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Hhtfa8e ch06 stud devry Accounting 212 FINANCIAL ACCOUNTING

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devry Accounting 212 FINANCIAL ACCOUNTING

devry Accounting 212 FINANCIAL ACCOUNTING

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Hhtfa8e ch06 stud devry Accounting 212 FINANCIAL ACCOUNTING Hhtfa8e ch06 stud devry Accounting 212 FINANCIAL ACCOUNTING Presentation Transcript

  • Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 1
  • Copyright © 2010 Pearson Education Inc. Publishing as Prentice Hall. 2
  • Inventory and Cost of Goods SoldChapter 6 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 3
  • Merchandise Inventory Balance Sheet (partial) Current assets: Cash $$$$ Accounts receivable $$$$ Inventory (1 chair @ cost of $300) $300 Income Statement (partial) Sales (2 chairs @ $500 selling price) Cost of goods sold (2 chairs @ $300 cost) Gross profit Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 4
  • The cost of The cost of inventory that’s inventory on been sold = hand = Cost of Goods Inventory Sold? on the Balance ? on the Income Sheet Statement Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 5
  • Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 6
  • Number of units• Determined from accounting records• Evidenced by physical count at year end• Consigned goods• In transit goods Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 7
  • Shipping termsFOB Shipping Point FOB Destination• Legal title passes to • Legal title passes to purchaser when items purchaser when items leave seller’s place of arrive at purchaser’s business place of business• Purchaser owns good • Seller owns goods while while in transit in transit• Purchaser pays • Seller pays transportation transportation costs costs Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 8
  • Account for inventory Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 9
  • Inventory Systems Perpetual PeriodicUsed for all types of goods Used for inexpensive goodsKeeps a running total of all Does not keep a runninggoods bought, sold and on total of all goods bought,hand sold and on handInventory counted at least Inventory counted at leastonce a year once a year Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 10
  • Perpetual Inventory• Bar codes on products provide information to record• Two entries needed for each sale Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 11
  • Recording Inventory (Amounts Assumed) JOURNALDate Accounts and explanation Debit Credit Inventory 400,000 Accounts payable 400,000 Purchased inventory on account Accounts receivable 750,000 Sales 750,000 Sold inventory on account Cost of goods sold 380,000 Inventory 380,000 Recorded cost of goods sold Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 12
  • Recording Inventory (Amounts Assumed) Inventory Beginning balance $50,000 $380,000 Cost of goods sold Purchases $400,000 Ending balance $70,000 Cost of Goods SoldCost of goods sold $380,000 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 13
  • Reporting in the FinancialStatements Balance Sheet (partial) Current assets: Cash $$$$ Accounts receivable $$$$ Inventory $70,000 Income Statement (partial) Sales $750,000 Cost of goods sold 380,000 Gross profit $370,000 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 14
  • Cost of Net Purchases Purchase price + Freight-in - Purchase returns - Purchase allowances - Purchase discounts = Net purchases Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 15
  • Net Sales Sales - Sales returns - Sales allowances - Sales discounts = Net sales Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 16
  • Understand the various inventory methods Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 17
  • Inventory Methods Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 18
  • Specific Unit• Used for businesses with unique inventory items• Inventory costed at specific price of the particular unit• Too expensive for inventories with common characteristics Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 19
  • Average Cost Average cost Cost of goods available * per unit Number of units available* *Goods available = Beginning inventory + Purchases Cost of Number of Average cost goods sold units sold per unit Ending Number of Average cost inventory units on hand per unit Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 20
  • First-in, First-out (FIFO)• Oldest items assumed to be sold first• Ending inventory consists of most recent purchase costs Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 21
  • Last-in, First-out (LIFO)• Most recent items purchased are assumed to be sold first• Oldest costs in ending inventory Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 22
  • Problem 6-63A Date Units Cost per Total unit cost Beg. inventory 72 tents $17 Oct. 4 103 tents $19 Oct. 19 158 tents $21 Oct. 25 43 tents $22 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 23
  • Problem 6-63A Average Cost Average cost Cost of goods available * per unit Number of units available* *Goods available = Beginning inventory + Purchases $1,224 + $1,957? +$3,318 + $946 $19.80 (rounded) 72 +103 +158 + 43 ? units Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 24
  • Problem 6-63A Average Cost Cost of Number of Average cost ? $6,415 goods sold ? tents units sold per unit (rounded) Ending Number of ? Average cost $1,030 inventory ? tents units on hand per unit (rounded) Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 25
  • Problem 6-63A FIFO Date Units Cost per Total unit cost Beg. inventory 72 tents $17 Oct. 4 103 tents $19 Oct. 19 158 tents $21 Oct. 25 43 tents $22 Cost of goods sold Ending inventory 72 tents $17 43 tents $22103 tents $19 Oldest items sold 9 tents $21items on Newest149 tents $21 first hand 52 tents324 tents Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 26
  • Problem 6-63A LIFO Date Units Cost per Total unit cost Beg. inventory 72 tents $17 Oct. 4 103 tents $19 Oct. 19 158 tents $21 Oct. 25 43 tents $22 Cost of goods sold Ending inventory 43 tents $22 52 tents $17158 tents $21 Newest items sold Oldest items on first103 tents $19 hand 20 tents $17324 tents Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 27
  • Impact of Inventory Methods onFinancial Statements Increasing inventory prices Cost of goods Ending sold inventory FIFO Lowest because Highest because based on older based on more costs, which are recent and less expensive expensive costs LIFO Highest because Lowest because based on more based on older recent costs, costs, which are which are more less expensive expensive Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 28
  • Impact of Inventory Methods onFinancial Statements Decreasing inventory prices Cost of goods Ending sold inventory FIFO LIFO Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 29
  • Tax Advantage of LIFO In periods of increasing prices Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 30
  • Use of the Various Inventory Methods 4% 19% 48% FIFO LIFO29% Average Other Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 31
  • Comparison of Inventory MethodsCOST OF GOODS SOLD ENDING INVENTORY Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 32
  • LIFO Issues• Allows manipulation of net income• Liquidation can occur• Not allowed under International Standards Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 33
  • Principles Related to Inventories Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 34
  • Consistency• Use the same accounting methods from year-to- year• Allows investors to compare financial statements from one period to the next• Companies are permitted to change methods Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 35
  • Disclosure• Financial statement should disclose enough information for users to make informed decisions Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 36
  • Conservatism• Accountants use caution and care in financial reporting Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 37
  • Lower-of-Cost-or-Market (LCM) • Inventory is reported at the lower of: ▫ Cost or ▫ Market • If market is lower, inventory is written down JOURNALDate Accounts and explanation Debit Credit Cost of goods sold Inventory Wrote down inventory to market Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 38
  • Use gross profit percentage and inventoryturnover to evaluate operations Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 39
  • Gross Profit Percentage ? ? Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 40
  • Inventory Turnover ? ? (Beginning Inventory + Ending Inventory)/2 Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 41
  • Cost of Goods Sold Model Cost of Goods Sold: Beginning Inventory + Purchases = Cost of goods available for sale - Ending Inventory = Cost of goods sold Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 42
  • Using Cost of Goods Sold Model Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 43
  • Rearranging the Cost of Goods SoldModel Cost of goods sold (based on plan for next period) + Ending inventory (based on plan for next period) = Goods available as planned - Beginning inventory (actual amount) = Purchases (amount manager should buy) Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 44
  • Estimate inventory by the gross profit method Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 45
  • Gross Profit MethodBeginning inventory $$$$Purchases $$$$Goods available for sale $$$$Estimated cost of goods sold: Net sales revenue $$$$ Less estimated gross profit ($$$) Estimated cost of goods sold $$$$Estimated cost of ending inventory $$$ Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 46
  • Exercise 6-26ABeginning inventoryPurchasesGoods available for saleEstimated cost of goods sold: Net sales revenue Less estimated gross profit Estimated cost of goods soldEstimated cost of ending inventory Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 47
  • Show how inventory errors affect the financialstatements Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 48
  • Effect of Inventory Errors Period 1 Period 2 Ending inventory Beginning inventory overstated overstatedSales No effect No effectCost of goods sold:Beginning inventory No effect OverstatedPurchases No effect No effectGoods available No effect OverstatedEnding inventory Overstated No effectCost of goods sold Understated OverstatedGross profit Overstated Understated Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 49
  • Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 50