1 / 98

Inventories

7. Inventories. Describe the importance of control over inventories. 1. Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet. 2.

peter-mendez
Download Presentation

Inventories

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 7 Inventories

  2. Describe the importance of control over inventories. 1 Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet. 2 Determine the cost of inventory under the perpetual inventory system, using the FIFO, LIFO, and average cost methods. 3 Inventories After studying this chapter, you should be able to: 7-2

  3. Describe the cost of inventory under the periodic inventory system, using the FIFO, LIFO, and average cost methods. After studying this chapter, you should be able to: 4 Compare and contrast the use of the three inventory costing methods. 5 Describe and illustrate the reporting of merchandise inventory in the financial statements. 6 Inventories (continued) 7-3

  4. 1 Describe the importance of control over inventory. 7-4

  5. 1 Two primary objectives of control over inventory are: • Safeguarding the inventory, and • Properly reporting it in the financial statements.

  6. 1 • The purchase order authorizes the purchase of the inventory from an approved vendor. • The receiving report establishes an initial record of the receipt of the inventory. • The amount of inventory is always available in the subsidiary inventory ledger.

  7. 1 Controls for safeguarding inventory should include security measures to prevent damage and customer or employee theft. Some examples of security measures include the following: • Storing inventory in areas that are restricted to only authorized employees.

  8. 1 • Locking high-priced inventory in cabinets. • Using two-way mirrors, cameras, security tags, and guards.

  9. 1 A physical inventory or count of inventory should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate.

  10. 2 Describe the three inventory cost flow assumptions and how they impact the income statement and balance sheet. 7-10

  11. 2 Inventory Costing Methods

  12. 2 May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12 ($36 ÷ 3 units)

  13. 2 Assume that one unit is sold on May 30 for $20. Depending upon which unit was sold, the gross profit varies from $11 to $6 as shown below:

  14. 2 Under the specific identificationinventory cost flow method, the unit sold is identified with a specific purchase. Not practical unless each inventory unit can be separately identified.

  15. 2 Under the first-in, first out (FIFO)inventory cost flow method, the first units purchased are assumed to be sold and the ending inventory is made up of the most recent purchases.

  16. 2 Under the last-in, first out (LIFO)inventory cost flow method, the last units purchased are assumed to be sold first and the ending inventory is made up of the first units purchased.

  17. 2 Under the average inventory cost flow method, the cost of the units sold and in ending inventory is an average of the purchase costs.

  18. Exhibit 1 2 Effect of Inventory Costing Methods on Financial Statements FIFO Method Income Statement Sales $20 Cost of merchan- dise sold 9 Gross profit $11 (continued)

  19. Exhibit 1 2 Effect of Inventory Costing Methods on Financial Statements (continued) LIFO Method Income Statement Sales $20 Cost of merchan- dise sold 14 Gross profit $ 6 (continued)

  20. Exhibit 1 2 Effect of Inventory Costing Methods on Financial Statements (continued) Average Cost Method Income Statement Sales $20 Cost of merchan- dise sold 12 Gross profit $ 8 $36 ÷ 3 = $12 $12 × 2 = $24

  21. Exhibit 2 2 Inventory Costing Methods* *Firms may be counted more than once for using multiple methods

  22. 2 Example Exercise 7-1 Cost Flow Methods The three identical units of Item QBM are purchased during February, as shown below. Item QBMUnitsCost Feb. 8 Purchase 1 $ 45 15 Purchase 1 48 26 Purchase 1 51 Total 3 $144 Average cost per unit $48 ($144 ÷ 3 units) Assume that one unit is sold on February 27 for $70. Determine the gross profit for February and ending inventory on February 28 using (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) average cost methods. 7-22

  23. For Practice: PE 7-1A, PE 7-1B Follow My Example 7-1 2 Example Exercise 7-1 (continued) Gross ProfitEnding Inventory • First-in, first-out (FIFO): $25 ($70 – $45) $99 ($48 + $51) • Last-in, first-out (LIFO): $19 ($70 – $51) $93 ($45 + $48) • Average cost: $22 ($70 – $48) $96 ($48 × 2) 7-23

  24. 3 Determine the cost of inventory under the perpetual inventory system, using the FIFO, LIFO, and average cost methods. 7-24

  25. 3 First-In, First-Out Method On January 1, the firm had 100 units of Item 127B that cost $20 per unit. Item 127B Units Cost Jan. 1 Inventory 100 $20

  26. 3 First-In, First-Out Method On January 4, the firm sold 70 units of 127B at $30 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70

  27. Exhibit 3 3 Entries and Perpetual Inventory Account (FIFO)

  28. 3 First-In, First-Out Method On January 10, the firm purchased 80 units at $21 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70 10 Purchase 80 21

  29. Exhibit 3 3 Entries and Perpetual Inventory Account (FIFO) (continued) 10 Merchandise Inventory 1,680 Accounts Payable 1,680 Date Jan. 1

  30. 3 First-In, First-Out Method On January 22, the firm sold 40 units for $30 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70 10 Purchase 80 21 22 Sale 40

  31. Exhibit 3 Date Jan. 1 3 Entries and Perpetual Inventory Account (FIFO) (continued)

  32. 3 First-In, First-Out Method On January 28, the firm sold 20 units at $30 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70 10 Purchase 80 21 22 Sale 40 28 Sale 20

  33. Exhibit 3 3 Entries and Perpetual Inventory Account (FIFO) (continued) Date Jan. 1

  34. 3 First-In, First-Out Method On January 30, purchased one hundred additional units of Item 127B at $22 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70 10 Purchase 80 21 22 Sale 40 28 Sale 20 30 Purchase 100 22

  35. Exhibit 3 3 Entries and Perpetual Inventory Account (FIFO) (continued)

  36. Exhibit 3 3 Entries and Perpetual Inventory Account (FIFO) (concluded) January 31 inventory Cost of merchandise sold

  37. 3 Example Exercise 7-2 Perpetual Inventory Using FIFO Beginning inventory, purchases, and sales for Item ER27 are as follows: Nov. 1 Inventory 40 units at $5 5 Sale 32 units 11 Purchase 60 units at $7 21 Sale 45 units Assuming a perpetual inventory system and the first-in, first-out (FIFO) method, determine (a) the cost of the merchandise sold for the November 21 sale and (b) the inventory on November 30. 7-37

  38. For Practice: PE 7-2A, PE 7-2B Follow My Example 7-2 3 Example Exercise 7-2 (continued) • Cost of merchandise sold (November 21): • 8 units @ $5 $40 • 37 units @ $7 259 • 45 units $299 • Inventory, November 30: • $161 = (23 units × $7) 7-38

  39. 3 Last-In, First-Out Method On January 1, the firm had 100 units of Item 127B that cost $20 per unit. Item 127B Units Cost Jan. 1 Inventory 100 $20

  40. 3 Last-In, First-Out Method On January 4, the firm sold 70 units of 127B at $30 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70

  41. Exhibit 4 3 Entries and Perpetual Inventory Account (LIFO)

  42. 3 Last-In, First-Out Method On January 10, the firm purchased 80 units at $21 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70 10 Purchase 80 21

  43. Exhibit 4 3 Entries and Perpetual Inventory Account (LIFO) (continued) 10 Merchandise Inventory 1,680 Accounts Payable 1,680 Date Jan. 1 4

  44. 3 Last-In, First-Out Method On January 22, the firm sold 40 units for $30 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70 10 Purchase 80 21 22 Sale 40

  45. Exhibit 4 3 Entries and Perpetual Inventory Account (LIFO) (continued) Date Jan. 1 4

  46. 3 Last-In, First-Out Method On January 28, the firm sold 20 units at $30 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70 10 Purchase 80 21 22 Sale 40 28 Sale 20

  47. Exhibit 4 3 Entries and Perpetual Inventory Account (LIFO) (continued) Date Jan. 1 4

  48. 3 Last-In, First-Out Method On January 30, the firm purchased one hundred additional units of Item 127B at $22 each. Item 127B Units Cost Jan. 1 Inventory 100 $20 4 Sale 70 10 Purchase 80 21 22 Sale 40 28 Sale 20 30 Purchase 100 22

  49. Exhibit 4 3 Entries and Perpetual Inventory Account (LIFO) (continued) Date Jan. 1 4 10

  50. Exhibit 4 3 Entries and Perpetual Inventory Account (LIFO) (concluded) Cost of Merchandise Sold January 31 Inventory

More Related