Inventory Management and Cost Analysis in Business Operations

1. Chapter 5 Reporting and Analyzing Inventories

2. Conceptual Chapter Objectives C1: Identify the items making up merchandise inventory C2: Identify the costs of merchandise inventory

3. Analytical Chapter Objectives A1: Analyze the effects of inventory methods for both financial and tax reporting A2: Analyze the effects of inventory errors on current and future financial statements A3: Assess inventory management using both inventory turnover and days’ sales in inventory

4. Procedural Chapter Objectives P1: Compute inventory in a perpetual system using the methods of specific identification, FIFO, LIFO, and weighted average P2: Compute the lower of cost or market amount of inventory P3:Appendix 6A: Compute inventory in a periodic system using the methods of specific identification, FIFO, LIFO, and weighted average P4:Appendix 6B: Apply both the retail inventory and gross profit methods to estimate inventory.

5. Determining Inventory Items C 1 Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include: Goods in Transit Goods Damaged or Obsolete Goods on Consignment

6. FOB Shipping Point Public Carrier Seller Buyer Ownership passes to the buyer here. Public Carrier Seller Buyer FOB Destination Point Goods in Transit C 1

7. Goods on Consignment C 1 Merchandise is included in the inventory oftheconsignor, the owner of the inventory. Thanks for selling my inventory in your store. Consignee Consignor

8. Goods Damaged or Obsolete C 1 Damaged or obsolete goods are not counted in inventory if they cannot be sold. Cost should be reduced to net realizable value if they can be sold.

9. Determining Inventory Costs C 2 Include all expenditures necessary to bring an item to a salable condition and location. Invoice Cost Minus Discounts and Allowances Plus Insurance Plus Import Duties Plus Storage Plus Freight

10. Most companies take a physical count of inventory at least once each year. When the physical count does not match the Merchandise Inventory account, an adjustment must be made. InventoryCount Tag Quantity Counted ___ Countedby _______ Internal Controls and Taking a Physical Count C 2

11. Balance Sheet Income Statement Inventory Costing Under a Perpetual System P1 Inventory affects . . . The matching principle requires matching cost of sales with sales.

12. Costing Method Specific Identification, FIFO, LIFO, or Weighted Average Inventory System Perpetual or Periodic Inventory Costing Under a Perpetual System P1 Accounting for inventory requires several decisions . . .

13. Frequency in Use of Inventory Methods P1

14. Inventory Cost Flow Assumptions P1 First-In, First-Out(FIFO) Assumes costs flow in the order incurred. Last-In, First-Out(LIFO) Assumes costs flow in the reverse order incurred. Weighted Average Assumes costs flow at an average of the costs available.

15. Inventory Costing Illustration P1

16. When units are sold, the specific cost of the unit sold is added to cost of goods sold. Specific Identification P1

17. Specific Identification P1 The above purchases were made in August. On August 14, a company sold eight bikes originally costing $91 and 12 bikes originally costing $106.

18. Specific Identification P1 The Cost of Goods Sold for the August 14 sale is $2,000. 8 bikes @ 91 = $ 728 12 bikes @ 106 = $1,272 After this sale, there are five units in inventory at $500: 2 bikes @ $91 = $ 182 3 bikes @ $106 = $ 318

19. Specific Identification P1 Additional purchases were made on August 17 and 28. The cost of the 23 items sold on August 31 were as follows: 2 @ $91 3 @ $10615 @ $115 3 @ $119

20. Cost of Goods Sold for August 31 = $2,582 Specific Identification P1

21. After the August 31 sale, there are 12 units in inventory at $1,408: 5 @ $1157 @ $119 Specific Identification P1

22. Income Statement COGS = $4,582 Balance Sheet Inventory = $1,408 Specific Identification P1

23. Specific Identification P1 Here are the entries to record the purchases and sales. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150

24. Cost of Goods Sold Ending Inventory First-In, First-Out (FIFO) P1 Oldest Costs Recent Costs

25. First-In, First-Out (FIFO) P1 The above purchases were made in August. On August 14, the company sold 20 bikes.

26. First-In, First-Out (FIFO) P1 The Cost of Goods Sold for the August 14 sale is $1,970. After this sale, there are five units in inventory at $530: 5 @ $106

27. First-In, First-Out (FIFO) P1 Additional purchases were made on August 17 and 28. Twenty-three bikes were sold on August 31.

28. Cost of Goods Sold for August 31 = $2,600 First-In, First-Out (FIFO) P1

29. After the August 31 sale, there are 12 units in inventory at $1,420: 2 @ $11510 @ $119 First-In, First-Out (FIFO) P1

30. Income Statement COGS = $4,570 Balance Sheet Inventory = $1,420 First-In, First-Out (FIFO) P1

31. First-In, First-Out (FIFO) P1 Here are the entries to record the purchases and sales entries. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150

32. Cost of Goods Sold Ending Inventory Last-In, First-Out (LIFO) P1 Recent Costs Oldest Costs

33. Last-In, First-Out (LIFO) P1 The above purchases were made in August. On August 14, the company sold 20 bikes.

34. Last-In, First-Out (LIFO) P1 The Cost of Goods Sold for the August 14 sale is $2,045. After this sale, there are five units in inventory at $455: 5 @ $91

35. Last-In, First-Out (LIFO) P1 Additional purchases were made on August 17 and 28. Twenty-three bikes were sold on August 31.

36. Cost of Goods Sold for August 31 = $2,685 Last-In, First-Out (LIFO) P1

37. After the August 31 sale, there are 12 units in inventory at $1,260: 5 @ $91 7 @ $115 Last-In, First-Out (LIFO) P1

38. Income Statement COGS = $4,730 Balance Sheet Inventory = $1,260 Last-In, First-Out (LIFO) P1

39. Last-In, First-Out (LIFO) P1 Here are the entries to record the purchases and sales entries. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150

40. When a unit is sold, theaverage costof each unit in inventory is assigned to cost of goods sold. ÷ Cost of Goods Available for Sale Units on hand on the date of sale Weighted Average P1

41. Weighted Average P1 The above purchases were made in August. On August 14, 20 bikes were sold.

42. ÷ Weighted Average P1 First, we need to compute the weighted average cost per unit of items in inventory.

43. Weighted Average P1 The Cost of Goods Sold for the August 14 sale is $2,000. After this sale, there are five units in inventory at $500:

44. Weighted Average P1 Additional purchases were made on August 17 and 28. Twenty-three bikes were sold on August 31. What is the weighted average cost per unit of items in inventory?

45. ÷ Weighted Average P1

46. Cost of Goods Sold for August 31 = $2,622 Weighted Average P1

47. After the August 31 sale, there are 12 units in inventory at $1,368: 12 @ $114 Weighted Average P1

48. Income Statement COGS = $4,622 Balance Sheet Inventory = $1,368 Weighted Average P1

49. Weighted Average P1 Here are the entries to record the purchases and sales entries for Trekking. The numbers in red are determined by the cost flow assumption used. All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150

50. Because prices change, inventory methods nearly always assign different cost amounts. Financial Statement Effects of Costing Methods A1