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Chapter 8

Chapter 8. Reporting and Interpreting Inventories and Cost of Goods Sold. The Business of Inventory Management. The primary goals of inventory managers are to: ensure sufficient quantities of inventory are available to meet customer’s needs,

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Chapter 8

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  1. Chapter 8 Reporting and Interpreting Inventories and Cost of Goods Sold

  2. The Business of Inventory Management • The primary goals of inventory managers are to: • ensure sufficient quantities of inventory are available to meet customer’s needs, • ensure inventory quality meets customers’ expectations and company standards, and • minimize the costs of acquiring and carrying inventory

  3. Items Included in Inventory • Inventory includes goods that are: • held for sale in the normal course of business, or • used to produce goods for sale. Inventory is reported on the balance sheet as a current asset because it normally is used or converted into cash within one year. Balance SheetCurrent Assets Inventory

  4. Inventory is acquired in a finished condition and is ready for sale without further processing. Raw materials inventory includes materials that are processed further into finished goods. Work in process inventory includes goods that are in the process of being manufactured. Finished goods inventory includes goods that are complete and ready to sell. Items Included in Inventory Merchandiser Manufacturer

  5. + + Goods Availablefor Sale$95,000 Cost ofGoods Sold$60,000 EndingInventory$35,000 Still Here Sold Cost of Goods Sold BeginningInventory$40,000 Purchases$55,000

  6. Cost of Goods Sold

  7. Inventory Costing Methods Specificidentification First-in, first-out(FIFO) Last-in, first-out(LIFO) Weighted average

  8. Inventory Costing Illustration

  9. When this method is used, the cost of each item sold is individually identified and recorded as cost of goods sold. Specific Identification

  10. Specific Identification The above purchases were made by Handheld, Inc. in August. On August 14, Handheld sold 8 personal digital assistants (PDAs) originally costing $91 and 12 PDAs originally costing $106.

  11. Specific Identification The Cost of Goods Sold for the August 14 sale is $2,000. After this sale, there are 5 PDAs in inventory at $500: 2 units at $91; 3 units at $106.

  12. Specific Identification Additional purchases were made on August 17 and 28. The cost of items sold on August 31 were as follows: 2 units at $91; 3 units at $106; 15 units at $115; 3 units at $119.

  13. Cost of Goods Sold onAugust 31 = $2,582 Specific Identification

  14. After the August 31 sale, there are 12 units in inventory at $1,408: 5 units at $115; 7 units at $119. Specific Identification

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

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

  17. First-In, First-Out (FIFO) The above purchases were made by Handheld in August. On August 14, Handheld sold 20 PDAs.

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

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

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

  21. After the August 31 sale, there are 12 units in inventory at $1,420: 2 units at $115; 10 units at $119. First-In, First-Out (FIFO)

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

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

  24. Last-In, First-Out (LIFO) The above purchases were made by Handheld in August. On August 14, Handheld sold 20 PDAs.

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

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

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

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

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

  30. When a unit is sold, the average cost of 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

  31. Weighted Average The above purchases were made by Handheld in August. On August 14, Handheld sold 20 PDAs.

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

  33. Weighted Average The Cost of Goods Sold for the August 14 sale is $2,000. After this sale, there are 5 units at $100 in inventory.

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

  35. ÷ Weighted Average

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

  37. After the August 31 sale, there are12 units at $114 in inventory. Weighted Average

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

  39. Because prices change, inventory methods nearly always assign different cost amounts. Exh. 6.8 Financial Statement Effects of Costing Methods

  40. Smooths out price changes. Ending inventory approximates current replacement cost. Better matches current costs in cost of goods sold with revenues. Financial Statement Effects of Costing Methods Advantages of Methods Weighted Average First-In, First-Out Last-In, First-Out

  41. Reporting Inventory at the Lower of Cost or Market • The value of inventory can fall below its recorded cost for two reasons: • it’s easily replaced by identical goods at a lower cost, or • it’s become outdated or damaged.

  42. Reporting Inventory at the Lower of Cost or Market When the value of inventory falls below its recorded cost, the amount recorded for inventory is written down to its lower market value. This is known as the lower of cost or market (LCM) rule.

  43. InventoryTurnoverRatio Cost of Goods SoldAverage Inventory = EndingInventory BeginningInventory + 2 Inventory Turnover Analysis

  44. Days toSell 365Inventory Turnover Ratio = Inventory Turnover Analysis

  45. End of Chapter 8

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