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# Section 8

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### Section 8

1. 1. ““ I will not say I failed 1000 times, I will say I will not say I failed 1000 times, I will say that I discovered there are 1000 ways that that I discovered there are 1000 ways that can cause failure can cause failure ””Thomas Edison Thomas Edison
2. 2. No Cellphone
3. 3. Principles Of Accounting (1)Principles Of Accounting (1) Chapter 6Chapter 6 InventoriesInventories Mohamed Mahmoud mmahmoud@eelu.edu.eg Tel: (+202) 33318449
4. 4. O b je c t iv e s : 1. Calculation of Cost of Goods Sold 2. Lower-of-Cost-or-Market 3. Inventory turnover ratio 4. Inventory Cost Flow Methods
5. 5. E x e r c is e s
6. 6. 1. Calculation of Cost of Goods Sold1. Calculation of Cost of Goods Sold \$316,000
7. 7. E x e r c is e 1 Ammar Company had beginning inventory on May 1 of \$12,000. During the month, the company made purchases of \$30,000 but returned \$2,000 of goods because they were defective. At the end of the month, the inventory on hand was valued at \$9,500. Calculate the following: - cost of goods available for sale - cost of goods sold for the month
8. 8. A n s w e r s Beginning inventory \$12,000 Net purchases (\$30,000 – \$2,000) +28,000 Goods available for sale \$40,000 Ending inventory – 9,500 Cost of goods sold \$30,500
9. 9. 2. Lower-of-Cost-or-Market 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.
10. 10. E x e r c is e 2 The Entertainment Center accumulates the following cost and market data at December 31. Inventory Categories Cost Data Market Data Camera \$11,000 \$10,200 Camcorders 8,000 8,500 DVDs 14,000 12,000 What is the lower-of-cost-or-market value of the inventory?
11. 11. A n s w e r s Lower of cost- Inventory Categories Cost Data Market Data or Market Value Camera \$11,000 \$10,200 \$10,200 Camcorders 8,000 8,500 8,000 DVDs 14,000 12,000 12,000 \$30,200
12. 12. 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 = 3. Inventory turnover ratioturnover ratio
13. 13. E x e r c is e 3 At December 31, 2008, the following information was available for Rich Company :  Ending inventory \$22,600  Beginning inventory \$21,400  Cost of goods sold \$171,000  Sales revenue \$430,000 Calculate the inventory turnover ratio and days in inventory for Rich.
14. 14. A n s w e r s - Inventory Turnover Ratio = \$171,000 ÷ [(\$21,400 + \$22,600) ÷ 2] = 7.8 times - Days in Inventory = 365 ÷ 7.8 = 46.8 days
15. 15. Earliest goods purchased are first to be sold. ““First-In-First-Out (FIFO)”First-In-First-Out (FIFO)” Latest goods purchased are first to be sold. ““Last-In-First-Out (LIFO)”Last-In-First-Out (LIFO)” Allocates cost of goods available for sale on the basis of weighted average unit cost incurred. ““Average-Cost ”Average-Cost ” 4. Inventory Cost Flow Methods
16. 16. ““First-In-First-Out (FIFO)”First-In-First-Out (FIFO)” Cost of goods sold Ending inventory
17. 17. Ending inventory Cost of goods sold ““ Last-In-First-Out (LIFO) ”Last-In-First-Out (LIFO) ”
18. 18. Cost of goods sold Ending inventory ““Average-Cost ”Average-Cost ”
19. 19. E x e r c is e 4 Reda Company sells many products. Ringo is one of its popular items. Below is an analysis of the inventory purchases and sales of Ringo for the month of March. Reda Company uses the periodic inventory system. Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 \$40 3/3 Purchase 60 \$50 3/4 Sales 70 \$80 3/10 Purchase 200 \$55 3/16 Sales 80 \$90 3/19 Sales 60 \$90 3/25 Sales 40 \$90 3/30 Purchase 40 \$60 Instructions: (o) Using the FIFO assumption, calculate the amount charged to cost of goods sold for March. (p) Using the weighted average method, calculate the amount assigned to the inventory on hand on March 31. (c) Using the LIFO assumption, calculate the amount assigned to the inventory on hand on March 31.
20. 20. A n s w e r Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 \$40 3/3 Purchase 60 \$50 3/4 Sales 70 \$80 3/10 Purchase 200 \$55 3/16 Sales 80 \$90 3/19 Sales 60 \$90 3/25 Sales 40 \$90 3/30 Purchase 40 \$60 _____ 400 250 (a) Using FIFO - the earliest units purchased were the first sold. 3/1 100 @ \$40 = \$ 4,000 3/3 60 @ 50 = 3,000 3/10 90 @ 55 = 4,950 250 units \$11,950 = the cost of goods sold
21. 21. A n s w e r Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 \$40 3/3 Purchase 60 \$50 3/4 Sales 70 \$80 3/10 Purchase 200 \$55 3/16 Sales 80 \$90 3/19 Sales 60 \$90 3/25 Sales 40 \$90 3/30 Purchase 40 \$60 _____ 400 250 (b) Calculate the Weighted Average unit cost: \$ 20,400 ÷ 400 = \$51 \$ 51 × units in ending inventory (400 available less 250 sold = 150) \$ 51 × 150 = \$7,650
22. 22. A n s w e r Purchases Sales Units Unit Cost Units Selling Price/Unit 3/1 Beginning inventory 100 \$40 3/3 Purchase 60 \$50 3/4 Sales 70 \$80 3/10 Purchase 200 \$55 3/16 Sales 80 \$90 3/19 Sales 60 \$90 3/25 Sales 40 \$90 3/30 Purchase 40 \$60 _____ 400 250 (c) There are 150 units in ending inventory. They are comprised of the first units purchased when LIFO is assumed. 3/1 100 @ \$40 = \$4,000 3/3 50 @ \$50 = 2,500 150 units \$6,500 = Ending inventory