Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 By Jessica Huff.
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Transcript of Created for ENMU Tutoring/Supplemental Instruction Huff Fall 2011 By Jessica Huff.
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
InventoryBy Jessica Huff
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Ownership of GoodsGoods in Transit
Free on Board (FOB) shipping says that the goods are yours once another company ships them to you
FOB destination means that the goods are yours when you receive them
Consigned GoodsThese are goods that you are holding, but
they are not yoursYou sell them for a fee/commissionAntique dealers do this quite often
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Inventory SystemsPerpetual- Perpetual systems keep track
of inventory simultaneouslyAn example would be a grocery store where
every time an items crosses the scanner, it is taken off of inventory
Periodic- Inventory is physically checked at certain timesThis could be a small business that cannot
afford to have a perpetual systemMany companies adopt both systems
because even a computer can be wrong (theft is a good example of why it would be wrong)
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Solving Inventory ProblemsWhen doing inventory problems, you first
need to think about the system that is being used
Every company will begin with a certain amount, then make purchases and sell inventory in any given periodFIFO will sell inventory starting with the
beginning balanceLIFO will sell inventory starting with the
last purchaseWeighted-Average will sell inventory in any
order without giving preference
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Inventory MethodsFIFO (First-in, First-out)- The goods that are
received or made first will be sold firstMost companies use this methodMakes sense for things that expire because if you
don’t sell them now, they will go bad (milk, eggs, etc.)
LIFO (Last-in, First-out)- The newest goods that are received or made will be sold firstGeneral Accepted Accounting Principles (GAAP)
is doing away with this methodCompanies that don’t have goods that expire can
use this (tires, laundry detergent, etc.)Weighted-Average- The average unit cost is
found and then everything is sold as a lump
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Formula
Cost of Goods Available for Sale
Less: Cost of Goods Sold= Ending Inventory
Ending InventoryAdd: Cost of Goods Sold= Cost of Goods Available
for Sale
Cost of Goods Available for SaleLess: Ending Inventory= Cost of Goods Sold
It can also be written as:
Cost of Goods SoldAdd: Ending Inventory=Cost of Goods Available
for Sale
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Formula, ContinuedThe point of the different variations is to
point out that there are many different ways to solve inventory problems
Depending on what is easiest for you will dictate how to approach the problems
Cost of Goods Available for Sale is almost always givenWhat is important is calculating Cost of Goods
Sold or Ending InventoryProblems will give one of these two to calculate
the rest of the equation
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
FIFO ExampleDate Explanation Units Unit Cost
Total CostJan. 1 Beg. Bal. 200 x $5 =
$1,000Mar. 10 Purchase 50 x 8 =
400Jun. 20 Purchase 300 x 4 =
1,200Nov. 3 Purchase 150 x 6 =
900 Total 700
$3,500
Units sold during the year= 600
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Cost of Goods Available for SaleThe Cost of Goods Available for Sale (COGAS)
is calculated by taking the beginning inventory + any purchases made during the period being looked at
Question: So, for this problem, what is the Cost of Goods Available for Sale?
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Cost of Goods Available for SaleDate Explanation Units Unit Cost
Total CostJan. 1 Beg. Bal. 200 x $5 =
$1,000Mar. 10 Purchase 50 x 8 =
400Jun. 20 Purchase 300 x 4 =
1,200Nov. 3 Purchase 150 x 6 =
900 Total 700
$3,500
Cost of Goods Available for Sale
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Calculating Ending InventoryThe problem says that 600 units were sold
during the periodQuestion: What is the amount for Ending
Inventory (EI)?Remember, we’re doing FIFO!!
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Ending InventoryDate Explanation Units Unit Cost
Total CostJan. 1 Beg. Bal. 200 x $5
= $1,000Mar. 10 Purchase 50 x 8
= 400Jun. 20 Purchase 300 x 4
= 1,200Nov. 3 Purchase 150 x 6
= 900 Total 700
$3,500Since we’re selling 600, we’re selling
everything in red and part of the orange which leaves 100 units not sold
100*$6= $600 is the Ending Inventory
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Calculating Cost of Goods SoldThe problem says that 600 units were sold
during the periodQuestion: What is the amount for Cost of
Goods Sold (COGS)?Work it out not plugging into the formula
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Cost of Goods SoldDate Explanation Units Unit Cost Total CostJan. 1 Beg. Bal. 200 x $5 = $1,000Mar. 10 Purchase 50 x 8 = 400Jun. 20 Purchase 300 x 4 = 1,200Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500Since we’re selling 600, we’re selling everything in red and
part of the orange to make up the 600$1,000+$400+$1,200+ (50*$6)= $2,900 is Cost of Goods Sold
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Checking Your WorkNow, to check your work, you put the numbers into
the equation Cost of Goods Available for Sale $3,500 Less: Cost of Goods Sold 2,900 Ending Inventory $600Sure enough, the equation works outAnother way of solving the problem is to figure out
two parts of the equation and solve for the thirdThis is where what’s easiest for you comes inSince COGAS was given, you can calculated EI or
COGS to get to the other answer instead of working it out by hand
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
LIFO Example- Same ProblemDate Explanation Units Unit Cost
Total CostJan. 1 Beg. Bal. 200 x $5 =
$1,000Mar. 10 Purchase 50 x 8 =
400Jun. 20 Purchase 300 x 4 =
1,200Nov. 3 Purchase 150 x 6 =
900 Total 700
$3,500
Units sold during the year= 600
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
SolvingQuestion: What is the Cost of Goods
Available for Sale? Question: What is the Ending Inventory?
Remember: we’re doing LIFO!!Question: What is the Cost of Goods
Sold?Don’t plug it into the formula again
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Cost of Goods Available for SaleDate Explanation Units Unit Cost
Total CostJan. 1 Beg. Bal. 200 x $5 =
$1,000Mar. 10 Purchase 50 x 8 =
400Jun. 20 Purchase 300 x 4 =
1,200Nov. 3 Purchase 150 x 6 =
900 Total 700
$3,500
Cost of Goods Available for SaleNote: It’s the same answer as
before
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Ending InventoryDate Explanation Units Unit Cost
Total CostJan. 1 Beg. Bal. 200 x $5
= $1,000Mar. 10 Purchase 50 x 8
= 400Jun. 20 Purchase 300 x 4
= 1,200Nov. 3 Purchase 150 x 6
= 900 Total 700
$3,500Since we’re selling 600, we’re selling
everything in red and part of the orange which leaves 100 units not sold
100*$5= $500 is the Ending Inventory
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Cost of Goods SoldDate Explanation Units Unit Cost Total CostJan. 1 Beg. Bal. 200 x $5 = $1,000Mar. 10 Purchase 50 x 8 = 400Jun. 20 Purchase 300 x 4 = 1,200Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500Since we’re selling 600, we’re selling everything in red and
part of the orange to make up the 600$900+$1,200+$400+ (100*$5)= $3,000 is Cost of Goods Sold
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Checking Your WorkNow, to check your work, you put the
numbers into the equation Cost of Goods Available for Sale
$3,500 Less: Cost of Goods Sold
3,000 Ending Inventory
$500Sure enough, the equation works out
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Weighted-Average- Same Problem
Date Explanation Units Unit Cost Total Cost
Jan. 1 Beg. Bal. 200 x $5 = $1,000
Mar. 10 Purchase 50 x 8 = 400
Jun. 20 Purchase 300 x 4 = 1,200
Nov. 3 Purchase 150 x 6 = 900
Total 700 $3,500
Units sold during the year= 600
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
SolvingQuestion: What is the Cost of Goods
Available for Sale?If you said $3,500, you are correct!!
Question: What is the Ending Inventory?Remember: we’re doing Weighted-Average!!
Question: What is the Cost of Goods Sold?Don’t plug it into the formula again
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Ending InventoryDate Explanation Units Unit Cost
Total CostJan. 1 Beg. Bal. 200 x $5 =
$1,000Mar. 10 Purchase 50 x 8 =
400Jun. 20 Purchase 300 x 4 =
1,200Nov. 3 Purchase 150 x 6 =
900 Total 700
$3,500Unit Cost= COGAS/Units= $3,500/700= $5Since there are 100 units left 100*5=$500 is Ending Inventory
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Cost of Goods SoldDate Explanation Units Unit Cost Total CostJan. 1 Beg. Bal. 200 x $5 = $1,000Mar. 10 Purchase 50 x 8 = 400Jun. 20 Purchase 300 x 4 = 1,200Nov. 3 Purchase 150 x 6 = 900 Total 700 $3,500Since we’re selling 600 units 600*5=$3,000 Cost of Goods Sold
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Checking Your WorkNow, to check your work, you put the
numbers into the equation Cost of Goods Available for Sale
$3,500 Less: Cost of Goods Sold
3,000 Ending Inventory
$500Sure enough, the equation works out
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Income Statement Effects FIFO Average LIFO
COGAS $3,500 $3,500 $3,500COGS 2,900 3,000 3,000EI 600 500 500Net Income Highest Medium Medium
With the exception of this problem, Weighted-Average and LIFO do not usually come out equalLIFO has a higher COGS and lower EILIFO will result in a lower Net Income than Weighted-
Average
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Lower of Cost or MarketThis is used after an inventory method is
chosenThis replacement method is used when
the value of inventory go down (is impaired)
Basically, the company looks at if the cost is lower than the market or vice versa and takes that amount as the new value
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
Lower of Cost or Market Example
Lower of Cost Market
Cost or MarketBooks $3,000 $2,500
$2,500Music 3,500 3,600
3,500Movies 4,000 5,000
4,000Total Inventory $10,500 $11,100
$10,000
So, you take the lower of the cost or market, and that becomes your new amount ($10,000)
Created for ENMU Tutoring/Supplemental Instruction
Huff Fall 2011
More ProblemsYou can challenge yourself by coming up with
different problemsOnce you understand the basics, these
problems are very easy to doWork them as many ways as you can think of
and remember to CHECK YOUR WORK!!