Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… ·...
Transcript of Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… ·...
![Page 1: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/1.jpg)
McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Inventories and the Cost Inventories and the Cost of Goods Soldof Goods SoldChapter 8
![Page 2: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/2.jpg)
8-2
INCOME STATEMENT
Revenue Cost of goods sold Gross profit Expenses Profit
as goods are sold
BALANCE SHEET
Asset Inventory
Purchase costs (or manufacturing
costs)
The Flow of Inventory The Flow of Inventory CostsCosts
![Page 3: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/3.jpg)
8-3
GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Entry on Purchase DateInventory $$$$
Accounts Payable $$$$
Entry on Sale DateCost of Goods Sold $$$$
Inventory $$$$
In a perpetual inventory system, inventory entries parallel the flow of costs.
The Flow of Inventory The Flow of Inventory CostsCosts
![Page 4: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/4.jpg)
8-4
When identical units of inventory have different 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? Which Unit Did We Sell?
![Page 5: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/5.jpg)
8-5
Inventory Subsidiary Inventory Subsidiary LedgerLedger
A separate subsidiary account is maintained for each item in inventory.
How can we determine the unit cost for the 10 Sept. sale?
Item LL002 Primary supplier Electronic CityDescription Laser Light Secondary supplier Electric CompanyLocation Storeroom 2 Inventory level: Min: 25 Max: 200
Purchased Sold Balance
Date UnitsUnitCost Total Units
UnitCost
Cost ofGoodsSold Units
UnitCost Total
Sept. 5 100 30$ 3,000$ 100 30$ 3,000$ 9 75 50 3,750 100 30 3,000
75 50 3,750 10 10 ? ? ? ? ?
? ? ?
![Page 6: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/6.jpg)
8-6
The Bike Company (TBC)
Data for an IllustrationData for an Illustration
![Page 7: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/7.jpg)
8-7
On 14 August, TBC sold 20 bikes for $130 each. Of the bikes sold 9 originally cost $91 and
11 cost $106.
Specific Cost IdentificationSpecific Cost Identification
The Cost of Goods Sold for the 14 August sale is $1,985. This leaves 5 units, with a total cost of $515, in inventory:
1 unit that costs $91 and 4 units that cost $106 each.
Purchases Cost of Goods Sold
Date Units Unit Cost Total Units Unit Cost Total Units
Unit Cost Total
Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$
Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$
15 @ 106$
Aug. 14 9 @ 91$ 1 @ 91$
11 @ 106$ 4 @ 106$
Inventory Balance
= 2,500$
= 515$ = 1,985$
Purchases Cost of Goods Sold
Date Units Unit Cost Total Units Unit Cost Total Units
Unit Cost Total
Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$
Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$
15 @ 106$
Aug. 14 9 @ 91$ 1 @ 91$
11 @ 106$ 4 @ 106$
Inventory Balance
= 2,500$
= 515$ = 1,985$
![Page 8: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/8.jpg)
8-8
Retail (20 × $130)
Cost
A similar entry is made after each sale.
Specific Cost IdentificationSpecific Cost Identification
![Page 9: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/9.jpg)
8-9
Purchases Cost of Goods Sold
Date Units Unit Cost Total Units
Unit Cost Total Units
Unit Cost Total
Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$
Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$
15 @ 106$
Aug. 14 9 @ 91$ 1 @ 91$
11 @ 106$ 4 @ 106$
Aug. 17 20 @ 115$ = 2,300$ 1 @ 91$
4 @ 106$
20 @ 115$
Aug. 28 10 @ 119$ = 1,190$ 1 @ 91$
4 @ 106$
20 @ 115$
10 @ 119$
Aug. 31 1 @ 91$ 1 @ 106$
3 @ 106$ 5 @ 115$
15 @ 115$ 6 @ 119$
4 @ 119$
= 1,395$
= 1,985$
= 2,610$
= 2,815$
= 4,005$
Inventory Balance
= 2,500$
= 515$
Additional purchases were made on 17 and 28 August .
Specific Cost IdentificationSpecific Cost Identification
![Page 10: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/10.jpg)
8-10
Balance Sheet Inventory = $1,395
Specific Cost IdentificationSpecific Cost IdentificationCost of Goods Sold
Units Unit Cost Total Units
Unit Cost Total
10 @ 91$ = 910$
10 @ 91$
15 @ 106$
9 @ 91$ 1 @ 91$
11 @ 106$ 4 @ 106$
1 @ 91$
4 @ 106$
20 @ 115$
1 @ 91$
4 @ 106$
20 @ 115$
10 @ 119$
1 @ 91$ 1 @ 106$
3 @ 106$ 5 @ 115$
15 @ 115$ 6 @ 119$
4 @ 119$
Inventory Balance
= 2,500$
= 515$
= 1,395$
= 1,985$
= 2,610$
= 2,815$
= 4,005$
Income StatementCOGS = $4,595
![Page 11: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/11.jpg)
8-11
Purchases Cost of Goods Sold
Date Units Unit Cost Total Units Unit Cost Total Units Unit Cost Total
Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$
Aug. 3 15 @ 106$ = 1,590$ 25 @ 100$ = 2,500$
Aug. 14 20 @ 100$ = 2,000$ 5 @ 100$ = 500$
Inventory Balance
Weighted Average Cost Weighted Average Cost MethodMethod
The weighted average cost per unit must be
computed prior to each sale.
On 14 August, TBC sold 20 bikes for $130 each. On 14 August, TBC sold 20 bikes for $130 each.
$2,500 25 = $100 avg. cost
![Page 12: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/12.jpg)
8-12
Purchases Cost of Goods Sold
Date Units Unit Cost Total Units
Unit Cost Total Units
Unit Cost Total
Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$
Aug. 3 15 @ 106$ = 1,590$ 25 @ 100$ = 2,500$
Aug. 14 20 @ 100$ = 2,000$ 5 @ 100$ = 500$
Aug. 17 20 @ 115$ = 2,300$ 25 @ 112$ = 2,800$
Aug. 28 10 @ 119$ = 1,190$ 35 @ 114$ = 3,990$
Aug. 31 23 @ 114$ = 2,622$ 12 @ 114$ = 1,368$
Inventory Balance
$114 = $3,990 35
Additional purchases were made on 17 August and 28 August. On 31 August, an additional 23 units
were sold.
Weighted Average Cost Weighted Average Cost MethodMethod
![Page 13: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/13.jpg)
8-13
Income StatementCOGS = $4,622
Balance Sheet Inventory = $1,368
Cost of Goods Sold
Units Unit Cost Total Units
Unit Cost Total
10 @ 91$ = 910$
25 @ 100$ = 2,500$
20 @ 100$ = 2,000$ 5 @ 100$ = 500$
25 @ 112$ = 2,800$
35 @ 114$ = 3,990$
23 @ 114$ = 2,622$ 12 @ 114$ = 1,368$
Inventory Balance
Weighted Average Cost Weighted Average Cost MethodMethod
![Page 14: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/14.jpg)
8-14
Purchases Cost of Goods Sold
Date Units Unit Cost Total Units
Unit Cost Total Units
Unit Cost Total
Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$
Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$
15 @ 106$
Aug. 14 10 @ 91$
10 @ 106$ @ 106$
Inventory Balance
= 2,500$
= 1,970$ = 530$ 5
On 14 August, TBC sold 20 bikes for $130 each. On 14 August, TBC sold 20 bikes for $130 each.
The Cost of Goods Sold for the 14 August sale is $1,970, leaving 5 units, with a total cost of $530, in inventory.
First-In, First-Out Method First-In, First-Out Method (FIFO)(FIFO)
![Page 15: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/15.jpg)
8-15
Additional purchases were made on 17 Aug. and 28 Aug. On 31 August, an additional 23 units were sold.
First-In, First-Out Method First-In, First-Out Method (FIFO)(FIFO)
Purchases Cost of Goods Sold
Date Units Unit Cost Total Units
Unit Cost Total Units
Unit Cost Total
Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$
Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$
15 @ 106$
Aug. 14 10 @ 91$
10 @ 106$
Aug. 17 20 @ 115$ = 2,300$ 5 @ 106$
20 @ 115$
Aug. 28 10 @ 119$ = 1,190$ 5 @ 106$
20 @ 115$
10 @ 119$
Aug. 31 5 @ 106$ 2 @ 115$
18 @ 115$ 10 @ 119$
@ 106$
= 2,830$
= 4,020$
= 2,600$ = 1,420$
Inventory Balance
= 2,500$
= 1,970$ = 530$ 5
![Page 16: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/16.jpg)
8-16
First-In, First-Out Method First-In, First-Out Method (FIFO)(FIFO)
Cost of Goods Sold
Units Unit Cost Total Units
Unit Cost Total
10 @ 91$ = 910$
10 @ 91$
15 @ 106$
10 @ 91$
10 @ 106$
5 @ 106$
20 @ 115$
5 @ 106$
20 @ 115$
10 @ 119$
5 @ 106$ 2 @ 115$
18 @ 115$ 10 @ 119$
@ 106$
= 2,830$
= 4,020$
= 2,600$ = 1,420$
Inventory Balance
= 2,500$
= 1,970$ = 530$ 5
Balance SheetInventory = $1,420
Income StatementCOGS = $4,570
![Page 17: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/17.jpg)
8-17
Inventory Valuation Methods: A SummaryCosts Allocated to:
ValuationMethod
Cost of GoodsSold Inventory Comments
Specific Actual cost of Actual cost of units Parallels physical flowcostidentification
the units sold remaining Logical method when unitsare uniqueMay be misleading foridentical units
Weightedaverage cost
Number of unitssold times the
Number of units onhand times the
Assigns all units the sameaverage unit cost
average unit cost average unit cost Current costs are averagedin 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 thesale
purchased units Inventory valued at currentcostsMay overstate profit duringperiods of rising prices; mayincrease income taxes due
![Page 18: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/18.jpg)
8-18
Once a company has adopted a particular
accounting method, it should follow that
method consistentlyrather than switch methods from one year to the next.
The Principle of The Principle of ConsistencyConsistency
![Page 19: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/19.jpg)
8-19
The primary reason for taking a physical inventory is to adjust the perpetual inventory
records for unrecorded shrinkage losses, such as theft, spoilage, or breakage.
Taking a Physical Taking a Physical InventoryInventory
![Page 20: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/20.jpg)
8-20
Reduces the value of the inventory.Obsolescence
Adjust inventory value to the lower
of historical cost or net realizable value
(NRV).
Lower of Cost and
Net Realizable Value (LCNRV)
LCNRV and Other Write-LCNRV and Other Write-Downs of InventoryDowns of Inventory
![Page 21: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/21.jpg)
8-21
LCNRV and Other Write-LCNRV and Other Write-Downs of InventoryDowns of Inventory
Cost Market Individual
Items InventoryCategory
TotalInventory
Bicycles: Boy's bicycles 4,200$ 4,600$ 4,200 Girls bicycles 3,800 3,100 3,100 Junior bicycle 5,700 5,000 5,000 Total 13,700$ 12,700$ 12,700 Bicycle accessories: Training wheels 485$ 525$ 485 Headlamps 312 400 312 Protective helmets 700 600 600 Gloves 245 212 212 Kneepads 195 145 145 Total 1,937$ 1,882$ 1,882 Total inventory 15,637$ 14,582$ 14,054$ 14,582$ 14,582$
LCNRV Applied on the Basis of . . .
![Page 22: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/22.jpg)
8-22
Year End
A sale should be recorded when title to the goods passes to the buyer.
F.O.B. shipping
point title passes to
buyer at the point of
shipment.
F.O.B. F.O.B. destination destination pointpoint title passes to
buyer at the point of
destination.
Goods In TransitGoods In Transit
![Page 23: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/23.jpg)
8-23
In a periodic inventory system, inventory entries are as follows.
Note that an entry is not made to inventory.
Periodic Inventory Periodic Inventory SystemsSystems
![Page 24: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/24.jpg)
8-24
In a periodic inventory system, inventory entries are as follows.
Periodic Inventory Periodic Inventory SystemsSystems
![Page 25: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/25.jpg)
8-25
Computers Co.Mouse Pad Inventory
Date Units $/Unit TotalBeginningInventory 1,000 5.25$ 5,250.00$ Purchases:3 Jan. 300 5.30 1,590.00 20 June 150 5.60 840.00 15 Sept. 200 5.80 1,160.00 29 Nov. 150 5.90 885.00 GoodsAvailablefor Sale 1,800 9,725.00$
EndingInventory 1,200 ?
Cost ofGoods Sold 600 ?
Information for the Following Information for the Following Inventory ExamplesInventory Examples
![Page 26: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/26.jpg)
8-26
Computers Co.Mouse Pad Inventory
Date Units $/Unit TotalBeginningInventory 1,000 5.25$ 5,250.00$ Purchases:3 Jan. 300 5.30 1,590.00 20 June 150 5.60 840.00 15 Sept. 200 5.80 1,160.00 29 Nov. 150 5.90 885.00 GoodsAvailablefor Sale 1,800 9,725.00$
EndingInventory 1,200 6,400.00$
Cost ofGoods Sold 600 3,325.00$
Cost of Goods Sold$9,725 - $6,400 = $3,325
Specific Cost IdentificationSpecific Cost Identification
![Page 27: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/27.jpg)
8-27
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 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 ?
WAC $9,725 1,800 = $5.40278
Weighted Average Cost Weighted Average Cost MethodMethod
Computers Co.Mouse Pad Inventory
Date Units $/Unit TotalBeginning Inventory 1,000 5.25$ 5,250.00$ Purchases:3 Jan. 300 5.30 1,590.00 20 June 150 5.60 840.00 15 Sept. 200 5.80 1,160.00 29 Nov. 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 InventoryWAC $5.40278 1,200 =
$6,483Cost of Goods Sold
WAC $5.40278 600 = $3,242
![Page 28: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/28.jpg)
8-28
Remember: Start with the 29 Nov purchase and then add other purchases until you reach the
number of units in ending inventory.
First-In, First-Out Method First-In, First-Out Method (FIFO)(FIFO)
Computers Co.Mouse Pad Inventory
Date Units $/Unit TotalBeginningInventory 1,000 5.25$ 5,250.00$ Purchases:3 Jan. 300 5.30 1,590.00 20 June 150 5.60 840.00 15 Sept. 200 5.80 1,160.00 29 Nov. 150 5.90 885.00 GoodsAvailablefor Sale 1,800 9,725.00$
EndingInventory 1,200 ?
Cost ofGoods Sold 600 ?
![Page 29: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/29.jpg)
8-29
Date Beg. Inv. Purchases End. Inv.Cost of
Goods Sold
29 Nov. 150@$5.90 150@$5.90Units 150
Now, let’s complete the table.
First-In, First-Out Method First-In, First-Out Method (FIFO)(FIFO)
Date Beg. Inv. Purchases End. Inv.Cost of
Goods Sold1,000@$5.25 600@$5.25
400@$5.253 Jan. 300@$5.30 300@$5.3020 June 150@$5.60 150@$5.6015 Sept. 200@$5.80 200@$5.8029 Nov. 150@$5.90 150@$5.90Units 1,200 600
Now, we have allocated the cost to all 1,200 units in ending
inventory.
Date Beg. Inv. Purchases End. Inv.Cost of
Goods Sold1,000@$5.25 600@$5.25
400@$5.253 Jan. 300@$5.30 300@$5.3020 June 150@$5.60 150@$5.6015 Sept. 200@$5.80 200@$5.8029 Nov. 150@$5.90 150@$5.90Units 1,200 600
Costs $6,575 $3,150
Cost of Goods Available for Sale $9,725
![Page 30: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/30.jpg)
8-30
Completing the table
summarizes the
computations just made.
First-In, First-Out Method First-In, First-Out Method (FIFO)(FIFO)
Computers Co.Mouse Pad Inventory
Date Units $/Unit TotalBeginningInventory 1,000 5.25$ 5,250.00$ Purchases:3 Jan. 300 5.30 1,590.00 20 June 150 5.60 840.00 15 Sept. 200 5.80 1,160.00 29 Nov. 150 5.90 885.00 GoodsAvailablefor Sale 1,800 9,725.00$
EndingInventory 1,200 6,575.00$
Cost ofGoods Sold 600 3,150.00$
![Page 31: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/31.jpg)
8-31
Errors in Measuring InventoryBeginning Inventory Ending Inventory
Effect on Income Statement Overstated Understated Overstated UnderstatedGoods Available for Sale + - NE NECost of Goods Sold + - - +Gross Profit - + + -Profit - + + -Effect on Balance SheetEnding Inventory NE NE + -Retained Earnings - + + -An error in ending inventory in a year will result in the
same error in the beginning inventory of the next year.
Importance of an Accurate Importance of an Accurate Valuation of InventoryValuation of Inventory
![Page 32: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/32.jpg)
8-32
The Gross Profit MethodThe Gross Profit Method1. Determine cost of
goods available for sale.
2. Estimate cost of goods sold by multiplying the net sales by the cost ratio.
3. Deduct cost of goods sold from cost of goods available for sale to determine ending inventory.
![Page 33: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/33.jpg)
8-33
The Gross Profit MethodThe Gross Profit MethodIn March 2010, Matrix Company’s inventory was destroyed by fire.
Matrix normal gross profit ratio is 30% of net sales. At the time of the fire,
Matrix showed the following balances:
Sales 315,000$ Sales returns 15,000 Beginning Inventory 120,000 Net cost of goods purchased 205,000
![Page 34: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/34.jpg)
8-34
Goods Available for Sale: Beginning Inventory 120,000$ Net cost of goods purchased 205,000 Goods available for sale 325,000$ Less estimated cost of goods sold: Sales 315,000$ Less sales returns (15,000) Net sales 300,000$ Estimated cost of goods sold (210,000) Estimated March inventory loss 115,000$
Estimating Inventory The Gross Profit Method
Goods Available for Sale: Beginning Inventory 120,000$ Net cost of goods purchased 205,000 Goods available for sale 325,000$ Less estimated cost of goods sold: Sales 315,000$ Less sales returns (15,000) Net sales 300,000$ Estimated cost of goods sold (21,000) Estimated March inventory loss 304,000$
Estimating Inventory The Gross Profit Method
The Gross Profit MethodThe Gross Profit Method
Goods Available for Sale: Beginning Inventory 120,000$ Net cost of goods purchased 205,000 Goods available for sale 325,000$ Less estimated cost of goods sold: Sales 315,000$ Less sales returns (15,000) Net sales 300,000$ Estimated cost of goods sold (210,000) Estimated March inventory loss 115,000$
Estimating Inventory The Gross Profit Method
× × 70%70%
Step 1
Step 2
Step 3
![Page 35: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/35.jpg)
8-35
The Retail MethodThe Retail MethodThe retail method of estimating inventory requires that management determine the value of ending inventory at retail prices.
Goods available for sale at cost 325,000$ Goods available for sale at retail 500,000 Physical count of ending inventory priced at retail 220,000
The Retail Method
In March of 2009, Matrix Company’s inventory was destroyed by fire. At the time of the fire, Matrix’s management collected the following information:
![Page 36: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/36.jpg)
8-36
The Retail MethodThe Retail Method
a Goods available for sale at cost 325,000$ b Goods available for sale at retail 500,000 c Cost ratio [a b] 65%d Physical count of ending inventory priced at retail 220,000 e Estimated ending inventory at cost [ c d] 143,000$
Estimating Inventory The Retail Method
Matrix would follow the steps below to estimate their ending inventory using the retail method.
![Page 37: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/37.jpg)
8-37
(Beginning Inventory + Ending Inventory) ÷ 2
Financial AnalysisFinancial AnalysisCost of Goods SoldAverage Inventory
=Inventory Turnover
365Inventory Turnover
Average Days to Sell Inventory
=
![Page 38: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/38.jpg)
8-38
Financial AnalysisFinancial Analysis
(Beginning Receivables + Ending Receivables) ÷ 2
Net SalesAverage Accounts Receivable=Receivables
Turnover
365Receivables Turnover
Average Days to Collect Receivables
=
![Page 39: Chapter Title - McGraw Hill Educationnovella.mhhe.com/sites/dl/free/0071288961/869226/Chap0… · PPT file · Web viewInventories and the Cost of Goods Sold Chapter 8 Before reporting](https://reader036.fdocuments.us/reader036/viewer/2022081605/5ae6a4937f8b9a3d3b8d7615/html5/thumbnails/39.jpg)
8-39
End of Chapter 8End of Chapter 8