of the sale. The first items in are the first items out expensed as Cost of Goods Sold. McGraw-Hill Education. 5-55 NEED-TO-KNOW 5-2 FIFO SOLUTION (2 of 2) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Cost of Goods Sold Ending inventory Goods available for sale McGraw-Hill Education. $115.00 52.40 $167.40

5-56 NEED-TO-KNOW 5-2 LIFO SOLUTION (1 of 2) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Perpetual LIFO Cost of Goods Sold is calculated at the time of the sale. The last items in are the first items out expensed as Cost of Goods Sold. McGraw-Hill Education. 5-57 NEED-TO-KNOW 5-2 LIFO SOLUTION (2 of 2) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Cost of Goods Sold Ending inventory

Goods available for sale McGraw-Hill Education. $119.00 48.40 $167.40 5-58 NEED-TO-KNOW 5-2 WEIGHTED AVERAGE SOLUTION (1 of 2) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Weighted Average Cost of Goods Sold is calculated at the time of the sale. Average cost is equal to cost of goods available at the time of the sale divided by number of units available at the time of the sale. McGraw-Hill Education.

5-59 NEED-TO-KNOW 5-2 WEIGHTED AVERAGE SOLUTION (2 of 2) Learning Objective P1: Compute inventory in a perpetual system using specific identification, FIFO, LIFO and weighted average Cost of Goods Sold Ending inventory Goods available for sale McGraw-Hill Education. $115.70 51.70 $167.40 5-60 Learning Objective P2: Compute the lower of cost or market amount of inventory.

McGraw-Hill Education. 5-61 Lower of Cost or Market (1 of 2) Learning Objective P2: Compute the lower of cost or market amount of inventory Inventory must be reported at market value when market is lower than cost. Defined as current replacement cost (not sales price). Consistent with the conservatism principle. Can be applied three ways: 1) separately to each individual item. 2) to major categories of assets. 3) to the whole inventory. McGraw-Hill Education.

5-62 Lower of Cost or Market (2 of 2) Learning Objective P2: Compute the lower of cost or market amount of inventory Exhibit 5.9 A motor sports retailer has the following items in inventory: Per Unit: Cost Per Unit: Market LCM Applied to Items Units Roadster

. 20 $ 8,500 $ 7,000 $ 170,000 $ 140,000 $140,000 Sprint. . 10 5,000 6,000

50,000 60,000 50,000 Totals Total Cost Total Market Inventory Items $220,000 Roadster: $140,000 is the lower of $170,000 or $140,000. Totals: The amount of $190,000 is lower than the

$220,000 recorder cost. McGraw-Hill Education. $190,000 5-63 NEED-TO-KNOW 5-3 (1 of 2) Learning Objective P2: Compute the lower of cost or market amount of inventory A company has the following products in its ending inventory. (a) Compute the lower of cost or market for its inventory when applied separately to each product. (b) If the LCM amount is less than the recorded cost of the inventory, then record the December 31 LCM adjustment to the Merchandise Inventory account. McGraw-Hill Education.

5-64 NEED-TO-KNOW 5-3 (2 of 2) Learning Objective P2: Compute the lower of cost or market amount of inventory Units Per Unit: Cost Per Unit: Market Total: Cost Total: Market LCM By item

Road bikes 5 $1,000 $800 $5,000 $4,000 $4,000 Mountain bikes 4 500 600

2,000 2,400 2,000 10 400 450 4,000 4,500 4,000 Town bikes Total

$11,000 McGraw-Hill Education. $10,000 5-65 Learning Objective A2: Analyze the effects of inventory errors on current and future financial statements. McGraw-Hill Education. 5-66 Exhibit 5.10 Financial Statement Effects of Inventory Errors Income Statement Effects Learning Objective A2: Analyze the effects of inventory errors on current and future financial statements

Ending Inventory Year 1: Cost of Goods Sold Year 1: Net Income Year 2: Cost of Goods Sold Year 2: Net Income Understated. Overstated Understated Understated

Overstated Overstated*. Understated Overstated Overstated Understated *This error is less likely under a perpetual system versus a periodic because it implies more inventory that is recorded (or less shrinkage than expected). Management will normally follow up and discover and correct this error before it impacts any accounts. McGraw-Hill Education. 5-67 Exhibit 5.12 Financial Statement

Effects of Inventory Errors Balance Sheet Effects Learning Objective A2: Analyze the effects of inventory errors on current and future financial statements Ending Inventory Assets Equity Understated .. Understated Understated Overstated .. Overstated Overstated

McGraw-Hill Education. 5-68 NEED-TO-KNOW 5-4 (1 of 2) Learning Objective A2: Analyze the effects of inventory errors on current and future financial statements A company had $10,000 of sales in each of three consecutive years 2015-2017, and it purchased merchandise costing $7,000 in each of those years. It also maintained a $2,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of year 2015 that caused its year-end 2015 inventory to appear on its statements as $1,600 rather than the correct $2,000. (a) Determine the correct amount of the companys gross profit in each of the years 20152017. (b) Prepare comparative income statements to show the effect of this error on the companys cost of goods sold and gross profit for each of the years 20152017 McGraw-Hill Education.

5-69 NEED-TO-KNOW 5-4 (2 of 2) Learning Objective A2: Analyze the effects of inventory errors on current and future financial statements McGraw-Hill Education. 5-70 Learning Objective A3: Assess inventory management using both inventory turnover and days sales in inventory. McGraw-Hill Education. 5-71 Inventory Turnover Learning Objective A3: Assess inventory management using both

inventory turnover and days sales in inventory 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 Average inventory Average inventory = (Beg. Inv. + End Inv.) 2 McGraw-Hill Education. 5-72 Days Sales in Inventory Learning Objective A3: Assess inventory management using both inventory turnover and days sales in inventory Reveals how much inventory is available in terms of

the number of days sales. Ending inventory Day' s sales in inventory 365 Cost of goods sold McGraw-Hill Education. 5-73 Learning Objective P3: Appendix 5A:Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average. McGraw-Hill Education. 5-74 Exhibit 5A.1 Inventory Costing Illustration Periodic System

Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average McGraw-Hill Education. 5-75 Inventory Costing Illustration Periodic System Specification Identification (1 of 3) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average On August 14, Trekking sold 8 bikes costing $91 and 12 bikes costing $106. On August 30, Trekking sold 23 bikes: 2 units costing $91; 3 units costing $106; 15 units costing $115 and 3 units costing $119. McGraw-Hill Education. 5-76 Inventory Costing Illustration Periodic

System Specification Identification (2 of 3) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Here are the entries to record the purchases and sales. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit. The selling price of inventory was as follows: 8/14 $130 8/31 $150 McGraw-Hill Education. 5-77 Inventory Costing Illustration Periodic System Specification Identification (3 of 3) Learning Objective P3: Compute inventory in a periodic system

using specific identification, FIFO, LIFO and weighted average McGraw-Hill Education. 5-78 Inventory Costing Illustration Periodic System - FIFO Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average During August, Trekking had a total of 55 units available for sale. They had 12 units in ending inventory and sold 43 units. The cost of the 12 bikes in ending inventory will be valued using the most recent purchases since the earlier units are assumed sold under FIFO. McGraw-Hill Education. 5-79 Inventory Costing Illustration Periodic System - LIFO

Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average During August, Trekking had a total of 55 units available for sale. They had 12 units in ending inventory and sold 43 units. The cost of the 12 bikes in ending inventory will be valued using the earliest purchases since the most recently purchased units are assumed sold under LIFO. McGraw-Hill Education. 5-80 Inventory Costing Illustration Periodic System Weighted Average Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. McGraw-Hill Education.

5-81 Weighted Average Determining Average Cost Per Unit Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Step 1 10 units @ $91 $ 910 15 units @ 106 1,590 20 units @ 115 2,300 10 units @ 119

1,190 55 $5,990 $ 108.91 weighted avg. cost per unit Step 2 $5,990 / 55 units Step 3 Total cost of 55 units available for sale Less ending inventory 12 units @ $108.91 $5,990 $1,307 $4,683

(43 units at $108.91 each) Cost of goods sold McGraw-Hill Education. 5-82 NEED-TO-KNOW 5-7 (1 of 3) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average A company reported the following December purchases and sales data for its only product. Date Activities Dec. 01 Beginning inventory

Dec. 08 Purchase Dec. 09 Sales Dec. 19 Purchase Dec. 24 Sales Dec. 30 Purchase Unit Acquired at Cost

Units Sold at Retail 5 units @ $3.00 = $15.00 10 units @ $4.50 = $45.00 8 units @ $7.00 13 units @ $5.00 = $65.00 18 units @ $8.00 8 units @ $5.30 = $42.40 36 units $167.40 McGraw-Hill Education. 26 units 5-83 NEED-TO-KNOW 5-7 (2 of 3) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average

The company uses a periodic inventory system. Determine the cost assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) FIFO, (c) LIFO, and (d) weighted average. (Round per unit costs and inventory amounts to cents.) For specific identification, ending inventory consists of 10 units, where eight are from the December 30 purchase and two are from the December 8 purchase. McGraw-Hill Education. 5-84 NEED-TO-KNOW 5-7 (3 of 3) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Regardless of the method used, the cost of 26 units are included in Cost of Goods Sold, and the cost of 10 units are included in Ending Inventory

McGraw-Hill Education. 5-85 NEED-TO-KNOW 5-7 SPECIFIC IDENTIFICATION (1 of 3) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average A company reported the following December purchases and sales data for its only product. Date Activities Dec. 01 Beginning inventory Dec. 08

Purchase Dec. 09 Sales Dec. 19 Purchase Dec. 24 Sales Dec. 30 Purchase Unit Acquired at Cost Units Sold at Retail

5 units @ $3.00 = $15.00 10 units @ $4.50 = $45.00 8 units @ $7.00 13 units @ $5.00 = $65.00 18 units @ $8.00 8 units @ $5.30 = $42.40 36 units $167.40 McGraw-Hill Education. 26 units 5-86 NEED-TO-KNOW 5-7 SPECIFIC IDENTIFICATION (2 of 3) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average The company uses a periodic inventory system.

Determine the cost assigned to ending inventory and to cost of goods sold using (a) specific identification, (b) FIFO, (c) LIFO, and (d) weighted average. (Round per unit costs and inventory amounts to cents.) For specific identification, ending inventory consists of 10 units, where 8 are from the December 30 purchase and 2 are from the December 8 purchase. McGraw-Hill Education. 5-87 NEED-TO-KNOW 5-7 SPECIFIC IDENTIFICATION (3 of 3) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Specific Identification Method Not an inventory assumption Actual Cost of Goods Sold represents the actual cost of the units selected by the customer. Ending Inventory represents the actual cost of

the units that remain in ending inventory. McGraw-Hill Education. 5-88 NEED-TO-KNOW 5-7 SPECIFIC IDENTIFICATION SOLUTION (1 of 2) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Ending inventory consists of 10 units, where eight are from the December 30 purchase and two are from the December 8 purchase. Specific Identification Cost of exact units sold are expensed as Cost of Goods Sold. McGraw-Hill Education. 5-89 NEED-TO-KNOW 5-7 SPECIFIC

IDENTIFICATION SOLUTION (2 of 2) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Date Activities Unit Acquired at Cost Cost of Goods Sale Dec. 01 Beginning inventory 5 @ $3.00 = $15.00 5 @ $3.00

= $15.00 Dec. 08 Purchase 10 @ $4.50 = $45.00 8 @ $4.50 = $36.00 Dec. 19 Purchase 13 @ $5.00 = $65.00 13 @ $5.00 = $65.00 Dec. 30

Purchase 8 @ $5.30 36 units = $42.40 $167.40 Cost of Ending Inventory 2 @ $4.50 = $9.00 8 @ $5.30 = $42.40 26 units McGraw-Hill Education. $116.00

10 units $51.40 5-90 NEED-TO-KNOW 5-7 FIFO SOLUTION Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Periodic FIFO Cost of Goods Sold is calculated at the end of the period. The first items in are the first items out expensed as Cost of Goods Sold. Date Activities Dec. 01 Beginning inventory

Dec. 08 Unit Acquired at Cost Cost of Goods Sale 5 @ $3.00 = $15.00 5 @ $3.00 = $15.00 Purchase 10 @ $4.50 = $45.00 10 @ $4.50 = $45.00 Dec. 19 Purchase 13 @ $5.00 = $65.00

11 @ $5.00 = $55.00 Dec. 30 Purchase 8 @ $5.30 = $42.40 36 units $167.40 Cost of Ending Inventory 2 @ $5.00 = $10.00 8 @ $5.30 = $42.40 26 units McGraw-Hill Education. $115.00

10 units $52.40 5-91 NEED-TO-KNOW 5-7 LIFO SOLUTION Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Periodic LIFO Cost of Goods Sold is calculated at the end of the period. The last items in are the first items out expensed as Cost of Goods Sold. Date Activities Unit Acquired at Cost Cost of Goods Sale Dec. 01

Beginning inventory Dec. 08 Purchase 10 @ $4.50 = $45.00 5 @ $4.50 = $22.50 Dec. 19 Purchase 13 @ $5.00 = $65.00 13 @ $5.00 = $55.00 Dec. 30

Purchase 8 @ $5.30 = $42.40 8 @ $5.30 = $42.40 5 @ $3.00 = $15.00 36 units $167.40 Cost of Ending Inventory 5 @ $3.00 = $15.00 26 units McGraw-Hill Education. $129.90

5 @ $4.50 = $22.50 10 units $37.50 5-92 NEED-TO-KNOW 5-7 WEIGHTED AVERAGE SOLUTION (1 of 2) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Weighted Average Cost of Goods Sold is calculated at the end of the period. Each unit sold, and each unit in ending inventory is assigned the same cost per unit: the average cost of units available for sale. McGraw-Hill Education. 5-93 NEED-TO-KNOW 5-7 WEIGHTED

AVERAGE SOLUTION (2 of 2) Learning Objective P3: Compute inventory in a periodic system using specific identification, FIFO, LIFO and weighted average Date Activities Unit Acquired at Cost Dec. 01 Beginning inventory Dec. 08 Purchase 10 @ $4.50 = $45.00 Dec. 19

Purchase 13 @ $5.00 = $65.00 Dec. 30 Purchase 8 @ $5.30 = $42.40 Cost of Goods Sale Cost of Ending Inventory 5 @ $3.00 = $15.00 36 units $167.40 26 @ $4.65 = $120.90

10 @ $4.65 = $46.50 Cost of goods available for sale $167.40 $4.65 per unit Number of units available for sale 36 units McGraw-Hill Education. 5-94 Learning Objective P4: Appendix 5B: Apply both the retail inventory and gross profit methods to estimate inventory. McGraw-Hill Education. 5-95 Exhibits 5B.1 & 5B3 Appendix 5B:

Inventory Estimation Methods (1 of 2) Learning Objective P4: Apply both the retail inventory and gross profit methods to estimate inventory Inventory sometimes requires estimation for interim statements or if some casualty such as fire or flood makes taking a physical count impossible. Retail Inventory Method Step 1: Goods available for sale at retail Net sales at retail = Ending inventory at retail Step 2: Goods available for sales at cost Goods available for sale at retail = Cost of retail ratio Step 3: Ending inventory at retail Cost-to-retail ratio = Estimated ending inventory at cost McGraw-Hill Education. 5-96 Exhibits 5B.1 & 5B3 Appendix 5B:

Inventory Estimation Methods (2 of 2) Learning Objective P4: Apply both the retail inventory and gross profit methods to estimate inventory Gross Profit Method Step 1: Net sales at retail 1.0 gross profit ratio = Estimated cost of goods of sold Step 2: Goods available for sale at cost Estimated cost of goods sold = Estimated ending inventory at cost McGraw-Hill Education. 5-97 NEED-TO-KNOW 5-8 (1 of 2) Learning Objective P4: Apply both the retail inventory and gross profit methods to estimate inventory Using the retail method and the following data, estimate the cost of ending inventory. Beginning inventory

Cost Retail $ 324,000 $ 530,000 195,000 335,000 Purchases Sales 320,000 McGraw-Hill Education. 5-98

NEED-TO-KNOW 5-8 (2 of 2) Learning Objective P4: Apply both the retail inventory and gross profit methods to estimate inventory Cost Beginning inventory Purchases Total merchandise available for sale Retail $ 324,000 $ 530,000 195,000 335,000 $ 519,000 $865,000

Less: Sales (320,000) Ending inventory priced at retail $ 545,000 Cost ratio 0.60 Ending inventory at cost $ 327,000 Cost-to-retail ratio Cost of goods available for sale $519,000 0.60 Retail of goods available for sale $865,000

McGraw-Hill Education. 5-99 End of Presentation McGraw-Hill Education. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or further distribution permitted without the prior written consent of McGraw-Hill Education. 5-100

Recently Viewed Presentations

  • Numerical Computation and Optimization  Solution of Nonlinear Equations

    Numerical Computation and Optimization Solution of Nonlinear Equations

    NumericalComputation and Optimization. Solution of Nonlinear Equations. Open Methods. Fixed Point Iteration. By. Assist Prof. Dr. Ahmed Jabbar
  • The Key Points We Want To Cover 1

    The Key Points We Want To Cover 1

    The Key Points We Want To Cover Two Challenges Facing All Generations Today's Reality The Power of a USANA Home-based Business Network Marketing Has Come of Age The Benefits of
  • Introduction to Shakespeare - Contact

    Introduction to Shakespeare - Contact

    The Shakespeare Debate There is much speculation as to whether or not there was an actual "Shakespeare." Many historians claim that "Shakespeare" is actually a collection of several poets and playwrights' works, while others claim that it was a pseudonym...
  • MELBOURNE OFFICE 365 USER GROUP October 2014 Proudly

    MELBOURNE OFFICE 365 USER GROUP October 2014 Proudly

    WinPhone, Android, IOS) Additional Sources and Signals (Yammer, Email, Calendar) New Graph-Driven features and integration into Office Products (i.e. clutter in Outlook) … Sponsors: Microsoft & Kloud. Next Meetup: November 27th @ Microsoft HQ.
  • Active Shooter Awareness

    Active Shooter Awareness

    Buckling up is the single most effective thing you can do to protect yourself in a crash. In 2014, seat belts saved more than 12,000 lives nationwide. From 2008 to 2014, seat belts saved over 85,000 lives - enough people...
  • Class Slides Set 16B Brains The brains .

    Class Slides Set 16B Brains The brains .

    Lateral view of the brain. The illustration shows the increase in the cerebral cortex of the brain. The cerebral cortex integrates sensory information and selects responses. Understanding Physical Anthropology and Archaeology, 9th ed., p. 107 The brains . . ....
  • FRCEM OSCE practice 21/9/18

    FRCEM OSCE practice 21/9/18

    The patient has been brought by the police after she tried to climb a lamppost while singing operatic songs in the town centre. She states she is a professional singer. Demo OSCE. Mark scheme. Tips for Psych OSCEs. Only 5...
  • ENERGY VALUE OF FOODS Submitted by, SELMA ABDUL

    ENERGY VALUE OF FOODS Submitted by, SELMA ABDUL

    1 cal =4.184 J. 1 kcal = 1,000 cal = 4,184 J = 4.184 kJ. ... Estrogen also increases BMR,but less in compare to testosterone because of less metabolic activity in females.Cortisol is the only hormone showing both catabolic activity...