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Chapter 7

Chapter 7. Reporting and Interpreting Cost of Goods Sold and Inventory. Business Background. Provides accurate information. Roles of the Accounting System. Provides up-to-date information. Provides information to help protect assets. Nature of Inventory and Cost of Goods Sold.

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Chapter 7

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  1. Chapter 7 Reporting and InterpretingCost of Goods Soldand Inventory

  2. Business Background Provides accurate information. Roles of the Accounting System Provides up-to-date information. Provides information to help protect assets.

  3. Nature of Inventory and Cost of Goods Sold BeginningInventory Purchasesfor the Period Goods availablefor Sale Ending Inventory(Balance Sheet) Cost of Goods Sold(Income Statement) Beginning inventory + Purchases – Ending inventory = Cost of goods sold

  4. Merchandiser MerchandisePurchases MerchandiseInventory Cost ofGoods Sold Manufacturer RawMaterials Raw MaterialsInventory Work in ProcessInventory Finished GoodsInventory DirectLabor Cost ofGoods Sold FactoryOverhead Flow of Inventory Costs

  5. The cost principle requires that inventory be recorded at the price paid or the consideration given up. Inventory Cost

  6. FIFO LIFO Weighted Average Specific Identification Inventory Costing Methods

  7. Applying the Four Methods Total Dollar Amount of Goods Available for Sale Ending Inventory Cost of Goods Sold

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

  9. First-In, First-Out The schedule on the next screen shows the mouse pad inventory for Computers, Inc. The physical inventory count shows 1,200 mouse pads in ending inventory. Use the FIFOinventorymethod to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  10. Remember: The costs of most recent purchases are in ending inventory. Start with 11/29 and add units purchased until you reach the number in ending inventory. First-In, First-Out

  11. First-In, First-Out

  12. First-In, First-Out

  13. First-In, First-Out

  14. First-In, First-Out

  15. First-In, First-Out Now, we have allocated the cost to all 1,200 units in ending inventory.

  16. First-In, First-Out

  17. ANY QUESTIONS BEFORE WE DISCUSS LIFO?

  18. Last-In, First-Out ? Oldest Costs ? Recent Costs

  19. Last-In, First-Out Ending Inventory Oldest Costs Cost of Goods Sold Recent Costs

  20. Last-In, First-Out The schedule on the next screen shows the mouse pad inventory for Computers, Inc. The physical inventory count shows 1,200 mouse pads in ending inventory. Use the LIFOinventory method to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  21. Remember: The costs of the oldest purchases are in ending inventory. Start with beginning inventory and add units purchased until you reach the number in ending inventory. Last-In, First-Out

  22. Last-In, First-Out

  23. Last-In, First-Out Now, we have allocated the cost to all 1,200 units in ending inventory.

  24. Last-In, First-Out

  25. Last-In, First-Out

  26. Average Cost Method Now let’s move on to the average cost inventory method.

  27. Average Cost Method The schedule on the next screen shows the mouse pad inventory for Computers, Inc. The physical inventory count shows 1,200 mouse pads in ending inventory. Use the average costinventorymethod to determine: (1) Ending inventory cost. (2) Cost of goods sold.

  28. Average Cost Method

  29. Weighted-Average Cost per Unit: $9,725 1,800 Ending Inventory: 1,200 Units × $5.40278 = $6,483* Cost of Goods Sold: 600 Units × $5.40278 = $3,242* *Rounded = $5.40278 Weighted-Average

  30. Comparison of Methods

  31. In periods of rising prices, FIFO results in the highest ending inventory, gross profit, tax expense, and net income, and the lowest cost of goods sold. Comparison of Methods

  32. Comparison of Methods In periods of rising prices, LIFO results in the lowest ending inventory, gross profit, tax expense, and net income, and the highest cost of goods sold.

  33. Choosing Inventory Costing Methods Net Income Effects.Managers prefer to report higher earning for their companies. Income Tax Effects.Managers prefer to pay the least amount of taxes allowed by law as late as possible.

  34. Choosing Inventory Costing Methods If . . . Then . . . LIFO Conformity Rule LIFO for taxes LIFO for books

  35. Inventory Costing Methods and Financial Statement Analysis

  36. No Yes LIFO and International Comparisons LIFO Permitted? Singapore China Canada Australia Great Britain

  37. Lower of Cost or Market Ending inventory is reported at the lower of cost or market (LCM). Market is either . . . Net Realizable ValueThe expected sales priceless selling costs. Replacement CostThe current purchase price of identical goods. or

  38. Lower of Cost or Market The mouse pads will be shown on the balance sheet at $6,640 (LCM). The company will recognize a “holding” loss in the current period rather than the period in which the item is sold.This practice is conservative.

  39. InventoryTurnover Measuring Efficiency in Inventory Management Cost of Goods Sold = Average Inventory Inventory Turnover Average Inventory is . . . (Beginning Inventory + Ending Inventory) ÷ 2 This ratio is often used to measure the liquidity (nearness to cash) of the inventory.

  40. Measuring Efficiency in Inventory Management InventoryTurnover Cost of Goods Sold = Average Inventory Inventory Turnover The 2000 inventory turnover ratio for Harley-Davidson: $1,915,547 ($191,931 + $168,616) ÷ 2 = 10.6

  41. Focus on Cash Flows Increase in Inventory Decrease in Accounts Payable Add Cost of Goods Sold Cash Payment to Suppliers Decrease in Inventory Increase in Accounts Payable Subtract

  42. Errors in Measuring Inventory

  43. Question If the 2002 ending inventory is understated by $3,000, which of the following is true for 2002? a. Beginning Inventory was understated. b. Cost of Goods Sold will be understated. c. Gross Profit will be overstated. d. Net Income will be understated.

  44. Question If the 2002 ending inventory is understated by $3,000, which of the following is true for 2003? a. Beginning Inventory was understated. b. Cost of Goods Sold will be understated. c. Gross Profit will be overstated. d. All of the above. Remember: The ending inventory for 2002 becomes the beginning inventory for 2003.

  45. Perpetual and Periodic Inventory Systems Provides up-to-date inventory records. Perpetual System Provides up-to-date cost of sales records.

  46. Comparison of Perpetual and Periodic Systems

  47. The End of Chapter 7

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