Chapter
6-1
Chapter
6-2
Reporting and
Analyzing Inventory
Accounting, Third Edition
Chapter
6-3
1. Describe the steps in determining inventory quantities.
2. Explain the basis of accounting for inventories ...
Chapter
6-4
Classifying
Inventory
Finished goods
Work in process
Raw materials
Inventory
turnover ratio
LIFO reserve
Speci...
Chapter
6-5
Classifying Inventory
One Classification:
Merchandise
Inventory
Three Classifications:
Raw Materials
Work in P...
Chapter
6-6
Chapter
6-7
Physical Inventory taken for two reasons:
Perpetual System
1. Check accuracy of inventory records.
2. Determin...
Chapter
6-8
Involves counting, weighing, or measuring each
kind of inventory on hand.
Taken,
when the business is closed o...
Chapter
6-9
Goods in Transit
Purchased goods not yet received.
Sold goods not yet delivered.
Determining Ownership of Good...
Chapter
6-10
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.
Illustration 6-...
Chapter
6-11
Goods in transit should be included in the
inventory of the buyer when the:
a. public carrier accepts the goo...
Chapter
6-12
Consigned Goods
Goods held for sale by one party although
ownership of the goods is retained by another
party...
Chapter
6-13
Unit costs can be applied to quantities on hand
using the following costing methods:
Specific Identification
...
Chapter
6-14
Illustration: Assume that BPL TV Company purchases
three identical 46-inch TVs on different dates at costs of...
Chapter
6-15
“Specific Identification”
Inventory Costing
If Crivitz sold the TVs it purchased on February 3 and May
22, th...
Chapter
6-16
An actual physical flow costing method in which
items still in inventory are specifically costed to
arrive at...
Chapter
6-17
Inventory Costing – Cost Flow Assumptions
Illustration 6-11
Use of cost flow methods in
major U.S. companies
...
Chapter
6-18
Illustration: Data for Houston Electronics’ Astro
condensers.
Inventory Costing – Cost Flow Assumptions
Illus...
Chapter
6-19
Earliest goods purchased are first to be
sold.
Often parallels actual physical flow of
merchandise.
Generally...
Chapter
6-20
“First-In-First-Out (FIFO)”
Inventory Costing – Cost Flow Assumptions
Illustration 6-5
SO 2 Explain the basis...
Chapter
6-21
“First-In-First-Out (FIFO)”
Inventory Costing – Cost Flow Assumptions
Illustration 6-5
SO 2 Explain the basis...
Chapter
6-22
Latest goods purchased are first to be sold.
Seldom coincides with actual physical flow of
merchandise.
Excep...
Chapter
6-23
“Last-In-First-Out (LIFO)”
Inventory Costing – Cost Flow Assumptions
Illustration 6-7
SO 2 Explain the basis ...
Chapter
6-24
“Last-In-First-Out (LIFO)”
Inventory Costing – Cost Flow Assumptions
Illustration 6-7
SO 2 Explain the basis ...
Chapter
6-25
Allocates cost of goods available for sale on
the basis of weighted average unit cost
incurred.
Assumes goods...
Chapter
6-26
“Average Cost”
Inventory Costing – Cost Flow Assumptions
Illustration 6-10
SO 2 Explain the basis of accounti...
Chapter
6-27
”Average Cost”
Inventory Costing – Cost Flow Assumptions
Illustration 6-10
SO 2 Explain the basis of accounti...
Chapter
6-28
FIFO
LO 3 Explain the financial statement and tax effects of
each of the inventory cost flow assumptions.
Inv...
Chapter
6-29
FIFO
Inventory Costing – Cost Flow Assumptions
Sales $9,000 $9,000 $9,000
Cost of goods sold 6,200 6,600 7,00...
Chapter
6-30
FIFO
Inventory Costing – Cost Flow Assumptions
Sales $9,000 $9,000 $9,000
Cost of goods sold 6,200 6,600 7,00...
Chapter
6-31
The cost flow method that often parallels the
actual physical flow of merchandise is the:
a. FIFO method.
b. ...
Chapter
6-32
In a period of inflation, the cost flow method
that results in the lowest income taxes is the:
a. FIFO method...
Chapter
6-33
Chapter
6-34
Using Cost Flow Methods Consistently
Inventory Costing
Method should be used consistently, enhances
comparabi...
Chapter
6-35
Lower-of-Cost-or-Market
Inventory Costing
SO 4 Explain the lower-of-cost-or-market
basis of accounting for in...
Chapter
6-36
Lower-of-Cost-or-Market
Inventory Costing
SO 4 Explain the lower-of-cost-or-market
basis of accounting for in...
Chapter
6-37
Analysis of Inventory
Inventory management is a double-edged sword
1. High Inventory Levels - may incur high ...
Chapter
6-38
Inventory turnover measures the number of times
on average the inventory is sold during the period.
Cost of G...
Chapter
6-39
Illustration: The following data are available for
Wal-Mart.
$264,152
(33,685 + 31,910) / 2
Inventory
Turnove...
Chapter
6-40
Illustration: The following data are available for
Wal-Mart.
$237,649
(31,910 + 29,419) / 2
Inventory
Turnove...
Chapter
6-41
Chapter
6-42
Analysis of Inventory
Companies using LIFO are required to report the amount
that inventory would increase (o...
Chapter
6-43
Analysis of Inventory
The LIFO reserve can have a significant effect on ratios
analysts commonly use.
Analyst...
Chapter
6-44
Illustration:
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual ...
Chapter
6-45
FIFO:
Transactions: Inventory Balance:
Date Units Layer 1 Layer 2 Layer 3 Layer 4 Total
Jan. 1 100 100
Apr. 1...
Chapter
6-46
LIFO:
Transactions: Inventory Balance:
Date Units Layer 1 Layer 2 Layer 3 Layer 4 Total
Jan. 1 100 100
Apr. 1...
Chapter
6-47
Transactions: Average
Date Units Cost Total Units Cost Cost
Jan. 1 100 10.00$ 1,000$ 100 1,000$ 10.00$
Apr. 1...
Chapter
6-48
Transactions: Average
Date Units Cost Total Units Cost Cost
Jan. 1 100 10.00$ 1,000$ 100 1,000$ 10.00$
Apr. 1...
Chapter
6-49
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial statements.
Common Cause:
Fai...
Chapter
6-50
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial statements.
Inventory errors ...
Chapter
6-51
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial statements.
Inventory errors ...
Chapter
6-52
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial statements.
Incorrect Correct...
Chapter
6-53
Understating ending inventory will overstate:
a. assets.
b. cost of goods sold.
c. net income.
d. owner's equ...
Chapter
6-54
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial statements.
Effect of invento...
Chapter
6-55
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyon...
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inventory mgt by mahi

  1. 1. Chapter 6-1
  2. 2. Chapter 6-2 Reporting and Analyzing Inventory Accounting, Third Edition
  3. 3. Chapter 6-3 1. Describe the steps in determining inventory quantities. 2. Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. 3. Explain the financial statement and tax effects of each of the inventory cost flow assumptions. 4. Explain the lower-of-cost-or-market basis of accounting for inventories. 5. Compute and interpret the inventory turnover ratio. 6. Describe the LIFO reserve and explain its importance for comparing results of different companies. 7. Apply the inventory cost flow methods to perpetual inventory records. 8. Indicate the effects of inventory errors on the financial statements. Study Objectives
  4. 4. Chapter 6-4 Classifying Inventory Finished goods Work in process Raw materials Inventory turnover ratio LIFO reserve Specific identification Cost flow assumptions Financial statement and tax effects Consistent use Lower-of-cost- or-market Taking a physical inventory Determining ownership of goods Determining Inventory Quantities Inventory Costing Analysis of Inventory Reporting and Analyzing Inventory
  5. 5. Chapter 6-5 Classifying Inventory One Classification: Merchandise Inventory Three Classifications: Raw Materials Work in Process Finished Goods Merchandising Company Manufacturing Company Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.
  6. 6. Chapter 6-6
  7. 7. Chapter 6-7 Physical Inventory taken for two reasons: Perpetual System 1. Check accuracy of inventory records. 2. Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft). Periodic System 1. Determine the inventory on hand 2. Determine the cost of goods sold for the period. Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities.
  8. 8. Chapter 6-8 Involves counting, weighing, or measuring each kind of inventory on hand. Taken, when the business is closed or when business is slow. at end of the accounting period. Taking a Physical Inventory Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities.
  9. 9. Chapter 6-9 Goods in Transit Purchased goods not yet received. Sold goods not yet delivered. Determining Ownership of Goods Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities. Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of sale.
  10. 10. Chapter 6-10 Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities. Illustration 6-1 Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Ownership of the goods remains with the seller until the goods reach the buyer. Terms of Sale
  11. 11. Chapter 6-11 Goods in transit should be included in the inventory of the buyer when the: a. public carrier accepts the goods from the seller. b. goods reach the buyer. c. terms of sale are FOB destination. d. terms of sale are FOB shipping point. Review Question Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities.
  12. 12. Chapter 6-12 Consigned Goods Goods held for sale by one party although ownership of the goods is retained by another party. Determining Ownership of Goods Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities.
  13. 13. Chapter 6-13 Unit costs can be applied to quantities on hand using the following costing methods: Specific Identification First-in, first-out (FIFO) Last-in, first-out (LIFO) Average-cost Inventory Costing SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. Cost Flow Assumptions
  14. 14. Chapter 6-14 Illustration: Assume that BPL TV Company purchases three identical 46-inch TVs on different dates at costs of rs.700, rs.750, and rs.800. During the year BPL sold two sets at RS.1,200 each. These facts are summarized below. Inventory Costing Illustration 6-2 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  15. 15. Chapter 6-15 “Specific Identification” Inventory Costing If Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold is $1,500 ($700 + $800), and its ending inventory is $750. Illustration 6-3 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  16. 16. Chapter 6-16 An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory. Practice is relatively rare. Most companies make assumptions (Cost Flow Assumptions) about which units were sold. Specific Identification Method Inventory Costing SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  17. 17. Chapter 6-17 Inventory Costing – Cost Flow Assumptions Illustration 6-11 Use of cost flow methods in major U.S. companies Cost Flow Assumption does not need to equal Physical Movement of Goods SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  18. 18. Chapter 6-18 Illustration: Data for Houston Electronics’ Astro condensers. Inventory Costing – Cost Flow Assumptions Illustration 6-4 (Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  19. 19. Chapter 6-19 Earliest goods purchased are first to be sold. Often parallels actual physical flow of merchandise. Generally good business practice to sell oldest units first. “First-In-First-Out (FIFO)” Inventory Costing – Cost Flow Assumptions SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  20. 20. Chapter 6-20 “First-In-First-Out (FIFO)” Inventory Costing – Cost Flow Assumptions Illustration 6-5 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. Solution on notes page
  21. 21. Chapter 6-21 “First-In-First-Out (FIFO)” Inventory Costing – Cost Flow Assumptions Illustration 6-5 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  22. 22. Chapter 6-22 Latest goods purchased are first to be sold. Seldom coincides with actual physical flow of merchandise. Exceptions include goods stored in piles, such as coal or hay. “Last-In-First-Out (LIFO)” Inventory Costing – Cost Flow Assumptions SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  23. 23. Chapter 6-23 “Last-In-First-Out (LIFO)” Inventory Costing – Cost Flow Assumptions Illustration 6-7 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. Solution on notes page
  24. 24. Chapter 6-24 “Last-In-First-Out (LIFO)” Inventory Costing – Cost Flow Assumptions Illustration 6-7 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  25. 25. Chapter 6-25 Allocates cost of goods available for sale on the basis of weighted average unit cost incurred. Assumes goods are similar in nature. Applies weighted average unit cost to the units on hand to determine cost of the ending inventory. “Average Cost” Inventory Costing – Cost Flow Assumptions SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  26. 26. Chapter 6-26 “Average Cost” Inventory Costing – Cost Flow Assumptions Illustration 6-10 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. Solution on notes page
  27. 27. Chapter 6-27 ”Average Cost” Inventory Costing – Cost Flow Assumptions Illustration 6-10 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
  28. 28. Chapter 6-28 FIFO LO 3 Explain the financial statement and tax effects of each of the inventory cost flow assumptions. Inventory Costing – Cost Flow Assumptions Sales $9,000 $9,000 $9,000 Cost of goods sold 6,200 6,600 7,000 Gross profit 2,800 2,400 2,000 Admin. & selling expense 330 330 330 Income before taxes 2,470 2,070 1,670 Income tax expense 140 120 110 Net income $2,330 $1,950 $1,560 Inventory balance $5,800 $5,400 $5,000 LIFOAverage Comparative Financial Statement Summary
  29. 29. Chapter 6-29 FIFO Inventory Costing – Cost Flow Assumptions Sales $9,000 $9,000 $9,000 Cost of goods sold 6,200 6,600 7,000 Gross profit 2,800 2,400 2,000 Admin. & selling expense 330 330 330 Income before taxes 2,470 2,070 1,670 Income tax expense 140 120 110 Net income $2,330 $1,950 $1,560 Inventory balance $5,800 $5,400 $5,000 LIFOAverage In Period of Rising Prices, FIFO Reports: Highest Lowest LO 3 Explain the financial statement and tax effects of each of the inventory cost flow assumptions.
  30. 30. Chapter 6-30 FIFO Inventory Costing – Cost Flow Assumptions Sales $9,000 $9,000 $9,000 Cost of goods sold 6,200 6,600 7,000 Gross profit 2,800 2,400 2,000 Admin. & selling expense 330 330 330 Income before taxes 2,470 2,070 1,670 Income tax expense 140 120 110 Net income $2,330 $1,950 $1,560 Inventory balance $5,800 $5,400 $5,000 LIFOAverage In Period of Rising Prices, LIFO Reports: Lowest Highest LO 3 Explain the financial statement and tax effects of each of the inventory cost flow assumptions.
  31. 31. Chapter 6-31 The cost flow method that often parallels the actual physical flow of merchandise is the: a. FIFO method. b. LIFO method. c. average cost method. d. gross profit method. Review Question Inventory Costing – Cost Flow Assumptions LO 3 Explain the financial statement and tax effects of each of the inventory cost flow assumptions.
  32. 32. Chapter 6-32 In a period of inflation, the cost flow method that results in the lowest income taxes is the: a. FIFO method. b. LIFO method. c. average cost method. d. gross profit method. Review Question Inventory Costing – Cost Flow Assumptions LO 3 Explain the financial statement and tax effects of each of the inventory cost flow assumptions.
  33. 33. Chapter 6-33
  34. 34. Chapter 6-34 Using Cost Flow Methods Consistently Inventory Costing Method should be used consistently, enhances comparability. Although consistency is preferred, a company may change its inventory costing method. Illustration 6-14 Disclosure of change in cost flow method LO 3 Explain the financial statement and tax effects of each of the inventory cost flow assumptions.
  35. 35. Chapter 6-35 Lower-of-Cost-or-Market Inventory Costing SO 4 Explain the lower-of-cost-or-market basis of accounting for inventories. When the value of inventory is lower than its cost Companies can “write down” the inventory to its market value in the period in which the price decline occurs. Market value = Replacement Cost Example of conservatism.
  36. 36. Chapter 6-36 Lower-of-Cost-or-Market Inventory Costing SO 4 Explain the lower-of-cost-or-market basis of accounting for inventories. Illustration: Assume that Ken Tuckie TV has the following lines of merchandise with costs and market values as indicated. Inventory Cost Market Lower of Categories Data Data Cost or Market TVs 60,000$ 55,000$ Radios 45,000 52,000 DVD recorders 48,000 45,000 DVDs 14,000 12,800 Total inventory $ 55,000 45,000 45,000 12,800 $157,800
  37. 37. Chapter 6-37 Analysis of Inventory Inventory management is a double-edged sword 1. High Inventory Levels - may incur high carrying costs (e.g., investment, storage, insurance, obsolescence, and damage). 2. Low Inventory Levels – may lead to stockouts and lost sales. Analysis of Inventory SO 5 Compute and interpret the inventory turnover ratio.
  38. 38. Chapter 6-38 Inventory turnover measures the number of times on average the inventory is sold during the period. Cost of Goods Sold Average Inventory Inventory Turnover = Days in inventory measures the average number of days inventory is held. Days in Year (365) Inventory Turnover Days in Inventory = SO 5 Compute and interpret the inventory turnover ratio. Analysis of Inventory
  39. 39. Chapter 6-39 Illustration: The following data are available for Wal-Mart. $264,152 (33,685 + 31,910) / 2 Inventory Turnover 2007 = SO 5 Compute and interpret the inventory turnover ratio. Analysis of Inventory = 8.1 times 365 Days 8.1 Days in inventory 2007 = = 45.1 Days
  40. 40. Chapter 6-40 Illustration: The following data are available for Wal-Mart. $237,649 (31,910 + 29,419) / 2 Inventory Turnover 2006 = SO 5 Compute and interpret the inventory turnover ratio. Analysis of Inventory = 7.7 times 365 Days 7.7 Days in inventory 2006 = = 47.4 Days
  41. 41. Chapter 6-41
  42. 42. Chapter 6-42 Analysis of Inventory Companies using LIFO are required to report the amount that inventory would increase (or occasionally decrease) if the company had instead been using FIFO. This amount is referred to as the LIFO reserve. Analysts’ Adjustments for LIFO Reserve SO 6 Describe the LIFO reserve and explain its importance for comparing results of different companies. Illustration 6-17
  43. 43. Chapter 6-43 Analysis of Inventory The LIFO reserve can have a significant effect on ratios analysts commonly use. Analysts’ Adjustments for LIFO Reserve SO 6 Describe the LIFO reserve and explain its importance for comparing results of different companies. Illustration 6-19
  44. 44. Chapter 6-44 Illustration: Cost Flow Methods in Perpetual Systems SO 7 Apply the inventory cost flow methods to perpetual inventory records. Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Average cost. Appendix 6A Illustration 6A-1
  45. 45. Chapter 6-45 FIFO: Transactions: Inventory Balance: Date Units Layer 1 Layer 2 Layer 3 Layer 4 Total Jan. 1 100 100 Apr. 15 200 200 Aug. 24 300 300 Sept. 10 (550) (100) (200) (250) Nov. 27 400 400 - - 50 400 450 Cost 10$ 11$ 12$ 13$ 450 -$ -$ 600$ 5,200$ 5,800$ Calculation of Cost of Goods Sold: Units Dollars Beg. inventory 100 1,000$ Purchases 900 11,000 Goods available 1,000 12,000 Ending inventory (450) (5,800) COGS 550 6,200$ Perpetual Inventory FIFO Method+ Cost Flow Methods in Perpetual Systems SO 7 Apply the inventory cost flow methods to perpetual inventory records. Solution on notes page
  46. 46. Chapter 6-46 LIFO: Transactions: Inventory Balance: Date Units Layer 1 Layer 2 Layer 3 Layer 4 Total Jan. 1 100 100 Apr. 15 200 200 Aug. 24 300 300 Sept. 10 (550) (50) (200) (300) Nov. 27 400 400 50 - - 400 450 Cost 10$ 11$ 12$ 13$ 450 500$ -$ -$ 5,200$ 5,700$ Calculation of Cost of Goods Sold: Units Dollars Beg. inventory 100 1,000$ Purchases 900 11,000 Goods available 1,000 12,000 Ending inventory (450) (5,700) COGS 550 6,300$ LIFO Method Cost Flow Methods in Perpetual Systems SO 7 Apply the inventory cost flow methods to perpetual inventory records. Perpetual Inventory + Solution on notes page
  47. 47. Chapter 6-47 Transactions: Average Date Units Cost Total Units Cost Cost Jan. 1 100 10.00$ 1,000$ 100 1,000$ 10.00$ Apr. 15 200 11.00 2,200 300 3,200 10.67 Aug. 24 300 12.00 3,600 600 6,800 11.33 Sept. 10 (550) 11.33 (6,233) 50 567 11.33 Nov. 27 400 13.00 5,200 450 5,767 12.46 450 5,767$ Cost of Goods Sold: Units Dollars Beg. inventory 100 1,000$ Purchases 900 11,000 Goods available 1,000 12,000 Ending inventory (450) (5,767) COGS 550 6,233$ Running Balances Perpetual Inventory Moving Average Cost per unit sold is determined by dividing total inventory $ by total units on hand after each purchase. + Cost Flow Methods in Perpetual Systems SO 7 Apply the inventory cost flow methods to perpetual inventory records.
  48. 48. Chapter 6-48 Transactions: Average Date Units Cost Total Units Cost Cost Jan. 1 100 10.00$ 1,000$ 100 1,000$ 10.00$ Apr. 15 200 11.00 2,200 300 3,200 10.67 Aug. 24 300 12.00 3,600 600 6,800 11.33 Sept. 10 (550) 11.33 (6,233) 50 567 11.33 Nov. 27 400 13.00 5,200 450 5,767 12.81 450 5,767$ Cost of Goods Sold: Units Dollars Beg. inventory 100 1,000$ Purchases 900 11,000 Goods available 1,000 12,000 Ending inventory (450) (5,767) COGS 550 6,233$ Running Balances Perpetual Inventory Moving Average Cost per unit sold is determined by dividing total inventory $ by total units on hand after each purchase. + Cost Flow Methods in Perpetual Systems SO 7 Apply the inventory cost flow methods to perpetual inventory records.
  49. 49. Chapter 6-49 Inventory Errors SO 8 Indicate the effects of inventory errors on the financial statements. Common Cause: Failure to count or price inventory correctly. Not properly recognizing the transfer of legal title to goods in transit. Errors affect both the income statement and balance sheet. Appendix 6B
  50. 50. Chapter 6-50 Inventory Errors SO 8 Indicate the effects of inventory errors on the financial statements. Inventory errors affect the computation of cost of goods sold and net income. Income Statement Effects Illustration 6-B2 Illustration 6-B1
  51. 51. Chapter 6-51 Inventory Errors SO 8 Indicate the effects of inventory errors on the financial statements. Inventory errors affect the computation of cost of goods sold and net income in two periods. An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period. Over the two years, the total net income is correct because the errors offset each other. The ending inventory depends entirely on the accuracy of taking and costing the inventory. Income Statement Effects
  52. 52. Chapter 6-52 Inventory Errors SO 8 Indicate the effects of inventory errors on the financial statements. Incorrect Correct Incorrect Correct Sales 80,000$ 80,000$ 90,000$ 90,000$ Beginning inventory 20,000 20,000 12,000 15,000 Cost of goods purchased 40,000 40,000 68,000 68,000 Cost of goods available 60,000 60,000 80,000 83,000 Ending inventory 12,000 15,000 23,000 23,000 Cost of good sold 48,000 45,000 57,000 60,000 Gross profit 32,000 35,000 33,000 30,000 Operating expenses 10,000 10,000 20,000 20,000 Net income 22,000$ 25,000$ 13,000$ 10,000$ 2009 2010 ($3,000) Net Income understated $3,000 Net Income overstated Combined income for 2-year period is correct. Illustration 6-B3
  53. 53. Chapter 6-53 Understating ending inventory will overstate: a. assets. b. cost of goods sold. c. net income. d. owner's equity. Review Question Inventory Errors SO 8 Indicate the effects of inventory errors on the financial statements.
  54. 54. Chapter 6-54 Inventory Errors SO 8 Indicate the effects of inventory errors on the financial statements. Effect of inventory errors on the balance sheet is determined by using the basic accounting equation:. Balance Sheet Effects Illustration 6-B1 Illustration 6-B4
  55. 55. Chapter 6-55 “Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Copyright
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