1 / 64

Chapter 7

Chapter 7. Inventories and Cost of Goods Sold. Financial Accounting, Alternate 4e by Porter and Norton. Inventory of Wholesalers and Retailers. Purchased in finished form Resold without transformation. Classified as “Merchandise Inventory” on balance sheet.

valentine-glover
Download Presentation

Chapter 7

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. Chapter 7 Inventories and Cost of Goods Sold Financial Accounting, Alternate 4e by Porter and Norton

  2. Inventory of Wholesalers and Retailers • Purchased in finished form • Resold without transformation • Classified as “Merchandise Inventory” on balance sheet

  3. CIRCUIT CITYConsolidated Balance Sheets [Partial] 20032002 ASSETS (in thousands) CURRENT ASSETS: Cash and cash equivalents $ 884,670 $1,248,246 Net accounts and notes receivable 775,339 553,273 Merchandise inventory 1,409,736 1,234,243 Prepaid expenses and other current assets 33,165 39,246 Assets of discontinued operations --- 577,703 TOTAL CURRENT ASSETS 3,102,910 3,652,711 Property, plant and equipment, net 853,778 988,947 Deferred income taxes 22,362 2,647 Other assets 24,252 11,354 Assets of discontinued operations --- 142,519 TOTAL ASSETS $3,799,117 $4,542,033 More than 1/3 of current assets

  4. Inventory of Manufacturers Costs Included in Inventory Direct Materials Direct Labor Manufacturing Overhead

  5. Inventory of Manufacturers Balance Sheet Classifications Costs Included in Inventory Direct Materials Raw Materials Manufacture Products Direct Labor Work in Process Manufacturing Overhead Finished Goods

  6. NIKE, INC.Consolidated Balance Sheets [Partial] May 31, 20022001 ASSETS (in millions) Current assets: Cash and cash equivalents $ 575.5 $ 304.0 Accounts receivable less allowance for doubtful accounts of $77.4 and $72.1 1,807.1 1,621.4 Inventories: Finished goods 1,348.2 1,399.9 Work in progress 13.0 15.1 Raw materials 12.6 9.1 1,373.8 1,424.1 Deferred income taxes 140.8 113.3 Prepaid expenses 260.5 162.5 Total current assets 4,157.7 3,625.3 Property, plant and equipment, net 1,614.5 1,618.8 Identifiable intangible assets and goodwill 437.8 397.3 Deferred income taxes and other assets 233.0 178.2 TOTAL ASSETS $ 6,443.0 $ 5,819.6

  7. Income Statement of a Merchandiser Cash sales $ 350,000 Credit sales 124,000 Total 474,000 Less: Sales returns & allowances ( 12,400) Sales discounts ( 34,600) Net sales $ 427,000 Contra-accounts used for control and analysis purposes

  8. Credit Terms and Sales Discounts n/30 Payment due 30 days from invoice date 1/10, n/30 Deduct 1% of invoice amount if paid within 10 days; otherwise full invoice amount is due in 30 days 2/10, n/30 Deduct 2% of invoice amount if paid within 10 days; otherwise full invoice amount is due in 30 days

  9. Cost of goods sold The Cost of Goods Sold Model New purchases Beginning inventory Inventory not sold - appears on balance sheet Ending inventory Inventory sold - appears on income statement

  10. “Pool” of goods available to sell during the period An increase in ending inventory means more was bought than sold The Cost of Goods Sold Model Beginning inventory $ 15,000 Plus: Cost of goods purchased 63,000 = Cost of goods available for sale 78,000 Less: Ending inventory ( 18,000) = Cost of goods sold $ 60,000

  11. Perpetual Inventory Systems Inventory records are updated after each purchase or sale • Point of sale terminals have improved ability of mass merchandisers to maintain perpetual systems

  12. Periodic Inventory Systems Inventory records are updated periodically based on physical inventory counts • Reduces record-keeping but also decreases ability to track theft, breakage, etc. and prepare interim financial statements

  13. Cost of Goods Purchased • Includes invoice price: Plus: Transportation-in Less: Purchase returns and allowances Purchase discounts

  14. Recording Purchase Discounts Assets = Liab. + O/E + Rev. – Exp. Cash (495) Accts Pay. 500 Purch. Discounts 5 To record payment within discount period to supplier who offers 1% purchase discount. ($ 500 x 1% = $5 discount)

  15. Buyer Seller FOB Destination Point • No sale or purchase until inventory reaches its destination • Seller responsible for inventory while in transit Title Passes at Destination

  16. Buyer Seller FOB Shipping Point • Both sale and purchase recorded upon shipment • Buyer responsible for inventory while in transit Title Passes when Shipped

  17. Inventory Valuation and Income Measurement Value Assigned to Inventory on Balance Sheet Value Expensed as Cost of Goods Sold on Income Statement When Sold =

  18. Beginning inventory $ 500 + Purchases 1,200 = Cost of goods available for sale 1,700 Calculating Cost of Goods Sold • Internal calculation -Ending inventory (600) = Cost of goods sold $ 1,100

  19. Inventory costs include • Any freight costs incurred by buyer • Cost of insurance for inventory in transit • Cost of storing inventory before selling • Excise and sales taxes

  20. Inventory Costing Methods Four costing methods available: Specific Identification Weighted Average First-in, First-out (FIFO) Last-in, First-out (LIFO)

  21. Detailed Costing Method Example Calculate the cost of goods sold and ending inventory under each method using the data below: Beginning inventory, Jan. 1: 500 units (unit cost $10) Inventory purchases: DateUnitsUnit Cost 1/20 300 $ 11 4/8 400 12 9/5 200 13 12/12 100 14 Total purchases 1,000 Ending inventory, Dec. 31: 600 units 21

  22. Specific Identification Method Step 1: Identify the specific units in inventory at the end of the year and their costs.

  23. Specific Identification Method Units in ending inventory: Date purchasedUnitsCostTotal cost 1/20 100 $11 $1,100 4/8 300 12 3,600 9/5 200 13 2,600 Ending inventory 600 $7,300 Units x Cost = Total cost

  24. Specific Identification Method Step 2: Identify the units sold and calculate the cost of goods sold.

  25. Specific Identification Method Date purchasedUnitsCostTotal cost Beg. Inventory 500 $10 $5,000 1/20 200 11 2,200 4/8 100 12 1,200 12/12 100 14 1,400 Cost of goods sold 900 $9,800 Units x Cost = Total cost

  26. Weighted Average Method Step 1: Calculate the cost of goods available for sale.

  27. Weighted Average Cost Method Date purchasedUnitsCostTotal cost Beg. inventory 500 $10 $ 5,000 1/20 300 11 3,300 4/8 400 12 4,800 9/5 200 13 2,600 12/12 100 14 1,400 Cost of goods available for sale 1,500 $17,100

  28. : Weighted Average Method Step 2: Divide the cost of goods available for sale by the total units to determine the weighted average cost per unit.

  29. Weighted Average Method Cost of Goods Available Units Available $17,100 1,500 = $ 11.40/unit

  30. Avg. Cost # Units X Weighted Average Method Step 3: Calculate ending inventory and COGS by multiplying the weighted average cost per unit by the # of units in ending inventory and the # of units sold.

  31. Weighted Average Method ALLOCATE TO Ending Cost of InventoryGoods Sold Units on hand 600 Units sold 900 Weighted average cost X $11.40$ 11.40 Total cost of goods available of $17,100 allocated: $6,840 $10,260

  32. 1st in First-in, First-out (FIFO) Method Step 1: Assign the cost of the beginning inventory to cost of goods sold.

  33. First-in, First-out (FIFO) Method ALLOCATE TO Ending Cost of UnitsCostInventoryGoods Sold 1/1 500 $10 $5,000 1/20 300 $11 4/8 400 $12 9/5 200 $13 12/12 100 $14

  34. First-in, First-out (FIFO) Method Step 2: Continue to work forward until you assign the total # of units sold during the period to cost of goods sold. Allocate the remaining units to ending inventory. etc. 3rd 2nd

  35. First-in, First-out (FIFO) Method ALLOCATE TO Ending Cost of UnitsCostInventoryGoods Sold 1/1 500 $10 $5,000 1/20 300 $11 3,300 4/8 300 / 100 $12 $3,600 1,200 9/5 200 $13 2,600 12/12 100 $14 1,400 TOTALS $7,600 $9,500

  36. 1st in Last-in, First-out (LIFO) Method Step 1: Assign the cost of the last units purchased to cost of goods sold.

  37. Last-in, First-out (LIFO) Method ALLOCATE TO Ending Cost of UnitsCostInventoryGoods Sold 1/1 500 $10 1/20 300 $11 4/8 400 $12 9/5 200 $13 12/12 100 $14 $1,400

  38. 1st in Last-in, First-out (LIFO) Method Step 2: Work backward until you assign the total # of units sold during the period to cost of goods sold (allocate the remaining units to ending inventory).

  39. Last-in, First-out (LIFO) Method ALLOCATE TO Ending Cost of UnitsCostInventoryGoods Sold 1/1 500 $10 $5,000 1/20 100 / 200 $11 1,100 $2,200 4/8 400 $12 4,800 9/5 200 $13 2,600 12/12 100 $14 1,400 TOTALS $6,100 $11,000

  40. Comparison of Costing Methods Cost of Goods Sold Goods Available for Sale Ending Inventory Specific Identification $7,300 9,800 $17,100 Weighted Average 10,260 6,840 17,100 FIFO 7,600 9,500 17,000 6,100 11,000 LIFO 17,100

  41. Comparison of Costing Methods X X X X X Weighted Avg. FIFOLIFO In periods of rising prices: highest COGS? lowest COGS? highest gross margin? lowestnet income? lowest income taxes?

  42. LIFO Issues • LIFO Liquidation • liquidation can result in high gross margin (and large tax bill) • LIFO Conformity Rule • if used for tax, LIFO must also be used for books • LIFO Reserve • difference between inventory value stated at FIFO and value stated at LIFO

  43. Reasons for Inventory Errors • Mathematical mistakes • Physical inventory counting errors • Cut-off problems - in-transit • Goods on consignment

  44. Effect of Inventory Errors on the Income Statement (In 000s)ReportedCorrectedEffect Sales $1,000 $1,000 Beginning inventory $ 200 200 Add: Purchases 700 700 Goods available for sale $ 900 $ 900 Less: Ending inventory 300 250 $50 OS Cost of goods sold $ 600 $ 650 50 US Gross margin $ 400 $ 350 50 OS Operating expenses 150 150 Net income 250 200 50 OS OS = overstatement US = understatement

  45. Effect of Inventory Errors on the Income Statement (in 000s) ReportedCorrectedEffect Sales $1,500$1,500 Beginning inventory $ 300 250 $50 OS Add: Purchases 1,100 1,100 Goods available for sale $1,400 $1,350 50 OS Less: Ending inventory 350 350 Cost of goods sold $1,050$1,000 50 OS Gross margin $ 450 $ 500 50 US Operating expenses 120 120 Net income 330 380 50 US OS = overstatement US = understatement

  46. Counterbalancing Errors Assume ending inventory is overstated (+) by $50,000 in 2004: 2004 Beginning inventory $xxx,xxx Add: Purchases xxx,xxx = Goods available for sale xxx,xxx Less: Ending inventory + 50,000 = Cost of goods sold- 50,000

  47. Counterbalancing Errors 2004 ending inventory becomes 2005 beginning inventory: 2004 2005 Beginning inventory $ xxx,xxx + 50,000 Add: Purchases xxx,xxx = Goods available for sale xxx,xxx Less: Ending inventory +50,000 = Cost of goods sold- 50,000

  48. Counterbalancing Errors The 2004 error reverses in 2005 (but 2004 inventory and both 2004 and 2005 profits are misstated by $50,000): 2004 2005 Beginning inventory $xxx,xxx $+50,000 Add: Purchases xxx,xxx xxx,xxx = Goods available for sale xxx,xxx + 50,000 Less: Ending inventory + 50,000 xxx,xxx = Cost of goods sold - 50,000 + 50,000

  49. Lower of Cost or Market Before After Price Price ChangeChange Cost 150 120 Report loss in year market falls below cost… 49

  50. Lower of Cost or Market Before After Price Price ChangeChange Selling price $200 $160 Cost 150 120 Gross margin $ 50 $ 40 …to maintain normal G.M.% when sold Gross margin % 25% 25% 50

More Related