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INVENTORIES AND COST OF GOODS SOLD

Chapter 8. INVENTORIES AND COST OF GOODS SOLD. Goods owned and held for sale to customers. Current asset. Inventory Defined. Inventory. BALANCE SHEET. Asset. Inventory. INCOME STATEMENT. Revenue. Cost of goods sold. Gross profit. Expenses. Net income.

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INVENTORIES AND COST OF GOODS SOLD

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  1. Chapter8 INVENTORIES AND COST OF GOODS SOLD

  2. Goods ownedand held for saleto customers Current asset Inventory Defined Inventory

  3. BALANCE SHEET Asset Inventory INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income The Flow of Inventory Costs Purchase costs (or manufacturing costs) as goods are sold

  4. The Flow of Inventory Costs In a perpetual inventory system, inventory entries parallel the flow of costs.

  5. Which Unit Did We Sell? When identical units of inventory have different unit costs, a question naturally arises as to which of these costs should be used in recording a sale of inventory.

  6. A separate subsidiary account is maintained for each item in inventory. Inventory Subsidiary Ledger How can we determine the unit cost for the Sept. 10 sale?

  7. Learning Objective In a perpetual inventory system, you are to determine the cost of goods sold using (a) specific identification, (b) average cost, (c) FIFO, and (d) LIFO. You should be able to discuss the advantages and shortcomings of each method. LO1

  8. AverageCost FIFO LIFO SpecificIdentification Inventory Cost Flows We use one of these inventory valuation methods to determine cost of inventory sold.

  9. Data for an Illustration The Bike Company (TBC)

  10. Specific Identification When a unitis sold, its specific cost is added to cost of goods sold.

  11. Specific Identification On August 14, TBC sold 20 bikes for $130 each. Of the bikes sold 9 originally cost $91 and11 cost $106.

  12. Specific Identification The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in inventory. Let’s look at the entries for the Aug. 14 sale.

  13. Retail (20 × $103) Cost Specific Identification A similar entry is made after each sale.

  14. Specific Identification Cost of Goods Sold for August 31 = $2,610 Additional purchases were made on August 17 and 28. Costs associated with sales on August 31 were as follows: 1 @ $91, 3 @ $106, 15 @ $115, & 4 @ $119.

  15. Specific Identification Income Statement COGS = $4,595 Balance Sheet Inventory = $1,395

  16. Since specific identification is so easy, can’t we use it all the time? Not really. Specific identification is hard to use when we sell a lot of inventory that has lots of different costs. Specific Identification

  17. Cost of Goods Available for Sale Units on hand on the date of sale Average-Cost Method When a unit is sold,theaverage cost of each unitin inventory is assigned to costof goods sold. ÷

  18. Average-Cost Method The average cost per unit must be computed prior to each sale. $2,500  25 = $100 On August 14, TBC sold 20 bikes for $130 each.

  19. Average-Cost Method The average cost per unit is $100. $100 = $2,500  25 Let’s look at the entries for the Aug. 14 sale.

  20. Retail Cost Average-Cost Method A similar entry is made after each sale.

  21. Average-Cost Method Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold.

  22. Average-Cost Method $114 = $3,990  35

  23. Average-Cost Method The average cost per unit is $114. $114 = $3,990  35

  24. Income Statement COGS = $4,622 Average-Cost Method Balance Sheet Inventory = $1,368 $114 × 12 = $1,368

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

  26. First-In, First-Out Method (FIFO) The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory. On August 14, TBC sold 20 bikes for $130 each.

  27. Retail Cost First-In, First-Out Method (FIFO) A similar entry is made after each sale.

  28. First-In, First-Out Method (FIFO) Additional purchases were made on Aug. 17 and Aug. 28. On August 31, an additional 23 units were sold. Cost of Goods Sold for August 31 = $2,600

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

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

  31. Last-In, First-Out Method (LIFO) The Cost of Goods Sold for the August 14 sale is $2,045, leaving $455 and 5 units in inventory. On August 14, TBC sold 20 bikes for $130 each.

  32. Retail Cost Last-In, First-Out Method (LIFO) A similar entry is made after each sale.

  33. Last-In, First-Out Method (LIFO) Additional purchases were made on Aug. 17 and Aug. 28. On Aug. 31, an additional 23 units were sold.

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

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

  36. The Principle of Consistency Once a company has adopted a particular accounting method, it should follow that method consistentlyrather than switch methods from one year to the next.

  37. Learning Objective To explain the need for taking a physical inventory. LO2

  38. Just-In-Time (JIT) Inventory Systems This inventory arrived just in time for us to use it in the manufacturing process.

  39. Taking a Physical Inventory The primary reason for taking a physical inventory is to adjust the perpetual inventory records for unrecorded shrinkage losses, such as theft, spoilage, or breakage.

  40. Learning Objective To record shrinkage losses and other year-end adjustments to inventory. LO3

  41. Reduces the value of the inventory. Obsolescence Lower of Cost or Market (LCM) Adjust inventory value to the lower of historical cost or current replacement cost (market). LCM and Other Write-Downsof Inventory

  42. LCM and Other Write-Downsof Inventory

  43. Goods In Transit A sale should be recorded when title to the merchandise passes to the buyer. F.O.B. shipping pointtitle passes to buyer at the point of shipment. F.O.B. destination point title passes to buyer at the point of destination. Year End

  44. Learning Objective In a periodic inventory system, you are to determine the cost of goods sold using (a) specific identification, (b) average cost, (c) FIFO, and (d) LIFO. LO4

  45. Periodic Inventory Systems In a periodic inventory system, inventory entries are as follows. Note that an entry is not made to inventory.

  46. Periodic Inventory Systems In a periodic inventory system, inventory entries are as follows.

  47. Periodic Inventory Systems The inventory on hand and the cost of goods sold for the year are not determined until year-end.

  48. Average cost Specific identification FIFO LIFO Periodic Inventory Systems We use one of these inventory valuation methods in a periodic inventory system.

  49. Information for the Following Inventory Examples

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