Whbm08

591 views

Published on

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
591
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
0
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide
  • 2
  • 4
  • 4
  • 4
  • 4
  • 4
  • 4
  • 50 51 51 51
  • 50 51 51 51
  • 50 51 51 51
  • 29 29 29 29
  • 30 30 36 36
  • 29 29 29 29
  • 41 41 41 41
  • 42 47 47 47
  • 29 29 29 29
  • 18 18 18 18
  • 97 97 97 97
  • 97 97 97 97
  • 97 97 97 97
  • Whbm08

    1. 1. Slide8-1 Chapter INVENTORIES AND THE 8 COST OF GOODS SOLD McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    2. 2. Slide8-2 Inventory Defined Inventory Defined Inventory Inventory Goods owned Goods owned Current Current and held for sale and held for sale asset asset to customers to customers McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    3. 3. Slide8-3 The Flow of Inventory Costs The Flow of Inventory Costs BALANCE SHEET As purchase costs Current assets: (or manufacturing Inventory costs) are incurred $ $ as goods INCOME STATEMENT are sold Revenue $ Cost of goods sold Gross profit Expenses Net income McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    4. 4. Slide8-4 The Flow of Inventory Costs The Flow of Inventory Costs In a perpetual inventory system, inventory entries parallel the flow of costs. GENERAL JOURNAL P Date Account Titles and Explanation R Debit Credit Entry on Purchase Date Inventory $$$$ Accounts Payable $$$$ Entry on Sale Date Cost of Goods Sold $$$$ Inventory $$$$ McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    5. 5. Slide8-5 Which Unit Did We Sell? Which Unit Did We Sell? When identical units of inventory have different unit costs, a question naturally arises as to which of these costs should be used in recording a sale of inventory. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    6. 6. Slide8-6 Inventory Subsidiary Ledger Inventory Subsidiary Ledger A separate subsidiary account is maintained A separate subsidiary account is maintained for each item in inventory. for each item in inventory. Item LL002 Primary supplier Electronic City Description Laser Light Secondary supplier Electric Company Location Storeroom 2 Inventory level: Min: 25 Max: 200 Purchased Sold Balance Cost of Unit Unit Goods Unit Date Units Cost Total Units Cost Sold Units Cost Total Sept. 5 100 $ 30 $ 3,000 100 $ 30 $ 3,000 Sept. 9 75 50 3,750 100 30 3,000 75 50 3,750 Sept. 10 10 ? ? ? ? ? ? ? ? How can we determine the unit cost for the Sept. 10 sale? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    7. 7. Slide8-7 Inventory Cost Flows Inventory Cost Flows We use one of these inventory valuation methods to determine cost of inventory sold. Specific Average identification cost FIFO LIFO McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    8. 8. Slide8-8 Information for the Following Information for the Following Inventory Examples Inventory Examples The Bike Company (TBC) McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    9. 9. Slide8-9 Specific Identification Specific Identification When a unit is sold, the specific cost of the unit sold is added to cost of goods sold. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    10. 10. Slide8-10 Specific Identification – Example Specific Identification – Example On August 14, TBC sold 20 bikes for $130 each. On August 14, TBC sold 20 bikes for $130 each. Nine bikes originally cost $91 and 11 bikes Nine bikes originally cost $91 and 11 bikes originally cost $106. originally cost $106. Continue McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    11. 11. Slide8-11 Specific Identification – Example Specific Identification – Example The Cost of Goods Sold for the August 14 sale is The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in inventory. $1,985, leaving $515 and 5 units in inventory. Let’s look at the entries for Continue the Aug. 14 sale. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    12. 12. Slide8-12 Specific Identification – Example Specific Identification – Example Retail Retail Cost Cost A similar entry is A similar entry is made after each sale. Continue made after each sale. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    13. 13. Slide8-13 Specific Identification – Example Specific Identification – Example Cost of Goods Cost of Goods Sold for Sold for August 31 = August 31 = $2,610 $2,610 Additional purchases were made on August 17 and 28. Additional purchases were made on August 17 and 28. Costs associated with sales on August 31 were as follows: 1 @ $91, Costs associated with sales on August 31 were as follows: 1 @ $91, 3 @ $106, 15 @ $115, & 4 @ $119. 3 @ $106, 15 @ $115, & 4 @ $119. McGraw-Hill/Irwin Continue © The McGraw-Hill Companies, Inc., 2002
    14. 14. Slide8-14 Specific Identification – Example Specific Identification – Example Income Statement COGS = $4,595 Balance Sheet Inventory = $1,395 1 @ $ 106 = $ 106 5 @ $ 115 = 575 6 @ $ 119 = 714 End. Inv. © The$ 1,395 Companies, Inc., 2002 McGraw-Hill McGraw-Hill/Irwin
    15. 15. Slide8-15 Not really. Specific Since specific identification is hard to use identification is so when we sell a lot of easy, can’t we use it inventory that has lots of all the time? different costs. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    16. 16. Slide8-16 Average-Cost Method Average-Cost Method When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Goods Units on hand Available for ÷ on the date of Sale sale McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    17. 17. Slide8-17 Average-Cost Method – Example Average-Cost Method – Example The average cost per unit The average cost per unit must be computed prior must be computed prior to each sale. to each sale. $100 = $2,500 ÷ 25 $100 = $2,500 ÷ 25 On August 14, TBC sold 20 bikes for $130 each. On August 14, TBC sold 20 bikes for $130 each. Continue McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    18. 18. Slide8-18 Average-Cost Method – Example Average-Cost Method – Example The average cost per The average cost per unit is $100. unit is $100. $100 = $2,500 ÷ 25 $100 = $2,500 ÷ 25 Let’s look at the entries Continue for the Aug. 14 sale. Inc., 2002 McGraw-Hill/Irwin © The McGraw-Hill Companies,
    19. 19. Slide8-19 Average-Cost Method – Example Average-Cost Method – Example Retail Retail Cost Cost A similar entry is A similar entry is made after each sale. Continue made after each sale. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    20. 20. Slide8-20 Average-Cost Method – Example Average-Cost Method – Example Additional purchases were made on August 17 and Additional purchases were made on August 17 and August 28. August 28. On August 31, an additional 23 units were sold. On August 31, an additional 23 units were sold. Continue McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    21. 21. Slide8-21 Average-Cost Method – Example Average-Cost Method – Example $114 = $3,990 ÷ 35 $114 = $3,990 ÷ 35 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    22. 22. Slide8-22 Average-Cost Method – Example Average-Cost Method – Example The average cost per The average cost per $114 = $3,990 ÷ 35 $114 = $3,990 ÷ 35 unit is $114. unit is $114. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    23. 23. Slide8-23 Average-Cost Method – Example Average-Cost Method – Example Income Statement COGS = $4,622 Balance Sheet Inventory = $1,368 $114 × 12 = $1,368 $114 × 12 = $1,368 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    24. 24. Slide8-24 First-In, First-Out Method (FIFO) First-In, First-Out Method (FIFO) Oldest Oldest Costs of Costs of Costs Costs Goods Sold Goods Sold Recent Recent Ending Ending Costs Costs Inventory Inventory McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    25. 25. Slide8-25 FIFO – Example FIFO – Example The Cost of Goods Sold for the August 14 sale is $1,970, The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory. leaving $530 and 5 units in inventory. On August 14, TBC sold 20 bikes for $130 each. On August 14, TBC sold 20 bikes for $130 each. Continue McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    26. 26. Slide8-26 FIFO – Example FIFO – Example Retail Retail Cost Cost A similar entry is A similar entry is made after each sale. Continue made after each sale. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    27. 27. Slide8-27 FIFO – Example FIFO – Example Additional purchases were made on Aug. 17 and Aug. 28. Additional purchases were made on Aug. 17 and Aug. 28. CostOn August 31, an additionalAugust 31 = $2,600 CostOn August 31,Sold for Augustwere sold. of Goods Sold for 23 units 31 = $2,600 of Goods an additional 23 units were sold. McGraw-Hill/Irwin Continue © The McGraw-Hill Companies, Inc., 2002
    28. 28. Slide8-28 FIFO – Example FIFO – Example Income Statement COGS = $4,570 Balance Sheet 2 @ $ 115 = $ 230 10 @ $ 119 = 1,190 Inventory = $1,420 End. Inv. $ 1,420 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    29. 29. Slide8-29 Last-In, First-Out Method (LIFO) Last-In, First-Out Method (LIFO) Recent Recent Costs of Costs of Costs Costs Goods Sold Goods Sold Oldest Oldest Ending Ending Costs Costs Inventory Inventory McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    30. 30. Slide8-30 LIFO – Example LIFO – Example The Cost of Goods Sold for the August 14 sale is The Cost of Goods Sold for the August 14 sale is $2,045, leaving $455 and 5 units in inventory. $2,045, leaving $455 and 5 units in inventory. On August 14, TBC sold 20 bikes for $130 each. On August 14, TBC sold 20 bikes for $130 each. Continue McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    31. 31. Slide8-31 LIFO – Example LIFO – Example Retail Retail Cost Cost A similar entry is A similar entry is made after each sale. Continue made after each sale. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    32. 32. Slide8-32 LIFO – Example LIFO – Example Additional purchases were made on Aug. 17 and Aug. 28. Additional purchases were made on Aug. 17 and Aug. 28. Cost of Aug. 31, anSold for August 31sold. Cost On Goods anadditional 23 units were sold. of Aug. 31, Sold for August 31 = $2,685 Goods additional 23 units were = $2,685 On Continue © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin
    33. 33. Slide8-33 LIFO – Example LIFO – Example Income Statement COGS = $4,730 Balance Sheet 5 @ $ 91 = $ 455 Inventory = $1,260 7 @ $ 115 = 805 End. Inv. $ 1,260 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    34. 34. Slide Inventory Valuation Methods: A Summary8-34 Costs Allocated to: Valuation Cost of Goods Method Sold Inventory Comments Specific Actual cost of Actual cost of units Parallels physical flow identification the units sold remaining Logical method when units are unique May be misleading for identical units Average cost Number of units Number of units on Assigns all units the same sold times the hand times the average unit cost average unit cost average unit cost Current costs are averaged in with older costs First-in, First-out Cost of earliest Cost of most Cost of goods sold is based (FIFO) purchases on recently on older costs hand prior to the purchased units Inventory valued at current sale costs May overstate income during periods of rising prices; may increase income taxes due Last-in, First-out Cost of most Cost of earliest Cost of goods sold shown at (LIFO) recently purchases recent prices purchased units (assumed still in Inventory shown at old (and inventory) perhaps out of date) costs Most conservative method during periods of rising prices; often results in lower McGraw-Hill/Irwin income taxes Companies, Inc., 2002 © The McGraw-Hill
    35. 35. Slide8-35 The Principle of Consistency The Principle of Consistency Once a company has adopted a particular accounting method, it should follow that method consistently, rather than switch methods from one year to the next. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    36. 36. Slide8-36 Just-In-Time (JIT) Inventory Just-In-Time (JIT) Inventory Systems Systems This inventory arrived just in time for us to use in the manufacturing process. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    37. 37. Slide8-37 Taking a Physical Inventory Taking a Physical Inventory The primary reason for taking a physical inventory The primary reason for taking a physical inventory is to adjust the perpetual inventory records for is to adjust the perpetual inventory records for unrecorded shrinkage losses, such as theft, unrecorded shrinkage losses, such as theft, spoilage, or breakage. spoilage, or breakage. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    38. 38. Slide8-38 LCM and Other Write-Downs LCM and Other Write-Downs of Inventory of Inventory Reduces the value Reduces the value Obsolescence Obsolescence of the inventory. of the inventory. Lower of Cost Lower of Cost Adjust inventory Adjust inventory or Market or Market value to the lower value to the lower (LCM) (LCM) of historical cost or of historical cost or current current replacement cost replacement cost (market). (market). McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    39. 39. Slide8-39 Goods In Transit Goods In Transit A sale should be recorded when title A sale should be recorded when title to the merchandise passes to the to the merchandise passes to the buyer. buyer. F.O.B. F.O.B. F.O.B. F.O.B. shipping shipping destination destination point  title point  title point  title point  title passes to passes to passes to passes to buyer at the buyer at the Year buyer at the buyer at the point of point of End point of point of shipment. shipment. destination. destination. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    40. 40. Slide8-40 Periodic Inventory Systems Periodic Inventory Systems In a periodic inventory system, inventory entries are as follows. Note that an entry is not Note that an entry is not made to inventory. made to inventory. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    41. 41. Slide8-41 Periodic Inventory Systems Periodic Inventory Systems In a periodic inventory system, inventory entries are as follows. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    42. 42. Slide8-42 Periodic Inventory Systems Periodic Inventory Systems The inventory on hand and the cost of goods sold for the year are not determined until year-end. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    43. 43. Slide8-43 Periodic Inventory Systems Periodic Inventory Systems We use one of these inventory valuation methods in a periodic inventory system. Specific Average identification cost FIFO LIFO McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    44. 44. Slide8-44 Information for the Following Information for the Following Inventory Examples Inventory Examples Computers, Inc. Mouse Pad Inventory Date Units $/Unit Total Beginning Inventory 1,000 $ 5.25 $ 5,250.00 Purchases: Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00 Sept. 15 200 5.80 1,160.00 Nov. 29 150 5.90 885.00 Goods Available for Sale 1,800 $ 9,725.00 Ending Inventory 1,200 ? Cost of Goods Sold 600 ? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    45. 45. Slide8-45 Specific Identification – Example Specific Identification – Example By reviewing actual purchase invoices, Computers, Inc. determines that the 1,200 mouse pads on hand at year-end have an actual total cost of $6,400. Determine the cost of goods sold for the year. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    46. 46. Slide8-46 Specific Identification – Example Specific Identification – Example Computers, Inc. Mouse Pad Inventory Date Units $/Unit Total Beginning Inventory 1,000 $ 5.25 $ 5,250.00 Purchases: Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00 Sept. 15 Goods Sold 200 Cost of Goods Sold 5.80 1,160.00 Nov. 29of Cost 150 5.90 885.00 -- $9,725 $6,400 = $3,325 Goods $6,400 = $3,325 $9,725 Available for Sale 1,800 $ 9,725.00 Ending Inventory 1,200 $ 6,400.00 Cost of Goods Sold 600 $ 3,325.00 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    47. 47. Slide8-47 Average-Cost Method Average-Cost Method The average cost is The average cost is calculated at year- calculated at year- end as follows: end as follows: Total Cost of Total Number Goods of Units Available for ÷ Available for Sale Sale McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    48. 48. Slide8-48 Average-Cost Method – Example Average-Cost Method – Example Computers, Inc. Mouse Pad Inventory Avg. Cost $9,725 ÷ 1,800 Avg. Cost $9,725 ÷ 1,800 Date Units $/Unit Total = $5.40278 = $5.40278 Beginning Ending Inventory Ending Inventory Inventory 1,000 $ 5.25 $ 5,250.00 Avg. Cost $5.40278 × 1,200 = Avg. Cost $5.40278 × 1,200 = Purchases: $6,483 $6,483 Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00 Cost of Goods Sold Cost of Goods Sold Sept. 15 200 5.80 1,160.00 Avg. Cost $5.40278 × 600 = Avg. Cost $5.40278 × 600 = Nov. 29 150 5.90 885.00 $3,242 $3,242 Goods Available for Sale 1,800 $ 9,725.00 Ending Inventory 1,200 1,200 $ 6,483.00 ? Cost of Goods Sold 600 $ 3,242.00 ? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    49. 49. Slide8-49 First-In, First-Out Method (FIFO) First-In, First-Out Method (FIFO) Oldest Oldest Costs of Costs of Costs Costs Goods Sold Goods Sold Recent Recent Ending Ending Costs Costs Inventory Inventory McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    50. 50. Slide8-50 FIFO – Example FIFO – Example Computers, Inc. Remember: Start Mouse Pad Inventory with the 11/29 Date Units $/Unit Total purchase and then Beginning add other purchases Inventory 1,000 $ 5.25 $ 5,250.00 until you reach the Purchases: number of units in Jan. 3 300 5.30 1,590.00 ending inventory. June 20 150 5.60 840.00 Sept. 15 200 5.80 1,160.00 Nov. 29 150 5.90 885.00 Goods Available for Sale 1,800 $ 9,725.00 Ending Inventory 1,200 ? Cost of Goods Sold 600 ? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    51. 51. Slide8-51 FIFO – Example FIFO – Example Cost of Date Beg. Inv. Purchases End. Inv. Goods Sold 1,000@$5.25 600@$5.25 400@$5.25 Jan. 3 300@$5.30 300@$5.30 June 20 150@$5.60 150@$5.60 Sept. 15 200@$5.80 200@$5.80 Nov. 29 150@$5.90 150@$5.90 Units 1,200 150 600 Now, we have allocated Costs $6,575 $3,150 the cost to allNow, let’s complete the Now, units complete the 1,200 let’s of Goods Available for table. table. Cost in ending inventory. Sale $9,725 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    52. 52. Slide8-52 FIFO – Example FIFO – Example Computers, Inc. Completing the table Mouse Pad Inventory summarizes the Date Units $/Unit Total computations just Beginning made. Inventory 1,000 $ 5.25 $ 5,250.00 Purchases: Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00 Sept. 15 200 5.80 1,160.00 Nov. 29 150 5.90 885.00 Goods Available for Sale 1,800 $ 9,725.00 Ending Inventory 1,200 $ 6,575.00 Cost of Goods Sold 600 $ 3,150.00 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    53. 53. Slide8-53 Last-In, First-Out Method (LIFO) Last-In, First-Out Method (LIFO) Recent Recent Costs of Costs of Costs Costs Goods Sold Goods Sold Oldest Oldest Ending Ending Costs Costs Inventory Inventory McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    54. 54. Slide8-54 LIFO – Example LIFO – Example Remember: Start with Computers, Inc. Mouse Pad Inventory beginning inventory Date Units $/Unit Total and then add other Beginning purchases until you Inventory 1,000 $ 5.25 $ 5,250.00 reach the number of Purchases: units in ending Jan. 3 300 5.30 1,590.00 inventory. June 20 150 5.60 840.00 Sept. 15 200 5.80 1,160.00 Nov. 29 150 5.90 885.00 Goods Available for Sale 1,800 $ 9,725.00 Ending Inventory 1,200 ? Cost of Goods Sold 600 ? McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    55. 55. Slide8-55 LIFO – Example LIFO – Example Cost of Date Beg. Inv. Purchases End. Inv. Goods Sold 1,000@$5.25 1,000@$5.25 Jan. 3 300@$5.30 200@$5.30 100@$5.30 June 20 150@$5.60 150@$5.60 Sept. 15 200@$5.80 200@$5.80 Nov. 29 150@$5.90 150@$5.90 Units 1,200 1,000 600 100 Now, we have allocated Costs $6,310 $3,415 Next, let’s Next, let’s the cost to all 1,200 units complete the complete the Cost in endingAvailable for Sale of Goods inventory. $9,725 table. table. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    56. 56. Slide8-56 LIFO – Example LIFO – Example Computers, Inc. Completing the table Mouse Pad Inventory summarizes the Date Units $/Unit Total computations just Beginning made. Inventory 1,000 $ 5.25 $ 5,250.00 Purchases: Jan. 3 300 5.30 1,590.00 June 20 150 5.60 840.00 Sept. 15 200 5.80 1,160.00 Nov. 29 150 5.90 885.00 Goods Available for Sale 1,800 $ 9,725.00 Ending Inventory 1,200 $ 6,310.00 Cost of Goods Sold 600 $ 3,415.00 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    57. 57. Slide8-57 Importance of an Accurate Importance of an Accurate Valuation of Inventory Valuation of Inventory Errors in Measuring Inventory Beginning Inventory Ending Inventory Effect on Income Statement Overstated Understated Overstated Understated Goods Available for Sale + - 0 0 Cost of Goods Sold + - - + Gross Profit - + + - Net Income - + + - Effect on Balance Sheet Ending Inventory 0 0 + - Retained Earnings - + + - An error in ending inventory in a year will result in the An error in ending inventory in a year will result in the same error in the beginning inventory of the next year. same error in the beginning inventory of the next year. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    58. 58. Slide8-58 For interim fi nancial statements, w e may need to estimate e nding inventory an d cost of goods sold. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    59. 59. Slide8-59 The Gross Profit Method The Gross Profit Method Determine cost of goods Determine cost of goods available for sale. available for sale. Estimate cost of goods sold Estimate cost of goods sold by multiplying the net sales by multiplying the net sales by the cost ratio. by the cost ratio. Deduct cost of goods sold Deduct cost of goods sold from cost of goods available from cost of goods available for sale to determine ending for sale to determine ending inventory. inventory. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    60. 60. Slide8-60 Gross Profit Method – Example Gross Profit Method – Example In March of 2003, Chemico’s inventory was In March of 2003, Chemico’s inventory was destroyed by fire. Chemico’s normal gross profit destroyed by fire. Chemico’s normal gross profit ratio is 30% of net sales. At the time of the fire, ratio is 30% of net sales. At the time of the fire, Chemico showed the following balances: Chemico showed the following balances: Sales $ 31,500 Sales returns 1,500 Beginning Inventory 12,000 Net cost of goods purchased 20,500 McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    61. 61. Slide8-61 Gross Profit Method – Example Gross Profit Method – Example  × 70%   McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    62. 62. Slide8-62 Inventory Turnover Rate Inventory Turnover Rate Measures how quickly a company Measures how quickly a company sells its merchandise inventory. sells its merchandise inventory. Average Inventory = (Beg. Inv. + End. Inv.) ÷ 2 Average Inventory = (Beg. Inv. + End. Inv.) ÷ 2 A ratio that is low compared to competitors A ratio that is low compared to competitors suggests inefficient use of assets. suggests inefficient use of assets. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    63. 63. Slide8-63 Accounting Methods Can Affect Accounting Methods Can Affect Analytical Ratios Analytical Ratios Remember that identical companies that use different inventory methods (e.g., FIFO and LIFO) will have different inventory turnover ratios. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002
    64. 64. Slide8-64 End of Chapter 8 End of Chapter 8 Careful! If you drop the inventory we will have another write down. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

    ×