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Accounting for Inventories

Accounting for Inventories. Inventory Costs. All expenditures incurred. Inventory Costs. All expenditures incurred to bring the item to its. Inventory Costs. All expenditures incurred to bring the item to its existing condition and location. Costs include. Invoice cost Shipping

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Accounting for Inventories

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  1. Accounting for Inventories

  2. Inventory Costs All expenditures incurred

  3. Inventory Costs All expenditures incurred to bring the item to its

  4. Inventory Costs All expenditures incurred to bring the item to its existing condition and location

  5. Costs include • Invoice cost • Shipping • Cash discounts • Purchases allowances

  6. Inventory Systems - Periodic • Compute inventory balance at end of each accounting period • Compute cost of goods sold at accounting period end

  7. Inventory Systems - Perpetual • Compute cost of goods sold at each sale • Compute new inventory balance at each sale

  8. Cost Flow Assumptions • Only with specific identification do we attempt to match the actual movement of product through the business with the movement of costs through the accounting system

  9. Cost Flow Assumptions • With other inventory cost methods, we make an assumption of the movement of costs through the accounting system. • This "flow" of costs through the system need not match the movement of product through the business.

  10. Cost Flow Assumptions • First-In, First-Out

  11. Cost Flow Assumptions • First-In, First-Out • Earliest goods assumed to be first units sold

  12. Cost Flow Assumptions • First-In, First-Out • Earliest goods assumed to be first units sold • Inventory made up of latest goods acquired

  13. Cost Flow Assumptions • Last-In, First-Out

  14. Cost Flow Assumptions • Last-In, First-Out • Newest goods assumed to be first units sold

  15. Cost Flow Assumptions • Last-In, First-Out • Newest goods assumed to be first units sold • Inventory made up of earliest goods acquired

  16. Cost Flow Assumptions • Average cost

  17. Cost Flow Assumptions • Average cost • Cost of items sold is the weighted average of costs incurred

  18. Cost Flow Assumptions • Average cost • Cost of items sold is the weighted average of costs incurred • Inventory is the weighted average of costs incurred

  19. Inventory Example Data Jan. 1 Beg Inven. 200 $4.00 $ 800.00 Apr. 10 Purchase 700 5.00 3,500.00 Oct. 23 Purchase 400 6.00 2,400.00 Available 1,300 $6,700.00 Merchandise Sales May 5 500 Dec. 19 300 Total 800

  20. First-In First-Out Newest layer $6.00

  21. First-In First-Out Newest layer 400 units @ $6.00 $2,400

  22. First-In First-Out Newest layer 400 units @ $6.00 $2,400 Next newest layer $5.00

  23. First-In First-Out Newest layer 400 units @ $6.00 $2,400 Next newest layer 100 units @ $5.00 500

  24. First-In First-Out Newest layer 400 units @ $6.00 $2,400 Next newest layer 100 units @ $5.00 500 Total cost $2,900

  25. First-In First-Out Cost of Goods Sold Beginning Inventory $ 800

  26. First-In First-Out Cost of Goods Sold Beginning Inventory $ 800 Purchases 5,900 Cost of goods available for sale $6,700

  27. First-In First-Out Cost of Goods Sold Beginning Inventory $ 800 Purchases 5,900 Cost of goods available for sale $6,700 Deduct: Ending Inventory 2,900 Cost of goods sold $3,800

  28. First-In First-Out Proof of cost of goods sold: Oldest cost layer 200 units @ $4.00 $ 800

  29. First-In First-Out Proof of cost of goods sold: Oldest cost layer 200 units @ $4.00 $ 800 Next oldest layer 600 units @ $5.00 3,000 Total $3,800

  30. Last-In First-Out Oldest layer $4.00

  31. Last-In First-Out Oldest layer 200 units @ $4.00 $ 800

  32. Last-In First-Out Oldest layer 200 units @ $4.00 $ 800 Next oldest layer $5.00

  33. Last-In First-Out Oldest layer 200 units @ $4.00 $ 800 Next oldest layer 300 units @ $5.00 1,500

  34. Last-In First-Out Oldest layer 200 units @ $4.00 $ 800 Next oldest layer 300 units @ $5.00 1,500 Total cost $2,300

  35. Last-In First-Out LIFO Periodic Inventory Cost of goods sold: Beginning inventory $ 800

  36. Last-In First-Out LIFO Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchase 5,900 Cost of goods available $6,700

  37. Last-In First-Out LIFO Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchase 5,900 Cost of goods available $6,700 Deduct: Ending inventory 2,300 Cost of goods sold $4,400

  38. Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold

  39. Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold Newest cost layer 400 units @ $6.00 $2,400

  40. Last-In First-Out LIFO Periodic Inventory Proof of Cost of Goods Sold Newest cost layer 400 units @ $6.00 $2,400 Next newest layer 400 units @ $5.00 2,000 Total cost $4,400

  41. Weighted Average Periodic Inventory Weighted average cost equals Cost of goods available for sale $6,700 divided by Total units available 1,300 equals Weighted average cost per unit $5.1538

  42. Weighted Average Periodic Inventory December 31 Inventory 500 units x $5.1538 = $2,577

  43. Weighted Average Periodic Inventory Cost of goods sold:

  44. Weighted Average Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchases 5,900 Cost of goods available $6,700

  45. Weighted Average Periodic Inventory Cost of goods sold: Beginning inventory $ 800 Purchases 5,900 Cost of goods available $6,700 Deduct: Ending inventory 2,577 Cost of goods sold $4,123

  46. Weighted Average Periodic Inventory Proof of cost of goods sold 800 units x $5.1538 = $4,123

  47. Income Statement Comparison Periodic Inventory FIFO LIFO WA Sales $8,000 $8,000 $8,000 CGS 3,800 4,400 4,123 GM $4,200 $3,600 $3,877 Op. expense 1,000 1,000 1,000 Net income $3,200 $2,600 $2,877

  48. Last-In First-Out LIFO - Perpetual Inventory 200 x $4 $800

  49. Last-In First-Out LIFO - Perpetual Inventory 4/4 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300

  50. Last-In First-Out LIFO - Perpetual Inventory 4/4 700 x $5 $3500 200 x $4 $800 700 x $5 3500 $4300 5/5 500 x $5 $2500 200 x $4 $800 200 x $5 1000 $1800

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