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Chapter 8

Chapter 8. Inventory: Measurement. Those assets that a company:. Inventory. 1. Intends to sell in the normal course of business. 2. Has in production for future sale. 3. Uses currently in the production of goods to be sold. Merchandise Inventory. Manufacturing Inventory.

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Chapter 8

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  1. Chapter 8 Inventory: Measurement

  2. Those assets that a company: Inventory 1. Intends to sell in the normal course of business. 2. Has in production for future sale. 3. Uses currently in the production of goods to be sold.

  3. Merchandise Inventory Manufacturing Inventory Goods acquired for resale • Raw Materials • Work-in-process • Finished Goods Types of Inventories

  4. Perpetual Inventory System Periodic Inventory System The inventory account is continuously updated as purchases and sales are made. The inventory account is adjusted at the end of a reporting cycle. Inventory Methods

  5. Accounting Entries in a Perpetual System Returns of inventory are credited to the inventory account. Discounts on inventory purchases can be recorded using the gross or net method.

  6. Accounting Entries in a Perpetual System

  7. Periodic Cost of Goods Sold Equation

  8. Accounting Entries in a Periodic System

  9. Accounting Entries in a Periodic System

  10. Accounting Entries in a Periodic System In addition to Purchases, the contra-purchase accounts are also closed to COGS at the end of the period: Purchases Discounts Purchase Returns and Allowances

  11. Comparison of Inventory Systems

  12. General Rule All goods owned by the company on the inventory date, regardless of their location. What is Included in Inventory? Goods in Transit Goods on Consignment Depends on FOB shipping terms.

  13. Invoice Price Purchase Returns + Freight-in on Purchases Purchase Discounts Expenditures Included in Inventory

  14. Specific cost identification Average cost First-in, first-out (FIFO) Last-in, first-out (LIFO) Inventory Cost Flow Methods

  15. Items are added to inventory at cost when they are purchased. COGS for each sale is based on the specific cost of the item sold. Specific Cost Identification • The specific cost of each inventory item must be known. • By selecting specific items from inventory at the time of sale, income can be manipulated.

  16. Average Cost Method

  17. Weighted-Average Periodic Example The following schedule shows the frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600frames in ending inventory. Use the periodic weighted-average method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  18. Weighted-AveragePeriodic Example

  19. Ending Inventory (600 units) Beginning Inventory (800 units) Purchases (1,150 units) Available for Sale (1,950 units) Goods Sold (1,350) Weighted-AveragePeriodic Example Now, we have to assign costs to ending inventory and cost of goods sold. $47,650 ÷ 1,950 = $24.4359 weighted-average per unit cost

  20. Weighted-AveragePeriodic Example

  21. Moving-AveragePerpetual Example The following schedule shows the Frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600mouse pads in ending inventory. Use the perpetual weighted-average method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  22. Moving-AveragePerpetual Example

  23. Moving-AveragePerpetual Example

  24. Moving-AveragePerpetual Example $11,600.00 ÷ (800-600+300) = $23.200

  25. Moving-AveragePerpetual Example $27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181

  26. Sum Moving-AveragePerpetual Example

  27. The cost of the oldest inventory items are charged to COGS when goods are sold. The cost of the newest inventory items remain in ending inventory. First-In, First-Out The FIFO method assumes that items are sold in the chronological order of their acquisition.

  28. First-In, First-Out Even though the periodic and the perpetual approaches differ in the timing of adjustments to inventory . . . . . . COGS and Ending Inventory Cost are the same under both approaches.

  29. FIFO - Periodic Example The following schedule shows the frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600mouse pads in ending inventory. Use the periodic FIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  30. FIFO - Periodic Example These are the 600 most recently acquired units.

  31. FIFO - Periodic Example

  32. FIFO - Periodic Example These are the first 1,350 units acquired.

  33. FIFO - Periodic Example

  34. FIFO - Perpetual Example The following schedule shows the frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600mouse pads in ending inventory. Use the perpetual FIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  35. FIFO - Perpetual Example

  36. FIFO - Perpetual Example 200 The ending inventory on 9/1 consists of: 200 units from beginning inventory @ $22.00

  37. FIFO - Perpetual Example 200 The ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00 300 units from the 9/3 purchase @ $24.00

  38. FIFO - Perpetual Example 200 The ending inventory on 9/10 consists of: 200 units from the 9/3 purchase @ $24.00

  39. FIFO - Perpetual Example 200 The ending inventory on 9/15 consists of: 200 units from the 9/3 purchase @ $24.00 250 units from the 9/15 purchase @ $25.00

  40. FIFO - Perpetual Example 200 The ending inventory on 9/21 consists of: 200 units from the 9/3 purchase @ $24.00 250 units from the 9/15 purchase @ $25.00 200 units from the 9/21 purchase @ $27.00

  41. FIFO - Perpetual Example 200 The ending inventory on 9/21 consists of: 200 units from the 9/3 purchase @ $24.00 250 units from the 9/15 purchase @ $25.00 200 units from the 9/21 purchase @ $27.00 400 units from the 9/29 purchase @ $28.00

  42. FIFO - Perpetual Example The ending inventory on 9/30 consists of: 200 units from the 9/21 purchase @ $27.00 400 units from the 9/29 purchase @ $28.00.

  43. FIFO - Perpetual Example Note that this is the same COGS computed using the Periodic approach.

  44. Last-In, First-Out Any questions before we run into LIFO?

  45. The cost of the newest inventory items are charged to COGS when goods are sold. The cost of the oldest inventory items remain in inventory. Last-In, First-Out The LIFO method assumes that the newest items are sold first, leaving the older units in inventory.

  46. Unlike FIFO, using the LIFO method may result in COGS and Ending Inventory Cost that differ under the periodic and perpetual approaches. Last-In, First-Out

  47. LIFO - Periodic Example The following schedule shows the frame inventory for Yore Frame, Inc. for September. The physical inventory count at September 30 shows 600mouse pads in ending inventory. Use the periodic LIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  48. LIFO - Periodic Example These are the 600 oldest units in inventory.

  49. 200 LIFO - Periodic Example 600 x $22.00

  50. 200 LIFO - Periodic Example These are the most recently acquired 1,350 units. 600 x $22.00

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