Reporting and  Analyzing Inventories UAA – ACCT 201  Principles of Financial Accounting  Dr. Fred Barbee Chapter 5
ACCOUNTING IS FUN! Day #2 ACCT 201  ACCT 201  ACCT 201
Chapter 5 - Day 2 - Agenda QS12, E9, E10 224-225 A3 Decision Analysis E7, E8, P3A 220-223 P2, P3 Other Inventory Valuation...
Reporting and  Analyzing Inventories Inventory Items  and Costs Chapter 5
Items in Merchandise Inventory FOB Destination Point Public   Carrier Seller Buyer Public   Carrier Seller Buyer FOB Shipp...
Items in Merchandise Inventory <ul><li>Goods on Consignment </li></ul><ul><ul><li>Goods shipped by the owner (consignor) t...
Items in Merchandise Inventory <ul><li>Goods Damaged or Obsolete </li></ul><ul><ul><li>Damaged or obsolete goods are not c...
Cost of Merchandise Inventory Include all expenditures necessary to bring an item to a salable condition and location. Inv...
Physical Count of Merchandise Inventory <ul><li>Most companies take a physical count of inventory at least once each year....
Physical Count of Merchandise Inventory <ul><li>When the physical count does not match the Merchandise Inventory account, ...
Reporting and  Analyzing Inventories Other Inventory Valuations Chapter 5
Lower of Cost  or Market Other Inventory Valuations
Lower of Cost or Market <ul><li>Inventory must be reported at market value when  market  is  lower  than cost. </li></ul>M...
Lower of Cost or Market <ul><li>Can be applied three ways: </li></ul><ul><ul><li>separately to each individual item. </li>...
<ul><li>A motorsports retailer has the following items in inventory (Exhibit 5.14) : </li></ul>Lower of Cost or Market
<ul><li>Here is how to compute lower of cost or market for  individual inventory items . </li></ul>Lower of Cost or Market
Lower of Cost or Market Here is how to compute lower of cost or market for the  two groups of inventory items .
Lower of Cost or Market <ul><li>Here is how to compute lower of cost or market for  the entire inventory . </li></ul>
Retail Inventory Method Other Inventory Valuations
Retail Inventory Method <ul><li>Often used to estimate inventory for interim period reporting.  </li></ul><ul><li>Needed I...
Retail Inventory Method Step 3 Cost to retail ratio Ending inventory at retail Estimated ending inventory at cost = × Step...
Retail Inventory Method
Retail Inventory Method
Retail Inventory Method
Gross Profit  Method Other Inventory Valuations
Gross Profit Method <ul><li>Estimate ending inventory by applying  the gross profit ratio to net sales (at retail). </li><...
Gross Profit Method Step 1 1.0  –  the gross profit ratio Net sales at retail × = Estimated cost of goods sold Step 2 Esti...
Gross Profit Method <ul><ul><li>In March of 2002, Chemical Company’s inventory was destroyed by fire.  Chemical’s normal g...
Gross Profit Method Step 1
Gross Profit Method Step 2
Reporting and  Analyzing Inventories Decision Analysis Chapter 5
Inventory Turnover <ul><li>Shows how many times a company turns over its inventory during a period. Indicator of how well ...
Days’ Sales in Inventory Reveals how much inventory is available in terms of the number of days’ sales. Days' Sales in  In...
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Reporting And Analyzing Inventories

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Reporting And Analyzing Inventories

  1. 1. Reporting and Analyzing Inventories UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee Chapter 5
  2. 2. ACCOUNTING IS FUN! Day #2 ACCT 201 ACCT 201 ACCT 201
  3. 3. Chapter 5 - Day 2 - Agenda QS12, E9, E10 224-225 A3 Decision Analysis E7, E8, P3A 220-223 P2, P3 Other Inventory Valuations QS5, QS7 219-220 C1, C2 Inventory Items and Cost HW Read LO Topic P5-2A due today!
  4. 4. Reporting and Analyzing Inventories Inventory Items and Costs Chapter 5
  5. 5. Items in Merchandise Inventory FOB Destination Point Public Carrier Seller Buyer Public Carrier Seller Buyer FOB Shipping Point Ownership passes to the buyer here.
  6. 6. Items in Merchandise Inventory <ul><li>Goods on Consignment </li></ul><ul><ul><li>Goods shipped by the owner (consignor) to another party (consignee). </li></ul></ul><ul><ul><li>Merchandise is included in the inventory of the consignor. </li></ul></ul>
  7. 7. Items in Merchandise Inventory <ul><li>Goods Damaged or Obsolete </li></ul><ul><ul><li>Damaged or obsolete goods are not counted in inventory. </li></ul></ul><ul><ul><li>Cost should be reduced to net realizable value. </li></ul></ul>
  8. 8. Cost of Merchandise Inventory Include all expenditures necessary to bring an item to a salable condition and location. Invoice Price Import Duties Freight-in Storage Insurance
  9. 9. Physical Count of Merchandise Inventory <ul><li>Most companies take a physical count of inventory at least once each year. </li></ul>Quantity ___ Inventory Count Tag Counted by _______
  10. 10. Physical Count of Merchandise Inventory <ul><li>When the physical count does not match the Merchandise Inventory account, an adjustment must be made. </li></ul>Quantity ___ Inventory Count Tag Counted by _______
  11. 11. Reporting and Analyzing Inventories Other Inventory Valuations Chapter 5
  12. 12. Lower of Cost or Market Other Inventory Valuations
  13. 13. Lower of Cost or Market <ul><li>Inventory must be reported at market value when market is lower than cost. </li></ul>Market is defined as current replacement cost (not sales price). Consistent with the conservatism principle. ACCT 201 ACCT 201 ACCT 201
  14. 14. Lower of Cost or Market <ul><li>Can be applied three ways: </li></ul><ul><ul><li>separately to each individual item. </li></ul></ul><ul><ul><li>to major categories of assets. </li></ul></ul><ul><ul><li>to the whole inventory. </li></ul></ul>
  15. 15. <ul><li>A motorsports retailer has the following items in inventory (Exhibit 5.14) : </li></ul>Lower of Cost or Market
  16. 16. <ul><li>Here is how to compute lower of cost or market for individual inventory items . </li></ul>Lower of Cost or Market
  17. 17. Lower of Cost or Market Here is how to compute lower of cost or market for the two groups of inventory items .
  18. 18. Lower of Cost or Market <ul><li>Here is how to compute lower of cost or market for the entire inventory . </li></ul>
  19. 19. Retail Inventory Method Other Inventory Valuations
  20. 20. Retail Inventory Method <ul><li>Often used to estimate inventory for interim period reporting. </li></ul><ul><li>Needed Information includes: </li></ul><ul><ul><li>Beginning inventory at cost and retail </li></ul></ul><ul><ul><li>Net purchases at cost and retail </li></ul></ul><ul><ul><li>Net sales </li></ul></ul>
  21. 21. Retail Inventory Method Step 3 Cost to retail ratio Ending inventory at retail Estimated ending inventory at cost = × Step 2 Goods available for sale at retail Goods available for sale at cost = ÷ Cost to retail ratio Step 1 Net sales at retail Goods available for sale at retail – = Ending inventory at retail
  22. 22. Retail Inventory Method
  23. 23. Retail Inventory Method
  24. 24. Retail Inventory Method
  25. 25. Gross Profit Method Other Inventory Valuations
  26. 26. Gross Profit Method <ul><li>Estimate ending inventory by applying the gross profit ratio to net sales (at retail). </li></ul><ul><li>Useful when inventory has been destroyed, lost, or stolen. </li></ul>
  27. 27. Gross Profit Method Step 1 1.0 – the gross profit ratio Net sales at retail × = Estimated cost of goods sold Step 2 Estimated cost of goods sold Goods available for sale at cost – = Estimated ending inventory at cost
  28. 28. Gross Profit Method <ul><ul><li>In March of 2002, Chemical Company’s inventory was destroyed by fire. Chemical’s normal gross profit ratio is 30% of net sales. At the time of the fire, Chemical showed the following balances: </li></ul></ul>ACCT 201 ACCT 201 ACCT 201
  29. 29. Gross Profit Method Step 1
  30. 30. Gross Profit Method Step 2
  31. 31. Reporting and Analyzing Inventories Decision Analysis Chapter 5
  32. 32. Inventory Turnover <ul><li>Shows how many times a company turns over its inventory during a period. Indicator of how well management is controlling the amount of inventory available. </li></ul>Inventory Turnover = Cost of goods sold Avg. inventory
  33. 33. Days’ Sales in Inventory Reveals how much inventory is available in terms of the number of days’ sales. Days' Sales in Inventory = Ending Inventory Cost of goods sold × 365

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