Cost of Sales and Inventories

1. 6 Cost of Sales and Inventories Part One: Financial Accounting • The McGraw-Hill Companies, Inc., 1999

2. Available for sale $11,400 Purchases $7,400 Cost of goods sold $? Merchandise Inventory and Flows Slide 6-1 Ending inventory $? Beginning inventory $4,000 Inventory reservoir

3. Periodic Inventory Method Slide 6-2 Beginning inventory $ 4,000 Plus: Purchases 7,400 Equals: Goods available for sale 11,400 Less: Ending inventory 2,000 Cost of goods sold $ 9,400 In the periodic inventory method a physical count is made of merchandise in the ending inventory.

4. Periodic Inventory Method Slide 6-3 Beginning inventory $ 4,000 Plus Purchases, gross $7,000 Freight-in 600 7,600 Less: Purchase returns 200 Net purchases 7,400 Goods available for sale 11,400 Less: Ending inventory 2,000 Cost of goods sold $ 9,400

5. Periodic Inventory Method Slide 6-4 Entries First, close the beginning inventory amount: Cost of Goods Sold 4,000 Merchandise Inventory 4,000 Next, close Purchases, Purchases Returns, and Freight-In accounts. Cost of Goods Sold 7,400 Purchase Return 200 Purchases 7,000 Freight-In 600

6. Periodic Inventory Method Slide 6-5 Entries The new balance from the physical inventory is entered: Merchandise Inventory 2,000 Cost of Goods Sold 2,000 Finally, Cost of Goods Sold is closed: Income Summary 9,400 Cost of Goods Sold 9,400

7. Perpetual Inventory Method Slide 6-6 Entries For purchases: Merchandise Inventory 7,000 Cost of Goods Sold 7,000 For shipment to customers: Cost of Goods Sold 8,800 Merchandise Inventory 8,800 For purchase returns: Accounts Payable 200 Merchandise Inventory 200

8. Perpetual Inventory Method Slide 6-7 Item: Cassette Deck, Model S150 Unit: Each Date Receipts Shipments Balance Unit Unit Unit Units Cost Total Units Cost Total Units Cost Total Jan. 2 40 100 100 4,000 12 32 100 3,200 8 100 800 14 10 100 1,000 18 100 1,800 25 4 100 400 22 100 2,200 31 2 100 200 20 100 2,000

9. Retail Method Slide 6-8 At Cost At Retail Beginning inventory $ 4,000 $ 6,000 Purchases 7,00010,000 Goods available for sale $11,000 $16,000 $11,000/$16,000 =69%

10. $ 2,070 $3,000 x .69 Retail Method Slide 6-9 At Cost At Retail Sales 13,000 Ending inventory at retail $ 3,000 Ending inventory at cost Beginning inventory $ 4,000 $ 6,000 Purchases 7,00010,000 Goods available for sale $11,000 $16,000 Cost of goods sold: $13,000 x .69 = $8,970

11. Flow of Cost Through Inventories Slide 6-10 Materials Inventory Balance, Jan 1 154 Purchases 273 Work in Process Inventory Balance, Jan 1 19 Finished Goods Inventory Balance, Jan 1 69

12. Flow of Cost Through Inventories Slide 6-11 Materials Inventory Balance, Jan 1 154 Purchases 273 264 Work in Process Inventory Balance, Jan 1 19 Materials used 264 Conversion cost 330 Finished Goods Inventory Balance, Jan 1 69

13. 573 Cost of Goods Sold Flow of Cost Through Inventories Slide 6-12 Materials Inventory Balance, Jan 1 154 Purchases 273 264 Work in Process Inventory Balance, Jan 1 19 Materials used 264 570 Conversion cost 330 Finished Goods Inventory Balance, Jan 1 69 Goods manufactured 570

14. Inventory Costing Methods Slide 6-13 • Specific identification • Average cost • First-in, first-out (FIFO) • Last-in, first-out (LIFO)

15. Inventory Costing Methods Slide 6-14 Basic Data Units Unit Cost Total Cost Inventory, January 1 100 $8 $ 800 Purchased June 1 60 9 540 Purchased October 1 80 10 800 Goods available for sale 240 $2,140 Goods sold 150 Ending inventory 90

16. Inventory Costing Methods Slide 6-15 Specific Identification Method Units Unit Cost Total Cost Inventory, January 1 100 $8 $ 800 Purchased June 1 60 9 540 Purchased October 1 80 10 800 Goods available for sale 240 $2,140 Goods sold 150 Ending inventory 90 SOLD 100 SOLD 50

17. Inventory Costing Methods Slide 6-16 Specific Identification Method Units Unit Cost Total Cost Purchased June 1 10 $ 9 $ 90 Purchased October 1 80 10 800 Ending inventory 90 $890 Cost of goods sold = (100 x $8) + (50 x $9) = $1,250

18. $2,140 240 Inventory Costing Methods Slide 6-17 Average Cost Method Units Unit Cost Total Cost Inventory, January 1 100 $8 $ 800 Purchased June 1 60 9 540 Purchased October 1 80 10 800 Goods available for sale 240 $8.917 $2,140 Ending inventory: 90 x $8.917 = $802 Cost of goods sold: 150 x $8.917 = $1,338

19. Inventory Costing Methods Slide 6-18 FIFO Units Unit Cost Total Cost Inventory, January 1 100 $8 $ 800 Purchased June 1 60 9 540 Purchased October 1 80 10 800 Goods available for sale 240 $2,140 Goods sold 150 Ending inventory 90 Sold 100 Sold 50

20. Inventory Costing Methods Slide 6-19 FIFO Units Unit Cost Total Cost Purchased June 1 10 9 90 Purchased October 1 80 10 800 Ending inventory 90 $890 Cost of goods sold: (100 x $8) + (50 x $9) = $1,250

21. Inventory Costing Methods Slide 6-20 LIFO Units Unit Cost Total Cost Inventory, January 1 100 $8 $ 800 Purchased June 1 60 9 540 Purchased October 1 80 10 800 Goods available for sale 240 $2,140 Goods sold 150 Ending inventory 90 Sold 10 Sold 60 Sold 80

22. Inventory Costing Methods Slide 6-21 LIFO Units Unit Cost Total Cost Inventory, January 1 90 $8 $720 Ending inventory Cost of goods sold: (80 x $10) + (60 x $9) + (10 x $8) = $1,420

23. Comparison of Method Slide 6-22 Cost of Ending Goods Sold Inventory Total FIFO $1,250 $890 $2,140 Average cost 1,338 802 2,140 LIFO 1,420 720 2,140

24. Chapter 6 TheEnd