SlideShare a Scribd company logo
1 of 36
6-1
6-1
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
WILEY
IFRS EDITION
6-2
6-2
PREVIEW OF CHAPTER 6
Financial Accounting
IFRS 3rd Edition
Weygandt ● Kimmel ● Kieso
6-3
6
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Discuss how to classify and determine inventory.
2. Explain the accounting for inventories and apply the inventory cost flow
methods.
3. Explain the financial effects of the inventory cost flow assumptions.
4. Explain the lower-of-cost-or-net realizable value basis of accounting for
inventories.
5. Indicate the effects of inventory errors on the financial statements.
6. Discuss the presentation and analysis of inventory.
CHAPTER
Inventories
6-4
6-4
One Classification:
 Inventory
Three Classifications:
 Raw Materials
 Work in Process
 Finished Goods
Merchandising
Company
Manufacturing
Company
• HELPFUL HINT
Regardless of the classification,
companies report all inventories
under Current Assets on the
statement of financial position.
LO 1
Classifying Inventory
Classifying and Determining Inventory
Learning Objective 1
Discuss how to classify and
determine inventory.
6-5
6-5
Physical Inventory taken for two reasons:
Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost due to 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
LO 1
6-6
6-6
Involves counting, weighing, or measuring each kind of
inventory on hand.
Companies often “take inventory”
 when the business is closed or
business is slow.
 at the end of the accounting period.
TAKING A PHYSICAL INVENTORY
Determining Inventory Quantities
LO 1
6-7
6-7
GOODS IN TRANSIT
 Purchased goods not yet received.
 Sold goods not yet delivered.
DETERMINING OWNERSHIP OF GOODS
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.
Determining Inventory Quantities
LO 1
6-8
6-8
Illustration 6-2
Terms of sale
GOODS IN TRANSIT
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.
DETERMINING OWNERSHIP OF GOODS
LO 1
6-9
6-9
CONSIGNED GOODS
To hold the goods of other parties and try to sell the goods for
them for a fee, but without taking ownership of the goods.
Many car, boat, and antique dealers sell goods on consignment,
why?
LO 1
Determining Ownership of Goods
6-10
6-10
1. Goods of ¥15,000 held on consignment should be deducted from the inventory
count.
2. The goods of ¥10,000 purchased FOB shipping point should be added to the
inventory count.
3. Item 3 was treated correctly.
Deng Yaping Company completed its inventory count. It arrived at a total inventory
value of ¥200,000. You have been given the information listed below. Discuss how
this information affects the reported cost of inventory.
1. Deng Yaping included in the inventory goods held on consignment for Falls Co.,
costing ¥15,000.
2. The company did not include in the count purchased goods of ¥10,000, which
were in transit (terms: FOB shipping point).
3. The company did not include in the count inventory that had been sold with a
cost of ¥12,000, which was in transit (terms: FOB shipping point).
Solution
Inventory should be ¥195,000
(¥200,000 - ¥15,000 + ¥10,000).
LO 1
> DO IT!
6-11
6-11
Inventory is accounted for at cost.
 Cost includes all expenditures necessary
to acquire goods and place them in a condition ready for
sale.
 Unit costs are applied to quantities to compute the total cost
of the inventory and the cost of goods sold using the
following costing methods:
► Specific identification
► First-in, first-out (FIFO)
► Average-cost
Cost Flow
Assumptions
LO 2
Classifying and Determining Inventory
6-12
Illustration: Crivitz TV Company purchases three identical 50-
inch TVs on different dates at costs of £700, £750, and £800.
During the year Crivitz sold two sets at £1,200 each. These
facts are summarized below.
Illustration 6-3
Data for inventory costing example
Inventory Costing
LO 2
6-13
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.
Specific Identification
Illustration 6-4
Specific identification method
LO 2
6-14
6-14
Actual physical flow costing method in which items still in
inventory are specifically costed to arrive at the total cost of
the ending inventory.
LO 2
 Practice is relatively rare.
 Most companies make
assumptions (cost flow
assumptions) about which units
were sold.
Specific Identification
6-15
There are two assumed cost flow methods:
1. First-in, first-out (FIFO)
2. Average-cost
Cost flow does not need be consistent with the physical
movement of the goods.
Cost Flow Assumptions
LO 2
6-16
6-16
Data for Lin Electronics’ Astro condensers.
(Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold
Cost Flow Assumptions
LO 2
Illustration 6-5
6-17
6-17
 Costs of the earliest goods purchased are the first to be
recognized in determining cost of goods sold.
 Often parallels actual physical flow of merchandise.
 Companies obtain the cost of the ending inventory by
taking the unit cost of the most recent purchase and
working backward until all units of inventory have been
costed.
FIRST-IN, FIRST-OUT (FIFO)
Cost Flow Assumptions
LO 2
6-18
6-18
FIRST-IN, FIRST-OUT (FIFO)
LO 2
Illustration 6-6
Allocation of costs—FIFO method
6-19
6-19
• HELPFUL HINT
Another way of thinking about
the calculation of FIFO ending
inventory is the LISH
assumption—last in still here.
FIRST-IN, FIRST-OUT (FIFO)
LO 2
Illustration 6-6
Allocation of costs—FIFO method
6-20
6-20
 Allocates cost of goods available for sale on the basis
of weighted-average unit cost incurred.
 Applies weighted-average unit cost to the units on
hand to determine cost of the ending inventory.
AVERAGE-COST
Cost Flow Assumptions
LO 2
Illustration 6-8
Formula for weighted-average unit cost
6-21
6-21
AVERAGE-COST
LO 2
Illustration 6-9
Allocation of costs—average-cost method
6-22
6-22
Illustration 6-11
LO 2
AVERAGE-COST
Illustration 6-9
Allocation of costs—average-cost method
6-23
6-23
Cost of goods available for sale = (4,000 × £3) + (6,000 × £4) = £36,000
Ending inventory = 10,000 − 7,000 = 3,000 units
(a) FIFO: £36,000 − (3,000 × £4) = £24,000
(b) Average cost per unit: [(4,000 × £3) + (6,000 × £4)] ÷ 10,000 = £3.60
Average-cost: £36,000 − (3,000 × £3.60) = £25,200
The accounting records of Shumway Ag Implement show the following.
Beginning inventory 4,000 units at £ 3
Purchases 6,000 units at £ 4
Sales 7,000 units at £12
Determine the cost of goods sold during the period under a periodic
inventory system using (a) the FIFO method and (b) the average-cost
method.
Solution
LO 2
> DO IT!
6-24
6-24
Common Causes:
 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 statement of
financial position.
LO 5
Inventory Errors
Learning Objective 5
Indicate the effects of inventory
errors on the financial
statements.
6-25
6-25
Inventory errors affect the computation of cost of goods sold
and net income in two periods. Illustration 6-12
Formula for cost of goods sold
Income Statement Effects
LO 5
Illustration 6-13
Effects of inventory errors on current year’s income statement
6-26
6-26
Effect of inventory errors on the statement of financial position
is determined by using the basic accounting equation: Assets
= Liabilities + Equity.
Errors in the ending inventory have the following effects.
LO 5
Statement of Financial Position Effects
Illustration 6-15
Effects of ending inventory errors on statement of financial position
6-27
Assuming the Perpetual Inventory System, compute Cost of Goods
Sold and Ending Inventory under FIFO and average-cost.
APPENDIX 6A Perpetual Inventory System
Learning Objective 7
Apply the inventory cost
flow methods to perpetual
inventory records.
Illustration 6A-1
Inventoriable units and costs
LO 7
6-28
Cost of Goods Sold
Ending Inventory
First-In-First-Out (FIFO)
Illustration 6A-2
Perpetual system—FIFO
LO 7
6-29
Cost of Goods Sold Ending Inventory
Average-Cost
Illustration 6A-3
Perpetual system—
average-cost method
LO 7
6-30
6-30
Estimates the cost of ending inventory by applying a gross
profit rate to net sales.
Gross Profit Method
APPENDIX 6B Estimating Inventories
Learning Objective 8
Describe the two methods of
estimating inventories.
Illustration 6B-1
Gross profit method formulas
LO 8
6-31
6-31
Illustration: Kishwaukee Company’s records for January show net sales
of $200,000, beginning inventory $40,000, and cost of goods purchased
$120,000. The company expects to earn a 30% gross profit rate.
Compute the estimated cost of the ending inventory at January 31 under
the gross profit method.
Gross Profit Method
Illustration 6B-2
Example of gross profit method
6-32
6-32
Company applies the cost-to-retail percentage to ending
inventory at retail prices to determine inventory at cost.
Retail Inventory Method
Illustration 6B-3
Retail inventory method formulas
LO 8
6-33
6-33
Note that it is not necessary to take a physical inventory to estimate
the cost of goods on hand at any given time.
Illustration:
Retail Inventory Method
Illustration 6B-4
Application of retail inventory method
LO 8
6-34
 Under IFRS, LIFO is not permitted for financial
reporting purposes.
 Assumes latest goods purchased are first to be sold.
 Seldom coincides with actual physical flow of
merchandise, except for goods stored in piles, such as
coal or hay.
Last-In-First-Out (LIFO)
APPENDIX 6C LIFO Inventory Method
Learning Objective 9
Apply the LIFO inventory
costing method.
LO 9
6-35
Last-In-First-Out (LIFO)
Illustration 6C-1
Allocation of costs—LIFO method
LO 9
6-36
Illustration 6C-2
Proof of COGS
Last-In-First-Out (LIFO)
Illustration 6C-1
Allocation of costs—LIFO method
LO 9

More Related Content

What's hot

Managerial Accounting Garrison Noreen Brewer Chapter 01
Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting Garrison Noreen Brewer Chapter 01
Managerial Accounting Garrison Noreen Brewer Chapter 01Asif Hasan
 
Analisis Biaya Volume Laba.pptx
Analisis Biaya Volume Laba.pptxAnalisis Biaya Volume Laba.pptx
Analisis Biaya Volume Laba.pptxAgustinusKismet
 
Income statement & related information
Income statement & related informationIncome statement & related information
Income statement & related informationRahmatia Azzindani
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 5
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 5Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 5
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 5Dwi Wahyu
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 10
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 10Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 10
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 10Dwi Wahyu
 
Intermediate Accounting: Accounting for Lease
Intermediate Accounting: Accounting for LeaseIntermediate Accounting: Accounting for Lease
Intermediate Accounting: Accounting for LeaseReskinoMalakiano2
 
chapter 8 budgetting for planning and controlling (hansen & mowen)
chapter 8 budgetting for planning and controlling (hansen & mowen)chapter 8 budgetting for planning and controlling (hansen & mowen)
chapter 8 budgetting for planning and controlling (hansen & mowen)Afifatul Jannah
 
Case econ08 ppt_26
Case econ08 ppt_26Case econ08 ppt_26
Case econ08 ppt_26Cibin Mathew
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 12
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 12Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 12
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 12Dwi Wahyu
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 11
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 11Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 11
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 11Dwi Wahyu
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 3
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 3Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 3
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 3Dwi Wahyu
 
Bab 8 - Valuation of Inventories, a Cost-Basis Approach
Bab 8 - Valuation of Inventories, a Cost-Basis ApproachBab 8 - Valuation of Inventories, a Cost-Basis Approach
Bab 8 - Valuation of Inventories, a Cost-Basis Approachmsahuleka
 
Pengantar Akuntansi 2 - Ch13 Statement of Cash Flow
Pengantar Akuntansi 2 - Ch13 Statement of Cash FlowPengantar Akuntansi 2 - Ch13 Statement of Cash Flow
Pengantar Akuntansi 2 - Ch13 Statement of Cash Flowyuliapratiwi2810
 
205101795 analisis-rantai-nilai-value-chain-analisis
205101795 analisis-rantai-nilai-value-chain-analisis205101795 analisis-rantai-nilai-value-chain-analisis
205101795 analisis-rantai-nilai-value-chain-analisisZakik Bsm
 
Audit siklus pembayaran
Audit siklus pembayaranAudit siklus pembayaran
Audit siklus pembayaranEY
 

What's hot (20)

Managerial Accounting Garrison Noreen Brewer Chapter 01
Managerial Accounting Garrison Noreen Brewer Chapter 01Managerial Accounting Garrison Noreen Brewer Chapter 01
Managerial Accounting Garrison Noreen Brewer Chapter 01
 
Analisis Biaya Volume Laba.pptx
Analisis Biaya Volume Laba.pptxAnalisis Biaya Volume Laba.pptx
Analisis Biaya Volume Laba.pptx
 
Income statement & related information
Income statement & related informationIncome statement & related information
Income statement & related information
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 5
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 5Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 5
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 5
 
Ch7 Summary.pptx
Ch7 Summary.pptxCh7 Summary.pptx
Ch7 Summary.pptx
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 10
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 10Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 10
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 10
 
Investasi-bagian 2
Investasi-bagian 2Investasi-bagian 2
Investasi-bagian 2
 
Intermediate Accounting: Accounting for Lease
Intermediate Accounting: Accounting for LeaseIntermediate Accounting: Accounting for Lease
Intermediate Accounting: Accounting for Lease
 
chapter 8 budgetting for planning and controlling (hansen & mowen)
chapter 8 budgetting for planning and controlling (hansen & mowen)chapter 8 budgetting for planning and controlling (hansen & mowen)
chapter 8 budgetting for planning and controlling (hansen & mowen)
 
Case econ08 ppt_26
Case econ08 ppt_26Case econ08 ppt_26
Case econ08 ppt_26
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 12
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 12Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 12
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 12
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 11
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 11Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 11
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 11
 
Materi akm2-investasi-bagian 1
Materi akm2-investasi-bagian 1Materi akm2-investasi-bagian 1
Materi akm2-investasi-bagian 1
 
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 3
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 3Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 3
Akuntansi Manajemen Edisi 8 oleh Hansen & Mowen Bab 3
 
Cost Accounting Chapter 8
Cost Accounting Chapter 8Cost Accounting Chapter 8
Cost Accounting Chapter 8
 
Bab 8 - Valuation of Inventories, a Cost-Basis Approach
Bab 8 - Valuation of Inventories, a Cost-Basis ApproachBab 8 - Valuation of Inventories, a Cost-Basis Approach
Bab 8 - Valuation of Inventories, a Cost-Basis Approach
 
cost12eppt_04.ppt
cost12eppt_04.pptcost12eppt_04.ppt
cost12eppt_04.ppt
 
Pengantar Akuntansi 2 - Ch13 Statement of Cash Flow
Pengantar Akuntansi 2 - Ch13 Statement of Cash FlowPengantar Akuntansi 2 - Ch13 Statement of Cash Flow
Pengantar Akuntansi 2 - Ch13 Statement of Cash Flow
 
205101795 analisis-rantai-nilai-value-chain-analisis
205101795 analisis-rantai-nilai-value-chain-analisis205101795 analisis-rantai-nilai-value-chain-analisis
205101795 analisis-rantai-nilai-value-chain-analisis
 
Audit siklus pembayaran
Audit siklus pembayaranAudit siklus pembayaran
Audit siklus pembayaran
 

Similar to Inventory slides.pptx

ch06 (1).ppt
ch06 (1).pptch06 (1).ppt
ch06 (1).ppttechraggs
 
Accounting Principles, 12th Edition ch6
Accounting Principles, 12th Edition ch6Accounting Principles, 12th Edition ch6
Accounting Principles, 12th Edition ch6AbdelmonsifFadl
 
Financial_Accounting_chapter_06.ppt
Financial_Accounting_chapter_06.pptFinancial_Accounting_chapter_06.ppt
Financial_Accounting_chapter_06.pptMostafaGamal216952
 
inventory mgt by mahi
inventory mgt by mahiinventory mgt by mahi
inventory mgt by mahi123221313
 
CH 4 intermediate for .ppt
CH 4 intermediate for .pptCH 4 intermediate for .ppt
CH 4 intermediate for .pptaddisyawkal18
 
Fundamental of accounting II, Chapter 1.pptx
Fundamental of accounting II, Chapter 1.pptxFundamental of accounting II, Chapter 1.pptx
Fundamental of accounting II, Chapter 1.pptxLenchoMusa
 
Wey_AP_8e_Ch06_Revised.pptx
Wey_AP_8e_Ch06_Revised.pptxWey_AP_8e_Ch06_Revised.pptx
Wey_AP_8e_Ch06_Revised.pptxRiadHasan25
 
6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docx
6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docx6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docx
6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docxtroutmanboris
 
2023 Chapter one accounting for inventory.pdf
2023 Chapter one accounting for inventory.pdf2023 Chapter one accounting for inventory.pdf
2023 Chapter one accounting for inventory.pdfHaftomYitbarek
 
Valuation of Inventories: A Cost-Basis Approach
Valuation of Inventories: A Cost-Basis ApproachValuation of Inventories: A Cost-Basis Approach
Valuation of Inventories: A Cost-Basis Approachreskino1
 
PPT_Inventory 1_Cost Basis Approach.ppt
PPT_Inventory 1_Cost Basis Approach.pptPPT_Inventory 1_Cost Basis Approach.ppt
PPT_Inventory 1_Cost Basis Approach.pptTaufiqHidayat111730
 
CH4.pptx best power point for accounting students
CH4.pptx best power point for accounting studentsCH4.pptx best power point for accounting students
CH4.pptx best power point for accounting studentsKalkaye
 

Similar to Inventory slides.pptx (20)

ch06 (1).ppt
ch06 (1).pptch06 (1).ppt
ch06 (1).ppt
 
ch06-200529001857.pdf
ch06-200529001857.pdfch06-200529001857.pdf
ch06-200529001857.pdf
 
Ch 2-Acc 2.pptx
Ch 2-Acc 2.pptxCh 2-Acc 2.pptx
Ch 2-Acc 2.pptx
 
Accounting Principles, 12th Edition ch6
Accounting Principles, 12th Edition ch6Accounting Principles, 12th Edition ch6
Accounting Principles, 12th Edition ch6
 
Financial_Accounting_chapter_06.ppt
Financial_Accounting_chapter_06.pptFinancial_Accounting_chapter_06.ppt
Financial_Accounting_chapter_06.ppt
 
inventory mgt by mahi
inventory mgt by mahiinventory mgt by mahi
inventory mgt by mahi
 
CH 4 intermediate for .ppt
CH 4 intermediate for .pptCH 4 intermediate for .ppt
CH 4 intermediate for .ppt
 
ch06 inventry practice.docx
ch06 inventry practice.docxch06 inventry practice.docx
ch06 inventry practice.docx
 
Fundamental of accounting II, Chapter 1.pptx
Fundamental of accounting II, Chapter 1.pptxFundamental of accounting II, Chapter 1.pptx
Fundamental of accounting II, Chapter 1.pptx
 
Wey_AP_8e_Ch06_Revised.pptx
Wey_AP_8e_Ch06_Revised.pptxWey_AP_8e_Ch06_Revised.pptx
Wey_AP_8e_Ch06_Revised.pptx
 
6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docx
6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docx6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docx
6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docx
 
2023 Chapter one accounting for inventory.pdf
2023 Chapter one accounting for inventory.pdf2023 Chapter one accounting for inventory.pdf
2023 Chapter one accounting for inventory.pdf
 
Ch09
Ch09Ch09
Ch09
 
Ch08
Ch08Ch08
Ch08
 
Valuation of Inventories: A Cost-Basis Approach
Valuation of Inventories: A Cost-Basis ApproachValuation of Inventories: A Cost-Basis Approach
Valuation of Inventories: A Cost-Basis Approach
 
PPT_Inventory 1_Cost Basis Approach.ppt
PPT_Inventory 1_Cost Basis Approach.pptPPT_Inventory 1_Cost Basis Approach.ppt
PPT_Inventory 1_Cost Basis Approach.ppt
 
CH4.pptx best power point for accounting students
CH4.pptx best power point for accounting studentsCH4.pptx best power point for accounting students
CH4.pptx best power point for accounting students
 
Ch08
Ch08Ch08
Ch08
 
Chapter 5 (2).pptx
Chapter 5 (2).pptxChapter 5 (2).pptx
Chapter 5 (2).pptx
 
Chapter3
Chapter3Chapter3
Chapter3
 

More from DerejeUrgecha1

financial statment anaysis training slide
financial statment anaysis training slidefinancial statment anaysis training slide
financial statment anaysis training slideDerejeUrgecha1
 
introduction to financial management chapter one
introduction to financial management chapter oneintroduction to financial management chapter one
introduction to financial management chapter oneDerejeUrgecha1
 
risk return hand out note chapter three.
risk return hand out note chapter three.risk return hand out note chapter three.
risk return hand out note chapter three.DerejeUrgecha1
 
lease and lease computation lecture note
lease and lease computation lecture notelease and lease computation lecture note
lease and lease computation lecture noteDerejeUrgecha1
 
Enviromental and industrial toxicants.ppt
Enviromental and industrial toxicants.pptEnviromental and industrial toxicants.ppt
Enviromental and industrial toxicants.pptDerejeUrgecha1
 
Introduction to investment.pptx
Introduction to investment.pptxIntroduction to investment.pptx
Introduction to investment.pptxDerejeUrgecha1
 
MathFundamentalsforCapitalMarketsCoursePresentation-191230-111251.pdf
MathFundamentalsforCapitalMarketsCoursePresentation-191230-111251.pdfMathFundamentalsforCapitalMarketsCoursePresentation-191230-111251.pdf
MathFundamentalsforCapitalMarketsCoursePresentation-191230-111251.pdfDerejeUrgecha1
 

More from DerejeUrgecha1 (16)

financial statment anaysis training slide
financial statment anaysis training slidefinancial statment anaysis training slide
financial statment anaysis training slide
 
introduction to financial management chapter one
introduction to financial management chapter oneintroduction to financial management chapter one
introduction to financial management chapter one
 
risk return hand out note chapter three.
risk return hand out note chapter three.risk return hand out note chapter three.
risk return hand out note chapter three.
 
lease and lease computation lecture note
lease and lease computation lecture notelease and lease computation lecture note
lease and lease computation lecture note
 
Enviromental and industrial toxicants.ppt
Enviromental and industrial toxicants.pptEnviromental and industrial toxicants.ppt
Enviromental and industrial toxicants.ppt
 
ch03.ppt
ch03.pptch03.ppt
ch03.ppt
 
Chapter-6.ppt
Chapter-6.pptChapter-6.ppt
Chapter-6.ppt
 
Chapter-7.ppt
Chapter-7.pptChapter-7.ppt
Chapter-7.ppt
 
Chapter-One.ppt
Chapter-One.pptChapter-One.ppt
Chapter-One.ppt
 
itroduction.ppt
itroduction.pptitroduction.ppt
itroduction.ppt
 
3824283.ppt
3824283.ppt3824283.ppt
3824283.ppt
 
ratio analysis.ppt
ratio analysis.pptratio analysis.ppt
ratio analysis.ppt
 
risk return.ppt
risk return.pptrisk return.ppt
risk return.ppt
 
ratio analysis.ppt
ratio analysis.pptratio analysis.ppt
ratio analysis.ppt
 
Introduction to investment.pptx
Introduction to investment.pptxIntroduction to investment.pptx
Introduction to investment.pptx
 
MathFundamentalsforCapitalMarketsCoursePresentation-191230-111251.pdf
MathFundamentalsforCapitalMarketsCoursePresentation-191230-111251.pdfMathFundamentalsforCapitalMarketsCoursePresentation-191230-111251.pdf
MathFundamentalsforCapitalMarketsCoursePresentation-191230-111251.pdf
 

Recently uploaded

Inside the Black Box of Venture Capital (VC)
Inside the Black Box of Venture Capital (VC)Inside the Black Box of Venture Capital (VC)
Inside the Black Box of Venture Capital (VC)Alejandro Cremades
 
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdfInnomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdfInnomantra
 
The Risks of Ignoring Bookkeeping in Your Business
The Risks of Ignoring Bookkeeping in Your BusinessThe Risks of Ignoring Bookkeeping in Your Business
The Risks of Ignoring Bookkeeping in Your BusinessYourLegal Accounting
 
Copyright: What Creators and Users of Art Need to Know
Copyright: What Creators and Users of Art Need to KnowCopyright: What Creators and Users of Art Need to Know
Copyright: What Creators and Users of Art Need to KnowMiriam Robeson
 
ابو ظبي اعلان | - سايتوتك في الامارات حبوب الاجهاض للبيع ف حبوب الإجهاض ... ا...
ابو ظبي اعلان | - سايتوتك في الامارات حبوب الاجهاض للبيع ف حبوب الإجهاض ... ا...ابو ظبي اعلان | - سايتوتك في الامارات حبوب الاجهاض للبيع ف حبوب الإجهاض ... ا...
ابو ظبي اعلان | - سايتوتك في الامارات حبوب الاجهاض للبيع ف حبوب الإجهاض ... ا...brennadilys816
 
Presentation4 (2) survey responses clearly labelled
Presentation4 (2) survey responses clearly labelledPresentation4 (2) survey responses clearly labelled
Presentation4 (2) survey responses clearly labelledCaitlinCummins3
 
PitchBook’s Guide to VC Funding for Startups
PitchBook’s Guide to VC Funding for StartupsPitchBook’s Guide to VC Funding for Startups
PitchBook’s Guide to VC Funding for StartupsAlejandro Cremades
 
Your Work Matters to God RestorationChurch.pptx
Your Work Matters to God RestorationChurch.pptxYour Work Matters to God RestorationChurch.pptx
Your Work Matters to God RestorationChurch.pptxOs Hillman
 
What is paper chromatography, principal, procedure,types, diagram, advantages...
What is paper chromatography, principal, procedure,types, diagram, advantages...What is paper chromatography, principal, procedure,types, diagram, advantages...
What is paper chromatography, principal, procedure,types, diagram, advantages...srcw2322l101
 
How Do Venture Capitalists Make Decisions?
How Do Venture Capitalists Make Decisions?How Do Venture Capitalists Make Decisions?
How Do Venture Capitalists Make Decisions?Alejandro Cremades
 
Toyota Kata Coaching for Agile Teams & Transformations
Toyota Kata Coaching for Agile Teams & TransformationsToyota Kata Coaching for Agile Teams & Transformations
Toyota Kata Coaching for Agile Teams & TransformationsStefan Wolpers
 
Stages of Startup Funding - An Explainer
Stages of Startup Funding - An ExplainerStages of Startup Funding - An Explainer
Stages of Startup Funding - An ExplainerAlejandro Cremades
 
5 Brilliant Ways To Buy Verified Payoneer Accounts In 2024
5 Brilliant Ways To Buy Verified Payoneer Accounts In 20245 Brilliant Ways To Buy Verified Payoneer Accounts In 2024
5 Brilliant Ways To Buy Verified Payoneer Accounts In 2024https://localsmmshop.com/
 
MichaelStarkes_UncutGemsProjectSummary.pdf
MichaelStarkes_UncutGemsProjectSummary.pdfMichaelStarkes_UncutGemsProjectSummary.pdf
MichaelStarkes_UncutGemsProjectSummary.pdfmstarkes24
 
Creating an Income Statement with Forecasts: A Simple Guide and Free Excel Te...
Creating an Income Statement with Forecasts: A Simple Guide and Free Excel Te...Creating an Income Statement with Forecasts: A Simple Guide and Free Excel Te...
Creating an Income Statement with Forecasts: A Simple Guide and Free Excel Te...Aurelien Domont, MBA
 
Guide to Networking Essentials 8th Edition by Greg Tomsho solution manual.doc
Guide to Networking Essentials 8th Edition by Greg Tomsho solution manual.docGuide to Networking Essentials 8th Edition by Greg Tomsho solution manual.doc
Guide to Networking Essentials 8th Edition by Greg Tomsho solution manual.docssuserf63bd7
 
wagamamaLab presentation @MIT 20240509 IRODORI
wagamamaLab presentation @MIT 20240509 IRODORIwagamamaLab presentation @MIT 20240509 IRODORI
wagamamaLab presentation @MIT 20240509 IRODORIIRODORI inc.
 
Elevate Your Online Presence with SEO Services
Elevate Your Online Presence with SEO ServicesElevate Your Online Presence with SEO Services
Elevate Your Online Presence with SEO ServicesHaseebBashir5
 
Series A Fundraising Guide (Investing Individuals Improving Our World) by Accion
Series A Fundraising Guide (Investing Individuals Improving Our World) by AccionSeries A Fundraising Guide (Investing Individuals Improving Our World) by Accion
Series A Fundraising Guide (Investing Individuals Improving Our World) by AccionAlejandro Cremades
 

Recently uploaded (20)

Inside the Black Box of Venture Capital (VC)
Inside the Black Box of Venture Capital (VC)Inside the Black Box of Venture Capital (VC)
Inside the Black Box of Venture Capital (VC)
 
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdfInnomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
 
The Risks of Ignoring Bookkeeping in Your Business
The Risks of Ignoring Bookkeeping in Your BusinessThe Risks of Ignoring Bookkeeping in Your Business
The Risks of Ignoring Bookkeeping in Your Business
 
Copyright: What Creators and Users of Art Need to Know
Copyright: What Creators and Users of Art Need to KnowCopyright: What Creators and Users of Art Need to Know
Copyright: What Creators and Users of Art Need to Know
 
ابو ظبي اعلان | - سايتوتك في الامارات حبوب الاجهاض للبيع ف حبوب الإجهاض ... ا...
ابو ظبي اعلان | - سايتوتك في الامارات حبوب الاجهاض للبيع ف حبوب الإجهاض ... ا...ابو ظبي اعلان | - سايتوتك في الامارات حبوب الاجهاض للبيع ف حبوب الإجهاض ... ا...
ابو ظبي اعلان | - سايتوتك في الامارات حبوب الاجهاض للبيع ف حبوب الإجهاض ... ا...
 
Presentation4 (2) survey responses clearly labelled
Presentation4 (2) survey responses clearly labelledPresentation4 (2) survey responses clearly labelled
Presentation4 (2) survey responses clearly labelled
 
PitchBook’s Guide to VC Funding for Startups
PitchBook’s Guide to VC Funding for StartupsPitchBook’s Guide to VC Funding for Startups
PitchBook’s Guide to VC Funding for Startups
 
Your Work Matters to God RestorationChurch.pptx
Your Work Matters to God RestorationChurch.pptxYour Work Matters to God RestorationChurch.pptx
Your Work Matters to God RestorationChurch.pptx
 
What is paper chromatography, principal, procedure,types, diagram, advantages...
What is paper chromatography, principal, procedure,types, diagram, advantages...What is paper chromatography, principal, procedure,types, diagram, advantages...
What is paper chromatography, principal, procedure,types, diagram, advantages...
 
How Do Venture Capitalists Make Decisions?
How Do Venture Capitalists Make Decisions?How Do Venture Capitalists Make Decisions?
How Do Venture Capitalists Make Decisions?
 
Toyota Kata Coaching for Agile Teams & Transformations
Toyota Kata Coaching for Agile Teams & TransformationsToyota Kata Coaching for Agile Teams & Transformations
Toyota Kata Coaching for Agile Teams & Transformations
 
Stages of Startup Funding - An Explainer
Stages of Startup Funding - An ExplainerStages of Startup Funding - An Explainer
Stages of Startup Funding - An Explainer
 
5 Brilliant Ways To Buy Verified Payoneer Accounts In 2024
5 Brilliant Ways To Buy Verified Payoneer Accounts In 20245 Brilliant Ways To Buy Verified Payoneer Accounts In 2024
5 Brilliant Ways To Buy Verified Payoneer Accounts In 2024
 
MichaelStarkes_UncutGemsProjectSummary.pdf
MichaelStarkes_UncutGemsProjectSummary.pdfMichaelStarkes_UncutGemsProjectSummary.pdf
MichaelStarkes_UncutGemsProjectSummary.pdf
 
Creating an Income Statement with Forecasts: A Simple Guide and Free Excel Te...
Creating an Income Statement with Forecasts: A Simple Guide and Free Excel Te...Creating an Income Statement with Forecasts: A Simple Guide and Free Excel Te...
Creating an Income Statement with Forecasts: A Simple Guide and Free Excel Te...
 
Guide to Networking Essentials 8th Edition by Greg Tomsho solution manual.doc
Guide to Networking Essentials 8th Edition by Greg Tomsho solution manual.docGuide to Networking Essentials 8th Edition by Greg Tomsho solution manual.doc
Guide to Networking Essentials 8th Edition by Greg Tomsho solution manual.doc
 
wagamamaLab presentation @MIT 20240509 IRODORI
wagamamaLab presentation @MIT 20240509 IRODORIwagamamaLab presentation @MIT 20240509 IRODORI
wagamamaLab presentation @MIT 20240509 IRODORI
 
(推特)Twitter账号批发(自助购买网址🎉top233.com🎉)
(推特)Twitter账号批发(自助购买网址🎉top233.com🎉)(推特)Twitter账号批发(自助购买网址🎉top233.com🎉)
(推特)Twitter账号批发(自助购买网址🎉top233.com🎉)
 
Elevate Your Online Presence with SEO Services
Elevate Your Online Presence with SEO ServicesElevate Your Online Presence with SEO Services
Elevate Your Online Presence with SEO Services
 
Series A Fundraising Guide (Investing Individuals Improving Our World) by Accion
Series A Fundraising Guide (Investing Individuals Improving Our World) by AccionSeries A Fundraising Guide (Investing Individuals Improving Our World) by Accion
Series A Fundraising Guide (Investing Individuals Improving Our World) by Accion
 

Inventory slides.pptx

  • 1. 6-1 6-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College WILEY IFRS EDITION
  • 2. 6-2 6-2 PREVIEW OF CHAPTER 6 Financial Accounting IFRS 3rd Edition Weygandt ● Kimmel ● Kieso
  • 3. 6-3 6 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Discuss how to classify and determine inventory. 2. Explain the accounting for inventories and apply the inventory cost flow methods. 3. Explain the financial effects of the inventory cost flow assumptions. 4. Explain the lower-of-cost-or-net realizable value basis of accounting for inventories. 5. Indicate the effects of inventory errors on the financial statements. 6. Discuss the presentation and analysis of inventory. CHAPTER Inventories
  • 4. 6-4 6-4 One Classification:  Inventory Three Classifications:  Raw Materials  Work in Process  Finished Goods Merchandising Company Manufacturing Company • HELPFUL HINT Regardless of the classification, companies report all inventories under Current Assets on the statement of financial position. LO 1 Classifying Inventory Classifying and Determining Inventory Learning Objective 1 Discuss how to classify and determine inventory.
  • 5. 6-5 6-5 Physical Inventory taken for two reasons: Perpetual System 1. Check accuracy of inventory records. 2. Determine amount of inventory lost due to 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 LO 1
  • 6. 6-6 6-6 Involves counting, weighing, or measuring each kind of inventory on hand. Companies often “take inventory”  when the business is closed or business is slow.  at the end of the accounting period. TAKING A PHYSICAL INVENTORY Determining Inventory Quantities LO 1
  • 7. 6-7 6-7 GOODS IN TRANSIT  Purchased goods not yet received.  Sold goods not yet delivered. DETERMINING OWNERSHIP OF GOODS 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. Determining Inventory Quantities LO 1
  • 8. 6-8 6-8 Illustration 6-2 Terms of sale GOODS IN TRANSIT 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. DETERMINING OWNERSHIP OF GOODS LO 1
  • 9. 6-9 6-9 CONSIGNED GOODS To hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods. Many car, boat, and antique dealers sell goods on consignment, why? LO 1 Determining Ownership of Goods
  • 10. 6-10 6-10 1. Goods of ¥15,000 held on consignment should be deducted from the inventory count. 2. The goods of ¥10,000 purchased FOB shipping point should be added to the inventory count. 3. Item 3 was treated correctly. Deng Yaping Company completed its inventory count. It arrived at a total inventory value of ¥200,000. You have been given the information listed below. Discuss how this information affects the reported cost of inventory. 1. Deng Yaping included in the inventory goods held on consignment for Falls Co., costing ¥15,000. 2. The company did not include in the count purchased goods of ¥10,000, which were in transit (terms: FOB shipping point). 3. The company did not include in the count inventory that had been sold with a cost of ¥12,000, which was in transit (terms: FOB shipping point). Solution Inventory should be ¥195,000 (¥200,000 - ¥15,000 + ¥10,000). LO 1 > DO IT!
  • 11. 6-11 6-11 Inventory is accounted for at cost.  Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale.  Unit costs are applied to quantities to compute the total cost of the inventory and the cost of goods sold using the following costing methods: ► Specific identification ► First-in, first-out (FIFO) ► Average-cost Cost Flow Assumptions LO 2 Classifying and Determining Inventory
  • 12. 6-12 Illustration: Crivitz TV Company purchases three identical 50- inch TVs on different dates at costs of £700, £750, and £800. During the year Crivitz sold two sets at £1,200 each. These facts are summarized below. Illustration 6-3 Data for inventory costing example Inventory Costing LO 2
  • 13. 6-13 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. Specific Identification Illustration 6-4 Specific identification method LO 2
  • 14. 6-14 6-14 Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory. LO 2  Practice is relatively rare.  Most companies make assumptions (cost flow assumptions) about which units were sold. Specific Identification
  • 15. 6-15 There are two assumed cost flow methods: 1. First-in, first-out (FIFO) 2. Average-cost Cost flow does not need be consistent with the physical movement of the goods. Cost Flow Assumptions LO 2
  • 16. 6-16 6-16 Data for Lin Electronics’ Astro condensers. (Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold Cost Flow Assumptions LO 2 Illustration 6-5
  • 17. 6-17 6-17  Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold.  Often parallels actual physical flow of merchandise.  Companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed. FIRST-IN, FIRST-OUT (FIFO) Cost Flow Assumptions LO 2
  • 18. 6-18 6-18 FIRST-IN, FIRST-OUT (FIFO) LO 2 Illustration 6-6 Allocation of costs—FIFO method
  • 19. 6-19 6-19 • HELPFUL HINT Another way of thinking about the calculation of FIFO ending inventory is the LISH assumption—last in still here. FIRST-IN, FIRST-OUT (FIFO) LO 2 Illustration 6-6 Allocation of costs—FIFO method
  • 20. 6-20 6-20  Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.  Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory. AVERAGE-COST Cost Flow Assumptions LO 2 Illustration 6-8 Formula for weighted-average unit cost
  • 22. 6-22 6-22 Illustration 6-11 LO 2 AVERAGE-COST Illustration 6-9 Allocation of costs—average-cost method
  • 23. 6-23 6-23 Cost of goods available for sale = (4,000 × £3) + (6,000 × £4) = £36,000 Ending inventory = 10,000 − 7,000 = 3,000 units (a) FIFO: £36,000 − (3,000 × £4) = £24,000 (b) Average cost per unit: [(4,000 × £3) + (6,000 × £4)] ÷ 10,000 = £3.60 Average-cost: £36,000 − (3,000 × £3.60) = £25,200 The accounting records of Shumway Ag Implement show the following. Beginning inventory 4,000 units at £ 3 Purchases 6,000 units at £ 4 Sales 7,000 units at £12 Determine the cost of goods sold during the period under a periodic inventory system using (a) the FIFO method and (b) the average-cost method. Solution LO 2 > DO IT!
  • 24. 6-24 6-24 Common Causes:  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 statement of financial position. LO 5 Inventory Errors Learning Objective 5 Indicate the effects of inventory errors on the financial statements.
  • 25. 6-25 6-25 Inventory errors affect the computation of cost of goods sold and net income in two periods. Illustration 6-12 Formula for cost of goods sold Income Statement Effects LO 5 Illustration 6-13 Effects of inventory errors on current year’s income statement
  • 26. 6-26 6-26 Effect of inventory errors on the statement of financial position is determined by using the basic accounting equation: Assets = Liabilities + Equity. Errors in the ending inventory have the following effects. LO 5 Statement of Financial Position Effects Illustration 6-15 Effects of ending inventory errors on statement of financial position
  • 27. 6-27 Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO and average-cost. APPENDIX 6A Perpetual Inventory System Learning Objective 7 Apply the inventory cost flow methods to perpetual inventory records. Illustration 6A-1 Inventoriable units and costs LO 7
  • 28. 6-28 Cost of Goods Sold Ending Inventory First-In-First-Out (FIFO) Illustration 6A-2 Perpetual system—FIFO LO 7
  • 29. 6-29 Cost of Goods Sold Ending Inventory Average-Cost Illustration 6A-3 Perpetual system— average-cost method LO 7
  • 30. 6-30 6-30 Estimates the cost of ending inventory by applying a gross profit rate to net sales. Gross Profit Method APPENDIX 6B Estimating Inventories Learning Objective 8 Describe the two methods of estimating inventories. Illustration 6B-1 Gross profit method formulas LO 8
  • 31. 6-31 6-31 Illustration: Kishwaukee Company’s records for January show net sales of $200,000, beginning inventory $40,000, and cost of goods purchased $120,000. The company expects to earn a 30% gross profit rate. Compute the estimated cost of the ending inventory at January 31 under the gross profit method. Gross Profit Method Illustration 6B-2 Example of gross profit method
  • 32. 6-32 6-32 Company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost. Retail Inventory Method Illustration 6B-3 Retail inventory method formulas LO 8
  • 33. 6-33 6-33 Note that it is not necessary to take a physical inventory to estimate the cost of goods on hand at any given time. Illustration: Retail Inventory Method Illustration 6B-4 Application of retail inventory method LO 8
  • 34. 6-34  Under IFRS, LIFO is not permitted for financial reporting purposes.  Assumes latest goods purchased are first to be sold.  Seldom coincides with actual physical flow of merchandise, except for goods stored in piles, such as coal or hay. Last-In-First-Out (LIFO) APPENDIX 6C LIFO Inventory Method Learning Objective 9 Apply the LIFO inventory costing method. LO 9
  • 36. 6-36 Illustration 6C-2 Proof of COGS Last-In-First-Out (LIFO) Illustration 6C-1 Allocation of costs—LIFO method LO 9