-WHBM08- Inventory & Cost of Goods Sold

7/30/2019 -WHBM08- Inventory & Cost of Goods Sold

http://slidepdf.com/reader/full/-whbm08-inventory-cost-of-goods-sold 1/64

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

Slide

8-1

INVENTORIES AND THECOST OF GOODS SOLD

Chapter

8




Slide

8-2

Inventory

Goods ownedand held for sale

to customers

Currentasset

Inventory Defined




Slide

8-3

INCOME STATEMENT

Revenue

Cost of goods sold

Gross profit

Expenses

Net income

As purchase costs(or manufacturing

costs) are incurred

as goodsare sold

BALANCE SHEET

Current assets:

Inventory

$ $

$

The Flow of Inventory Costs




Slide

8-4

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Entry on Purchase Date

Inventory $$$$

Accounts Payable $$$$

Entry on Sale Date

Cost of Goods Sold $$$$

Inventory $$$$

In a perpetual inventory system, inventory entriesparallel the flow of costs.

The Flow of Inventory Costs




Slide

8-5

GENERAL JOURNAL


Entry on Sale Date

Cost of Goods Sold $$$$

Inventory $$$$

When identical units of inventory havedifferent unit costs, a question naturally

arises as to which of these costs should be

used in recording a sale of inventory.

Which Unit Did We Sell?




Slide

8-6

A separate subsidiary account is maintainedfor each item in inventory.

How can we determine the unit cost for the Sept. 10 sale?

Item LL002 Primary supplier Electronic City

Descripti

on Laser Light Seconda

ry supplier Electric CompanyLocation Storeroo

m 2 Inventory level: Min: 25 Max: 200

Purchased Sold Balance

Date Units

Unit

Cost Total Units

Unit

Cost

Cost of

Goods

Sold Units

Unit

Cost Total

Sept. 5 100 30$ 3,000$ 100 30$ 3,000$

Sept. 9 75 50 3,750 100 30 3,000

75 50 3,750

Sept. 10 10 ? ? ? ? ?

? ? ?

Inventory Subsidiary Ledger


http://slidepdf.com/reader/full/-whbm08-inventory-cost-of-goods-sold 7/64© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

Slide

8-7

Specificidentification

LIFO

Averagecost

FIFO

We use one of these inventory valuationmethods to determine cost of inventory sold.

Inventory Cost Flows



Slide

8-8

Cost of Goods Available for Sale

Aug. 1 Beg. Inventory 10 units @ 91$ = 910$

Aug. 3 Purchased 15 units @ 106$ = 1,590$



Retail Sales of GoodsAug. 14 Sales 20 units @ 130$ = 2,600$

Aug. 31 Sales 23 units @ 150$ = 3,450$

The Bike Company (TBC)

Information for the FollowingInventory Examples



Slide

8-9

Specific Identification

When a unit

is sold, thespecific cost of

the unit sold is

added to costof goods sold.



Slide

8-10

Date Purchases Cost of Goods Sold

Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

On August 14, TBC sold 20 bikes for $130 each.

Nine bikes originally cost $91 and 11 bikesoriginally cost $106.

Continue

Specific Identification – Example



Slide

8-11

The Cost of Goods Sold for the August 14 sale is$1,985, leaving $515 and 5 units in inventory.

Continue


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$Aug. 14 9 @ 91$ = 819$

11 @ 106$ = 1,166$ 515$

Let’s look at the entries for

the Aug. 14 sale.




Slide

8-12

Continue

GENERAL JOURNAL


Aug. 14 Cash 2,600

Sales 2,600

14 Cost of Goods Sold 1,985

Inventory 1,985

Retail

Cost

A similar entry ismade after each sale.




Slide

8-13

Additional purchases were made on August 17 and 28.

Costs associated with sales on August 31 were as follows: 1 @ $91,3 @ $106, 15 @ $115, & 4 @ $119.


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$Aug. 14 9 @ 91$ = 819$

11 @ 106$ = 1,166$ 515$

Aug. 17 20 @ 115$ = 2,300$ 2,815$

Aug. 28 10 @ 119$ = 1,190$ 4,005$


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$Aug. 14 9 @ 91$ = 819$

11 @ 106$ = 1,166$ 515$

Aug. 17 20 @ 115$ = 2,300$ 2,815$

Aug. 28 10 @ 119$ = 1,190$ 4,005$

Aug. 31 1 @ 91$ = 91$

3 @ 106$ = 318$

15 @ 115$ = 1,725$

4 @ 119$ = 476$ 1,395$

Continue


Cost of Goods

Sold for August 31 =

$2,610



Slide

8-14

Balance Sheet

Inventory = $1,395

Income Statement

COGS = $4,595

1 @ 106$ = 106$

5 @ 115$ = 575

6 @ 119$ = 714

End. Inv. 1,395$


Cost of Goods SoldInventoryBalance

910$

2,500$

9 @ 91$ = 819$

11 @ 106$ = 1,166$ 515$2,815$

4,005$

1 @ 91$ = 91$

3 @ 106$ = 318$

15 @ 115$ = 1,725$

4 @ 119$ = 476$ 1,395$




Slide

8-15

Since specificidentification is so

easy, can’t we use itall the time?

Not really. Specificidentification is hard to use

when we sell a lot of

inventory that has lots of different costs.




Slide

8-16

Cost of Goods Available for

Sale

Units on handon the date of

sale

÷

Average-Cost Method

When a unit is sold,

the average cost of each unit

in inventory is assigned tocost

of goods sold.




Slide

8-17


Continue


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

The average cost per unitmust be computed prior

to each sale.

Average-Cost Method – Example

$100 = $2,500 25




Slide

8-18


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 20 @ 100$ = 2,000$ 500$

Continue

The average cost per unit is $100.

Let’s look at the entries

for the Aug. 14 sale.


$100 = $2,500 25

Slid




Slide

8-19

GENERAL JOURNAL


Aug. 14 Cash 2,600Sales 2,600


Inventory 2,000

Continue

Retail

Cost



Slid




Slide

8-20

Additional purchases were made on August 17 and

August 28.

On August 31, an additional 23 units were sold.

Continue


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 20 @ 100$ = 2,000$ 500$

Aug. 17 20 @ 115$ = 2,300$ 2,800$

Aug. 28 10 @ 119$ = 1,190$ 3,990$


Slid




Slide

8-21

$114 = $3,990 35


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 20 @ 100$ = 2,000$ 500$

Aug. 17 20 @ 115$ = 2,300$ 2,800$

Aug. 28 10 @ 119$ = 1,190$ 3,990$

Total Purchases 55

Less: Sales to Date -20Units on Hand 35


Slide




Slide

8-22

$114 = $3,990 35


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 20 @ 100$ = 2,000$ 500$

Aug. 17 20 @ 115$ = 2,300$ 2,800$

Aug. 28 10 @ 119$ = 1,190$ 3,990$

Aug. 31 23 @ 114$ = 2,622$ 1,368$

The average cost per unit is $114.




Slide




Slide

8-24

Costs of Goods Sold

EndingInventory

OldestCosts

RecentCosts

First-In, First-Out Method (FIFO)

Slide




Slide

8-25


Continue


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

The Cost of Goods Sold for the August 14 sale is $1,970,

leaving $530 and 5 units in inventory.


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 10 @ 91$ = 910$

10 @ 106$ = 1,060$ 530$

FIFO – Example

Slide




Slide

8-26

GENERAL JOURNAL




Inventory 1,970

Retail

Cost

Continue


FIFO – Example

Slide




Slide

8-27

Additional purchases were made on Aug. 17 and Aug. 28.

On August 31, an additional 23 units were sold.

Continue


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 10 @ 91$ = 910$

10 @ 106$ = 1,060$ 530$

Aug. 17 20 @ 115$ = 2,300$ 2,830$

Aug. 28 10 @ 119$ = 1,190$ 4,020$

FIFO – Example


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 10 @ 91$ = 910$

10 @ 106$ = 1,060$ 530$

Aug. 17 20 @ 115$ = 2,300$ 2,830$

Aug. 28 10 @ 119$ = 1,190$ 4,020$

Aug. 31 5 @ 106$ = 530$

18 @ 115$ = 2,070$ 1,420$

Cost of Goods Sold for August 31 = $2,600

Slide




Slide

8-28

Balance Sheet

Inventory = $1,420


910$

2,500$

10 @ 91$ = 910$

10 @ 106$ = 1,060$ 530$

2,830$

4,020$

5 @ 106$ = 530$

18 @ 115$ = 2,070$ 1,420$

Income Statement

COGS = $4,570

2 @ 115$ = 230$

10 @ 119$ = 1,190

End. Inv. 1,420$

FIFO – Example

Slide




Slide

8-29

Costs of Goods Sold

EndingInventory

RecentCosts

OldestCosts

Last-In, First-Out Method (LIFO)

Slide




Slide

8-30


Continue


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

LIFO – Example


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 15 @ 106$ = 1,590$

5 @ 91$ = 455$ 455$

The Cost of Goods Sold for the August 14 sale is

$2,045, leaving $455 and 5 units in inventory.

Slide




Slide

8-31

GENERAL JOURNAL




Inventory 2,045

Continue

Retail

Cost


LIFO – Example

Slide




8-32

Continue


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 15 @ 106$ = 1,590$

5 @ 91$ = 455$ 455$

Aug. 17 20 @ 115$ = 2,300$ 2,755$

Aug. 28 10 @ 119$ = 1,190$ 3,945$

LIFO – Example


Inventory

Balance

Aug. 1 10 @ 91$ = 910$ 910$

Aug. 3 15 @ 106$ = 1,590$ 2,500$

Aug. 14 15 @ 106$ = 1,590$

5 @ 91$ = 455$ 455$

Aug. 17 20 @ 115$ = 2,300$ 2,755$

Aug. 28 10 @ 119$ = 1,190$ 3,945$

Aug. 31 10 @ 119$ = 1,190$

13 @ 115$ = 1,495$ 1,260$

Additional purchases were made on Aug. 17 and Aug. 28.

On Aug. 31, an additional 23 units were sold.Cost of Goods Sold for August 31 = $2,685

Slide




8-33


910$

2,500$

15 @ 106$ = 1,590$

5 @ 91$ = 455$ 455$

2,755$

3,945$

10 @ 119$ = 1,190$

13 @ 115$ = 1,495$ 1,260$

Balance Sheet

Inventory = $1,260

Income Statement

COGS = $4,730

LIFO – Example

5 @ 91$ = 455$

7 @ 115$ = 805

End. Inv. 1,260$

Slide

Inventory Valuation Methods: A Summary




8-34 Costs Allocated to:

Valuation

Method

Cost of Goods

Sold Inventory Comments

Specific Actual cost of Actual cost of units Parallels physical flow

identification the units sold remaining Logical method when units

are uniqueMay be misleading for

identical units

Average cost Number of units

sold times the

Number of units on

hand times the

Assigns all units the same

average unit cost

average unit cost average unit cost Current costs are averaged

in with older costs

First-in, First-out(FIFO)

Cost of earliestpurchases on

Cost of mostrecently

Cost of goods sold is basedon older costs

hand prior to the

sale

purchased units Inventory valued at current

costs

May overstate income during

periods of rising prices; may

increase income taxes due

Last-in, First-out

(LIFO)

Cost of most

recently

Cost of earliest

purchases

Cost of goods sold shown at

recent prices

purchased units (assumed still in

inventory)

Inventory shown at old (and

perhaps out of date) costs

Most conservative method

during periods of rising

prices; often results in lower income taxes

Slide




8-35

Once a company hasadopted a particular

accounting method, itshould follow that

method consistently,

rather than switchmethods from oneyear to the next.

The Principle of Consistency

Slide




8-36

This inventory arrived just in time for us to use

in the manufacturing

process.

Just-In-Time (JIT) InventorySystems

Slide




8-37

GENERAL JOURNAL


Dec. 31 Cost of Goods Sold $$$$

Inventory $$$$

The primary reason for taking a physical inventoryis to adjust the perpetual inventory records for

unrecorded shrinkage losses, such as theft,

spoilage, or breakage.

Taking a Physical Inventory

Slide

C d O h i




8-38

Reduces the valueof the inventory.

Adjust inventoryvalue to the lower

of historical cost or current

replacement cost(market).

Obsolescence

Lower of Costor Market

(LCM)

LCM and Other Write-Downsof Inventory

Slide




8-39

Year End

A sale should be recorded when titleto the merchandise passes to the

buyer .

F.O.B.shipping

point title

passes tobuyer at the

point of shipment.

F.O.B.destinationpoint title

passes tobuyer at the

point of destination.

Goods In Transit

Slide

8 40




8-40

GENERAL JOURNAL


Entry on Purchase Date

Purchases $$$$

Accounts Payable $$$$

In a periodic inventory system, inventory entriesare as follows.

Note that an entry is not made to inventory.

Periodic Inventory Systems

Slide

8 41




8-41

GENERAL JOURNAL


Entry on Sale Date

No entry to inventory.

Accounts Receivable $$$$

Sales $$$$

In a periodic inventory system, inventory entriesare as follows.


Slide

8 42




8-42

The inventory onhand and the

cost of goodssold for the year

are notdetermined untilyear-end.


Slide

8 43




8-43

Specificidentification

LIFO

Averagecost

FIFO

We use one of these inventory valuationmethods in a periodic inventory system.


Slide

8 44

I f ti f th F ll i




8-44

Computers, Inc.Mouse Pad Inventory

Date Units $/Unit Total

Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00

June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 ?

Cost of

Goods Sold 600 ?

Information for the FollowingInventory Examples

Slide

8 45




8-45

By reviewing actualpurchase invoices,

Computers, Inc. determines

that the 1,200 mouse padson hand at year-end have

an actual total cost of $6,400.

Determine the cost of goods sold for the year.


Slide

8 46




8-46



Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00

June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 6,400.00$

Cost of

Goods Sold 600 3,325.00$

Cost of Goods Sold

$9,725 - $6,400 = $3,325


Slide

8-47




8-47

Total Cost of

Goods

Available for

Sale

Total Number

of Units

Available for

Sale÷

The average cost iscalculated at year-

end as follows:

Average-Cost Method

Slide

8-48




8-48



Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 ?

Cost of

Goods Sold 600 ?

Avg. Cost $9,725 1,800 =$5.40278




Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 6,483.00$

Cost of

Goods Sold 600 3,242.00$

Ending InventoryAvg. Cost $5.40278 1,200 =

$6,483

Cost of Goods SoldAvg. Cost $5.40278 600 =

$3,242

Slide

8-49




8 49

Costs of Goods Sold

EndingInventory

OldestCosts

RecentCosts

First-In, First-Out Method (FIFO)

Slide

8-50




8 50

Remember: Startwith the 11/29

purchase and thenadd other purchasesuntil you reach the

number of units inending inventory.

FIFO – Example



Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 ?

Cost of

Goods Sold 600 ?

Slide

8-51




8 51

Date Beg. Inv. Purchases End. Inv.Cost of

Goods Sold

Nov. 29 150@$5.90 150@$5.90

Units 150

Now, let’s complete the

table.

FIFO – Example


Goods Sold

1,000@$5.25 600@$5.25

400@$5.25

Jan. 3 300@$5.30 300@$5.30

June 20 150@$5.60 150@$5.60

Sept. 15 200@$5.80 200@$5.80

Nov. 29 150@$5.90 150@$5.90

Units 1,200 600

Now, we have allocatedthe cost to all 1,200 units

in ending inventory.


Goods Sold

1,000@$5.25 600@$5.25

400@$5.25

Jan. 3 300@$5.30 300@$5.30

June 20 150@$5.60 150@$5.60

Sept. 15 200@$5.80 200@$5.80

Nov. 29 150@$5.90 150@$5.90

Units 1,200 600

Costs $6,575 $3,150

Cost of Goods Available for Sale $9,725

Slide

8-52




8 52

Completing the tablesummarizes the

computations justmade.

FIFO – Example



Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 6,575.00$

Cost of

Goods Sold 600 3,150.00$

Slide

8-53




Costs of Goods Sold

EndingInventory

RecentCosts

OldestCosts

Last-In, First-Out Method (LIFO)

Slide

8-54




Remember: Start withbeginning inventoryand then add other purchases until youreach the number of

units in endinginventory.

LIFO – Example



Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 ?

Cost of

Goods Sold 600 ?

Slide

8-55





Goods Sold

1,000@$5.25 1,000@$5.25

Units 1,000

LIFO – Example


Goods Sold

1,000@$5.25 1,000@$5.25

Jan. 3 300@$5.30 200@$5.30

100@$5.30

Units 1,200 100

Now, we have allocatedthe cost to all 1,200 units

in ending inventory.

Next, let’s

complete thetable.


Goods Sold

1,000@$5.25 1,000@$5.25

Jan. 3 300@$5.30 200@$5.30

100@$5.30

June 20 150@$5.60 150@$5.60

Sept. 15 200@$5.80 200@$5.80

Nov. 29 150@$5.90 150@$5.90

Units 1,200 600

Costs $6,310 $3,415

Cost of Goods Available for Sale $9,725

Slide

8-56




Completing the tablesummarizes the

computations justmade.

LIFO – Example



Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 6,310.00$

Cost of

Goods Sold 600 3,415.00$

Slide

8-57

Importance of an Accurate




Errors in Measuring InventoryBeginning Inventory Ending Inventory

Effect on Income Statement Overstated Understated Overstated Understated

Goods Available for Sale + - 0 0

Cost of Goods Sold+ - - +Gross Profit - + + -

Net Income - + + -

Effect on Balance Sheet

Ending Inventory 0 0 + -

Retained Earnings - + + -

An error in ending inventory in a year will result in thesame error in the beginning inventory of the next year.

Importance of an AccurateValuation of Inventory

Slide

8-58




Slide

8-59




Determine cost of goods

available for sale.

Estimate cost of goods sold

by multiplying the net salesby the cost ratio.

Deduct cost of goods sold

from cost of goods available

for sale to determine ending

inventory.

The Gross Profit Method

Slide

8-60




In March of 2003, Chemico’s inventory was

destroyed by fire. Chemico’s normal gross profit

ratio is 30% of net sales. At the time of the fire,

Chemico showed the following balances:

Sales 31,500$

Sales returns 1,500

Beginning Inventory 12,000

Net cost of goods purchased 20,500

Gross Profit Method – Example

Slide

8-61




Gross Profit Method – Example

Computing Inventory using the Gross Profit Method

Goods Available for Sale:

Beginning Inventory 12,000$

Net cost of goods purchased 20,500 Goods available for sale 32,500$

Less estimated cost of goods sold:

Sales 31,500$

Less sales returns (1,500)

Net sales 30,000$

Estimated cost of goods sold (21,000)

Estimated March inventory loss 11,500$

× 70%

Slide

8-62




Measures how quickly a companysells its merchandise inventory.

A ratio that is low compared to competitorssuggests inefficient use of assets.

MerchandiseTurnover = Cost of goods sold

Average inventory

Average Inventory = (Beg. Inv. + End. Inv.) ÷ 2

Inventory Turnover Rate

Slide

8-63 Accounting Methods Can Affect




Remember that identicalcompanies that use differentinventory methods (e.g., FIFO

and LIFO) will have differentinventory turnover ratios.

Accounting Methods Can AffectAnalytical Ratios

Slide

8-64



Careful! If youdrop the inventory

we will have another write down.

End of Chapter 8

-WHBM08- Inventory & Cost of Goods Sold

Documents

Transcript of -WHBM08- Inventory & Cost of Goods Sold