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Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
Ch06 wrd12e instructor_final
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Ch06 wrd12e instructor_final

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  • 1. es ri n to ve In r6 te ap Ch c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 2. Learning Objectives 1. Describe the importance of control over inventory. 2. Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet. 3. Determine the cost of inventory under the perpetual inventory system, using the FIFO, LIFO, and weighted average cost methods. 4. Determine the cost of inventory under the periodic inventory system, using the FIFO, LIFO, and weighted average cost methods.
  • 3. Learning Objectives 5. Compare and contrast the use of the three inventory costing method. 6. Describe and illustrate the reporting of merchandise inventory in the financial statements. 7. Describe and illustrate the inventory turnover and the number of days’ sales in inventory in analyzing the efficiency and effectiveness of inventory management.
  • 4. Lear ning Obje De s c ctive ribe the i mpo rtanc e of cont over rol inve nt or y . 1 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 5. Control of Inventory o Two primary objectives of control over inventory are:  Safeguarding the inventory from damage or theft.  Reporting inventory in the financial statements. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 6. Safeguarding Inventory o The purchase order authorizes the purchase of the inventory from an approved vendor. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 7. Safeguarding Inventory o The receiving report establishes an initial record of the receipt of the inventory. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 8. Safeguarding Inventory o Recording inventory using a perpetual inventory system is also an effective means of control. The amount of inventory is always available in the subsidiary inventory ledger. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 9. Safeguarding Inventory o Controls for safeguarding inventory should include security measures to prevent damage and customer or employee theft. Some examples of security measures include the following:  Storing inventory in areas that are restricted to only authorized employees.  Locking high-priced inventory in cabinets.  Using two-way mirrors, cameras, security tags, and guards. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 10. Reporting Inventory o A physical inventory or count of inventory should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 11. Lear ning Obje De s c ctive r ibe assu mpti three inv t he in o e com ns and h ntory co e sta teme ow they i st flow m n t an d ba pact l anc e shee t. 2 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 12. INVENTORY COST FLOW ASSUMPTIONS
  • 13. Inventory Cost Flow Assumptions
  • 14. Inventory Cost Flow Assumptions o Assume that one unit is sold on May 30 for $20. Depending upon which unit was sold, the gross profit varies from $11 to $6 as shown below: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 15. Inventory Cost Flow Assumptions o Under the specific identification inventory cost flow method, the unit sold is identified with a specific purchase. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 16. Inventory Cost Flow Assumptions o Under the first-in, first out (FIFO) inventory cost flow method, the first units purchased are assumed to be sold first and the ending inventory is made up of the most recent purchases. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 17. Inventory Cost Flow Assumptions o Under the last-in, first out (LIFO) inventory cost flow method, the last units purchased are assumed to be sold first and the ending inventory is made up of the first units purchased. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 18. Inventory Cost Flow Assumptions o Under the weighted average inventory cost flow method, the cost of the units sold and in ending inventory is a weighted average of the purchase costs. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 19. INVENTORY COST FLOW ASSUMPTIONS (continued)
  • 20. INVENTORY COST FLOW ASSUMPTIONS (continued)
  • 21. INVENTORY COST FLOW ASSUMPTIONS (concluded)
  • 22. Lear ning Obje ctive Dete rmin e t he unde c r ost o syste r the p f inve m, u s e r pe weig hted ing the F tual inve ntory ntory IFO, aver age L cost IFO, and meth ods. 3 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 23. Inventory Costing Methods o For purposes of illustration, the data for Item 127B are used, as shown below. We will examine the perpetual inventory system first. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 24. FIRST-IN, FIRSTOUT METHOD (continued)
  • 25. FIRST-IN, FIRSTOUT METHOD (continued)
  • 26. FIRST-IN, FIRSTOUT METHOD (continued)
  • 27. FIRST-IN, FIRSTOUT METHOD (continued)
  • 28. FIRST-IN, FIRSTOUT METHOD (continued)
  • 29. FIRST-IN, FIRSTOUT METHOD (continued)
  • 30. FIRST-IN, FIRSTOUT METHOD (continued)
  • 31. LAST-IN, FIRSTOUT METHOD (continued)
  • 32. LAST-IN, FIRSTOUT METHOD (continued)
  • 33. LAST-IN, FIRSTOUT METHOD (continued)
  • 34. LAST-IN, FIRSTOUT METHOD (continued)
  • 35. LAST-IN, FIRSTOUT METHOD (continued)
  • 36. LAST-IN, FIRSTOUT METHOD
  • 37. LAST-IN, FIRSTOUT METHOD (continued)
  • 38. Weighted Average Cost Method o When the weighted average cost method is used in a perpetual system, an average unit cost for each item is computed each time a purchase is made. o This unit cost is then used to determine the cost of each sale until another purchase is made and a new average is computed. This averaging technique is called a moving average. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 39. WEIGHTED AVERAGE COST METHOD
  • 40. Lear ning Obje ctive Dete rmin u n de e t h e c ost o syste er the m, u s perio f inve weig hted ing the F dic inve ntory nt or y IFO, aver age L cost IFO, and meth ods. 4 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 41. First-In, First-Out Method o Using FIFO, the earliest batch purchased is considered the first batch of merchandise sold. The physical flow does not have to match the accounting method chosen. This time we will be examining the periodic inventory system. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 42. First-In, First-Out Method o Beginning inventory and purchases of Item 127B in January are as follows: Cost of merchandise available for sale c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 43. First-In, First-Out Method o The physical count on January 31 shows that 800 units are on hand. (Conclusion: 1,300 units were sold.) What is the cost of the ending inventory? c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 44. First-In, First-Out Method o Now we can calculate the cost of merchandise sold as follows: c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 45. FIRST-IN, FIRSTOUT METHOD
  • 46. Last-In, First-Out Method o Using LIFO, the most recent batch purchased is considered the first batch of merchandise sold. The actual flow of goods does not have to be LIFO. For example, a store selling fresh fish would want to sell the oldest fish first (which is FIFO), even though LIFO is used for accounting purposes. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 47. Last-In, First-Out Method o Assume again that the physical count on January 31 is 800 units (and that 1,300 units were sold). What is the cost of the merchandise sold? c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 48. LAST-IN, FIRSTOUT METHOD
  • 49. Weighted Average Cost Method o The weighted average cost method uses the weighted average unit cost for determining cost of merchandise sold and the ending merchandise inventory. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 50. Weighted Average Cost Method Average cost per unit Ending Inventory
  • 51. Weighted Average Cost Method
  • 52. Lear ning Obje Com ctive pare three and con tr i nven a tory st the us e of costi t he ng m etho ds. 5 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 53. Comparing Inventory Cost Methods o Using the perpetual inventory system illustration with sales of $39,000 (1,300 units x $30), the differences in ending inventory, cost of merchandise sold, and gross profit are illustrated in the next three slides. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 54. PARTIAL INCOME STATEMENTS (FIFO)
  • 55. PARTIAL INCOME STATEMENTS (WEIGHTED AVERAGE COST)
  • 56. PARTIAL INCOME STATEMENTS (LIFO)
  • 57. COMPARING INVENTORY COST METHODS
  • 58. Comparing Inventory Cost Methods o When the FIFO method is used during a period of inflation or rising prices, FIFO will show a larger profit than the other two inventory costing methods. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 59. Comparing Inventory Cost Methods o When the LIFO method is used during a period of inflation or rising prices, LIFO will show a lower profit than the other two inventory costing methods. o During a period of rising prices, using LIFO offers an income tax savings compared to the other two inventory costing methods. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 60. Comparing Inventory Cost Methods o The weighted average cost method of inventory costing is a compromise between FIFO and LIFO. Net income for the weighted average cost method is somewhere between the net incomes of LIFO and FIFO. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 61. Lear ning Obje ctive De s c repo ribe rting a nd of m illust erch rate in th an di t he e f in se in ancia vent or y l stat em e nts. 6 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 62. Reporting Merchandise Inventory o Cost is the primary basis for valuing and reporting inventories in the financial statements. However, inventory may be valued at other than cost in the following cases:  The cost of replacing items in inventory is below the recorded cost.  The inventory cannot be sold at normal prices due to imperfections, style changes, or other causes. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 63. Valuation at Lower of Cost or Market o Market, as used in lower-of-cost-or-market method, is the cost to replace the merchandise on the inventory date. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 64. Valuation at Lower of Cost or Market o Cost and replacement cost can be determined for the following:  Each item in the inventory.  Each major class or category of inventory.  Total inventory as a whole. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 65. VALUATION AT LOWER OF COST OR MARKET
  • 66. Valuation at Net Realizable Value o Merchandise that is out of date, spoiled, or damaged should be written down to its net realizable value. This is the estimated selling price less any direct costs of disposal, such as sales commissions or special advertising. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 67. Valuation at Net Realizable Value o Assume the following data about an item of damaged merchandise: Original cost Estimated selling price Selling expenses $1,000 800 150 o The merchandise should be valued at its net realizable value of $650 ($800 – $150). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 68. Merchandise Inventory on the Balance Sheet o Merchandise inventory is usually presented in the Current Assets section of the balance sheet, following receivables. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 69. Merchandise Inventory on the Balance Sheet o The method of determining the cost of the inventory (FIFO, LIFO, or weighted average) and the method of valuing the inventory (cost or the lower of cost or market) should be shown. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 70. MERCHANDISE INVENTORY ON THE BALANCE SHEET
  • 71. Inventory Errors o Some reasons that inventory errors may occur include the following:  Physical inventory on hand was miscounted.  Costs were incorrectly assigned to inventory.  Inventory in transit was incorrectly included or excluded from inventory.  Consigned inventory was incorrectly included or excluded from inventory. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 72. Inventory Errors o Inventory errors often arise from consigned inventory. Manufacturers sometimes ship merchandise to retailers who act as the manufacturer’s agent. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 73. Inventory Errors o The manufacturer, called the consignor, retains title until the goods are sold. Such merchandise is said to be shipped on consignment to the retailer, called the consignee. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 74. INVENTORY ERRORS
  • 75. LO 6
  • 76. BALANCE SHEET EFFECTS
  • 77. Lear ning Obje Desc ctive turno ribe a in in ver and nd illus ven tra th te e to r y in an number the inve and effecalyzing of days’ ntory s tiven the e ess o fficie ales nc f man inventor y agem y ent. 7 c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 78. Inventory Turnover o Inventory turnover measures the relationship between cost of merchandise sold and the amount of inventory carried during the period. It is calculated as follows: Cost of Merchandise Sold Inventory Turnover = Average Inventory c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 79. Inventory Turnover o Inventory turnover for Best Buy is shown below (in millions). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 80. Inventory Turnover o The number of days’ sales in inventory measures the length of time it takes to acquire, sell, and replace the inventory. It is computed as follows: Number of Days’ = Sales in Inventory Average Inventory Average Daily Cost of Merchandise Sold c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 81. Inventory Turnover o The number of days’ sales in inventory for Best Buy is computed below (in millions). c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 82. dix en ting pp ima A st E ost E ry C o nt o nve I c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 83. Retail Method of Inventory Costing o The retail inventory method of estimating inventory cost requires costs and retail prices to be maintained for the merchandise available for sale. o A ratio of cost to retail price is then used to convert ending inventory at retail to estimate the ending inventory cost. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 84. RETAIL METHOD OF INVENTORY COSTING
  • 85. Gross Profit Method of Inventory Costing o The gross profit method uses the estimated gross profit for the period to estimate the inventory at the end of the period. c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
  • 86. GROSS PROFIT METHOD OF INVENTORY COSTING
  • 87. es ri n to ve In nd E he T c. 2014 Cengage Learning.   All Rights Reserved.  May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.

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