Chapter Five Accounting for Inventories McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill...
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Transcript of Chapter Five Accounting for Inventories McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill...
Chapter Five
Accounting for
Inventories
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Specific Identification
When a company’s inventory consists
of many high-priced, low-
turnover goods the record keeping
necessary to use specific
identification is more practical.
5-2
First-in, First-out
The first-in, first-out cost flow
method requires that the cost of the
items purchased first be assigned to Cost of Goods Sold.
5-3
Last-in, First-out
The last-in, first-out cost flow
method requires that the cost of the
items purchased last be assigned to Cost of Goods Sold.
5-4
Weighted Average
The weighted average cost flow
method assigns the average cost of the items available to
Cost of Goods Sold.
5-5
Physical Flow
Our discussions about inventory cost flow
methods pertain to the flow of costs through
the accounting records, not the actual physical flow of goods.
Cost flows can be done on a different basis than physical flow.
5-6
Effect of Cost Flow on Income Statement
FIFO LIFOWeighted Average
Sales 120$ 120$ 120$ Cost of Goods Sold 100 110 105 Gross Margin 20$ 10$ 15$
The cost flow method a company uses can significantly affect the gross margin reported in the income
statement.
5-7
Effect of Cost Flow on Balance Sheet
FIFO LIFOWeighted Average
Ending Inventory 110$ 100$ 105$
Since total product costs are allocated between costs of goods sold and
ending inventory, the cost flow method used affects its balance sheet as well.
5-8
Inventory Cost Flow Under a Perpetual System
Jan. 1 Beginning Inventory 10 units at $200 = $2,000
Mar. 18 First purchase 20 units @ $220 =
$4,400
Aug. 21 Second purchase 25 units @ $250 =
$6,250
$12,650
TMBC Inventory
Total cost of 55 bikes (goods) available for sale
Goods Available for Sale
First-in, First-Out
(FIFO)
Last-in, First-Out
(LIFO)
Weighted
Average
Sold 43 bikes for $350 each
5-9
First-in, First-out Inventory Cost Flow
Jan. 1 Beginning inventory 10 units @ 200$ = 2,000$ Mar. 18 First purchase 20 units @ 220$ = 4,400 Aug. 21 Second purchase 13 units @ 250$ = 3,250 Total cost of the 43 bikes sold 9,650$
FIFO Cost of Goods Sold
5-10
Last-in, First-out Inventory Cost Flow
Aug. 21 Second purchase 25 units @ 250$ = 6,250$ Mar. 18 First purchase 18 units @ 220$ = 3,960 Total cost of the 43 bikes sold 10,210$
LIFO Cost of Goods Sold
5-11
Weighted Average Inventory Cost Flow
Total cost of the 43 bikes sold 43 units @ 230$ = 9,890$ Weighted Average Cost of Goods Sold
Total CostTotal
Number
=$12,650
55= $230
5-12
Comparative Financial Statements and the Impact of Income Taxes
5-13
Lower of Cost or Market (LCM)
Inventory must be reported at Inventory must be reported at lowerlower of cost of cost or market.or market.
Inventory must be reported at Inventory must be reported at lowerlower of cost of cost or market.or market.
Applied three ways:(1) separately to each individual item.(2) to major classes or categories of
assets.(3) to the whole
inventory.
Applied three ways:(1) separately to each individual item.(2) to major classes or categories of
assets.(3) to the whole
inventory.
Market is defined as current
replacement cost (not sales price).Consistent with
the conservatismprinciple.
Market is defined as current
replacement cost (not sales price).Consistent with
the conservatismprinciple.
5-14
5-15
If Ending Inventory is overstated then Cost of Goods Sold will be understated.
5-16
If Cost of Goods Sold is understated, then Gross Margin is overstated.
Resulting in overstatement of Net Income.
5-17
Then, on the balance sheet Inventory is overstated and Retained Earnings is overstated.
5-18
Calculate the expected gross margin ratio using prior period’s income statement.
Multiply the expected gross margin ratio by the current period’s sales to estimate the amount of gross margin.
Subtract the estimated gross margin from sales to estimate cost of goods sold.
Subtract the estimated cost of goods sold from the amount of goods available for sale to estimate the ending inventory.
Calculate the expected gross margin ratio using prior period’s income statement.
Multiply the expected gross margin ratio by the current period’s sales to estimate the amount of gross margin.
Subtract the estimated gross margin from sales to estimate cost of goods sold.
Subtract the estimated cost of goods sold from the amount of goods available for sale to estimate the ending inventory.
The Gross Margin Method
5-19
Inventory Turnover
Cost of Goods SoldInventory
This measures how quickly a company
sells its merchandise inventory.
This is the first step in calculating the average number of days to sell
inventory.
5-20
Average Number of Days to Sell Inventory
365Inventory Turnover
This measures how many days, on average, it takes to sell inventory.
Other things being equal, the company with the lower average
number of days to sell inventory is doing better.
5-21
End of Chapter Five
5-22