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Chapter 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACH Sommers – ACCT 3311

Chapter 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACH Sommers – ACCT 3311. Discussion Question. Q8-6 Goods out on approval to customers Goods in transit that were recently purchased f.o.b. destination Land held by a realty firm for sale R aw Materials

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Chapter 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACH Sommers – ACCT 3311

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  1. Chapter 8 VALUATION OF INVENTORIES: A COST-BASIS APPROACHSommers – ACCT 3311

  2. Discussion Question Q8-6 • Goods out on approval to customers • Goods in transit that were recently purchased f.o.b. destination • Land held by a realty firm for sale • Raw Materials • Goods received on consignment • Manufacturing supplies

  3. Transfer of ownership A company should record purchases when it obtains legal title to the goods.

  4. Discussion Question Q8-3 What is the difference between a perpetual inventory and a physical inventory? If a company maintains a perpetual inventory, should its physical inventory at any date be equal to the amount indicated by the perpetual inventory records? Why?

  5. Comparison of Inventory Systems

  6. Periodic Inventory System We need the following adjusting entry to record cost of good sold. December 31, 2011 To adjust inventory, close purchases, and record cost of goods sold.

  7. Inventory Notation Beginning Balance Purchases Cost of Goods Available for Sale Ending Balance Cost of Goods Sold ? ?

  8. Choosing a Cost Flow Assumption Specific Identification --- Average Cost LIFO --- FIFO Cost Flow Assumption Adopted does not need to equal Physical Movement of Goods Method adopted should be one that most clearly reflects periodic income.

  9. Example 1: FIFO Periodic Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using FIFO, periodic system.

  10. Example 1: FIFO Periodic Cost of Goods Sold: Ending Inventory:

  11. Example 1: LIFO Periodic Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using LIFO, periodic system.

  12. Example 1: LIFO Periodic Cost of Goods Sold: Ending Inventory:

  13. Example 1: LIFO Perpetual Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using LIFO, perpetual system.

  14. Ex 1: LIFO Perpetual (January 5th Sale) Available: Cost of Goods Sold: Ending Inventory:

  15. Ex 1: LIFO Perpetual (January 12th Sale) Available: Cost of Goods Sold: Ending Inventory:

  16. Ex 1: LIFO Perpetual (January 20th Sale) Available: Beg 3,000 units @ $ 8 = $ 24,000 Jan 10 3,000 units @ $ 9 = 27,000 Jan 18 6,000 units @ $10 = 60,000 12,000 units $111,000 Cost of Goods Sold: Jan 18 4,000 units @ $10 = $ 40,000 Ending Inventory: Beg 3,000 units @ $ 8 = $ 24,000 Jan 10 3,000 units @ $ 9 = 27,000 Jan 18 2,000 units @ $10 = 20,000 8,000 units $ 71,000

  17. Example 1: LIFO Perpetual (Summary) Cost of Goods Sold: Jan 5 3,000 units = $24,000 Jan 12 2,000 units = 18,000 Jan 20 4,000 units = 40,000 Total 9,000 units = $82,000 Ending Inventory: Beg 3,000 units @ $ 8 = $24,000 Jan 10 3,000 units @ $ 9 = 27,000 Jan 18 2,000 units @ $10 = 20,000 8,000 units $71,000

  18. Example 1: Average Cost, Periodic Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using Average Cost, Periodic.

  19. Example 1: Average Cost Periodic Cost of Goods Sold: Ending Inventory:

  20. Example 1: Average Cost, Perpetual Ferris Company began 2011 with 6,000 units of its principal product. The cost of each unit is $8. Merchandise transactions for the month of January 2011 are as follows: 8,000 units were on hand at the end of the month. Calculate January’s ending inventory and cost of goods sold for the month using Average Cost, Perpetual.

  21. Ex 1: Average Cost Perpetual (Jan 5th Sale) Cost of Goods Sold: Ending Inventory:

  22. Ex 1: Average Cost Perpetual (Jan 12th Sale) Cost of Goods Sold: Ending Inventory:

  23. Ex 1: Average Cost Perpetual (Jan 20th Sale) 111,750 / 12,000 = $9.3125 Cost per unit Cost of Goods Sold: 4,000 units @ $9.3125 = $37,250 Ending Inventory: 8,000 units @ $9.3125 = $74,500

  24. Ex 1: Average Cost Perpetual (Summary) Cost of Goods Sold: Jan 5 3,000 units = $24,000 Jan 12 2,000 units = 17,250 Jan 20 4,000 units = 37,250 Total 9,000 units = $78,500 Ending Inventory: 8,000 units @ $9.3125 = $74,500

  25. Example 1: Summary of Results

  26. Supplemental LIFO Disclosures Tootsie Roll 2008 Balance Sheet20082007 Finished goods and work-in-process 34,862 37,031 Raw materials and supplies 20,722 20,371 Income Statement Product cost of goods sold 333,314 327,695 Footnote: Inventories are stated at cost, not to exceed market. The cost of substantially all of the Company’s inventories ($53,557 and $54,367 at December 31, 2008 and 2007, respectively) has been determined by the last-in, first-out (LIFO) method. The excess of current cost over LIFO cost of inventories approximates $12,432 and $11,284 at December 31, 2008 and 2007, respectively. The cost of certain foreign inventories ($2,027 and $3,036 at December 31, 2008 and 2007, respectively) has been determined by the first-in, first-out (FIFO) method. Rebates, discounts and other cash consideration received from a vendor related to inventory purchases is reflected as a reduction in the cost of the related inventory item, and is therefore reflected in cost of sales when the related inventory item is sold.

  27. Supplemental LIFO Disclosures Tootsie Roll 2008 Balance Sheet20082007 Finished goods and work-in-process 34,862 37,031 Raw materials and supplies 20,72220,371 Total LIFO inventory 55,584 57,402 LIFO reserve 12,432 11,284 Total FIFO inventory 68,016 68,686 Income Statement Product cost of goods sold – LIFO 333,314 327,695 Product cost of goods sold – FIFO ? ?

  28. LIFO to FIFO Conversion – Tootsie Roll LIFO FIFO Inventory Turnover: LIFO: FIFO:

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