advanced finance applied powerpoint chapter (8)

8/13/2019 Advanced Finance applied PowerPoint Chapter (8)

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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIA

Cynthia J. Rooney, Ph.D., CPACopyright 2012 The McGraw-Hill Companies, I

nc.McGraw-Hill/Irwin

Inventories and the Cost of

Goods SoldChapter 8


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8-2

INCOME STATEMENT

Revenue

Cost of goods sold

Gross profit

Expenses

Net income

as goods aresold

BALANCE SHEET

Asset

InventoryPurchase costs (or

manufacturing

costs)

The Flow of Inventory Costs


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8-3

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

Entry on Purchase Date

Inventory $$$$

Accounts Payable $$$$

Entry on Sale Date

Cost of Goods Sold $$$$

Inventory $$$$

In a perpetualinventory system, inventoryentries parallel the flow of costs.

The Flow of Inventory Costs


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8-4

GENERAL JOURNAL


Entry on Sale Date

Cost of Goods Sold $$$$

Inventory $$$$

When identical units of inventory havedifferent unit costs, a question naturallyarises as to which of these costs should

be used in recording a sale of inventory.

Which Unit Did We Sell?


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Inventory Subsidiary Ledger

A separate subsidiary account ismaintained for each item in inventory.


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Cost of Goods Available for Sale

Aug. 1 Beg. Inventory 10 units @ 91$ = 910$

Aug. 3 Purchased 15 units @ 106$ = 1,590$



Retail Sales of GoodsAug. 14 Sales 20 units @ 130$ = 2,600$

Aug. 31 Sales 23 units @ 150$ = 3,450$

The Bike Company (TBC)

Data for an Illustration


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On August 14, TBC sold 20 bikes for $130 each.Of the bikes sold 9 originally cost $91 and

11 cost $106.

Specific Identification

The Cost of Goods Sold for the August 14 sale is $1,985.This leaves 5 units, with a total cost of $515, in inventory:

1 unit that costs $91 and 4 units that cost $106 each.

Purchases Cost of Goods Sold

Date Units Unit Cost Total UnitsUnitCost Total Units

UnitCost Total

Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$

Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$

15 @ 106$

Aug. 14 9 @ 91$ 1 @ 91$

11 @ 106$ 4 @ 106$

Inventory Balance

= 2,500$

= 515$= 1,985$


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GENERAL JOURNAL


Aug. 14 Cash 2,600

Sales 2,600

14 Cost of Goods Sold 1,985Inventory 1,985

Retail (20 $130)

Cost

A similar entry is made after each sale.



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Date Units

Unit

Cost Total Units

Unit

Cost Total Units

Unit

Cost Total

Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$

Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$

15 @ 106$

Aug. 14 9 @ 91$ 1 @ 91$

11 @ 106$ 4 @ 106$

Aug. 17 20 @ 115$ = 2,300$ 1 @ 91$

4 @ 106$

20 @ 115$

Aug. 28 10 @ 119$ = 1,190$ 1 @ 91$

4 @ 106$

20 @ 115$

10 @ 119$

Aug. 31 1 @ 91$ 1 @ 106$

3 @ 106$ 5 @ 115$

15 @ 115$ 6 @ 119$

4 @ 119$

= 1,395$

= 1,985$

= 2,610$

= 2,815$

= 4,005$

Inventory Balance

= 2,500$

= 515$

Additional purchases were made on August 17 and 28.



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Balance SheetInventory = $1,395

Cost of Goods Sold

UnitsUnitCost Total Units

UnitCost Total

10 @ 91$ = 910$

10 @ 91$

15 @ 106$

9 @ 91$ 1 @ 91$

11 @ 106$ 4 @ 106$

1 @ 91$

4 @ 106$

20 @ 115$

1 @ 91$

4 @ 106$

20 @ 115$

10 @ 119$

1 @ 91$ 1 @ 106$

3 @ 106$ 5 @ 115$

15 @ 115$ 6 @ 119$

4 @ 119$

Inventory Balance

= 2,500$

= 515$

= 1,395$

= 1,985$

= 2,610$

= 2,815$

= 4,005$

Income StatementCOGS = $4,595



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Date Units Unit Cost Total Units

Unit

Cost Total Units Unit Cost Total

Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$Aug. 3 15 @ 106$ = 1,590$ 25 @ 100$ = 2,500$

Aug. 14 20 @ 100$ = 2,000$ 5 @ 100$ = 500$

Inventory Balance

Average-Cost Method

The average cost perunit must be computed

prior to each sale.

On August 14, TBC sold 20 bikes for $130 each.

$2,500 25 = $100 avg. cost


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Date Units

Unit

Cost Total Units

Unit

Cost Total Units

Unit

Cost Total

Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$

Aug. 3 15 @ 106$ = 1,590$ 25 @ 100$ = 2,500$

Aug. 14 20 @ 100$ = 2,000$ 5 @ 100$ = 500$

Aug. 17 20 @ 115$ = 2,300$ 25 @ 112$ = 2,800$

Aug. 28 10 @ 119$ = 1,190$ 35 @ 114$ = 3,990$

Aug. 31 23 @ 114$ = 2,622$ 12 @ 114$ = 1,368$

Inventory Balance

Average-Cost Method

$114 = $3,990 35

Additional purchases were made on August 17 andAugust 28. On August 31, an additional 23 units

were sold.


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Income StatementCOGS = $4,622

Balance SheetInventory = $1,368

Average-Cost Method

Cost of Goods Sold

Units

Unit

Cost Total Units

Unit

Cost Total

10 @ 91$ = 910$

25 @ 100$ = 2,500$

20 @ 100$ = 2,000$ 5 @ 100$ = 500$

25 @ 112$ = 2,800$

35 @ 114$ = 3,990$

23 @ 114$ = 2,622$ 12 @ 114$ = 1,368$

Inventory Balance


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Date Units

Unit

Cost Total Units

Unit

Cost Total Units

Unit

Cost Total

Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$

Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$

15 @ 106$

Aug. 14 10 @ 91$

10 @ 106$

@ 106$

Inventory Balance

= 2,500$

= 1,970$ = 530$5

On August 14, TBC sold 20 bikes for $130 each.

The Cost of Goods Sold for the August 14 sale is $1,970,leaving 5 units, with a total cost of $530, in inventory.

First-In, First-Out Method (FIFO)


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Additional purchases were made on Aug. 17 and Aug. 28.On August 31, an additional 23 units were sold.



Date Units

Unit

Cost Total Units

Unit

Cost Total Units

Unit

Cost Total

Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$

Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$

15 @ 106$

Aug. 14 10 @ 91$

10 @ 106$

Aug. 17 20 @ 115$ = 2,300$ 5 @ 106$20 @ 115$

Aug. 28 10 @ 119$ = 1,190$ 5 @ 106$

20 @ 115$

10 @ 119$

Aug. 31 5 @ 106$ 2 @ 115$

18 @ 115$ 10 @ 119$

@ 106$

= 2,830$

= 4,020$

= 2,600$ = 1,420$

Inventory Balance

= 2,500$

= 1,970$ = 530$5


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Cost of Goods Sold

Units

Unit

Cost Total Units

Unit

Cost Total

10 @ 91$ = 910$

10 @ 91$

15 @ 106$

10 @ 91$

10 @ 106$

5 @ 106$

20 @ 115$

5 @ 106$

20 @ 115$

10 @ 119$

5 @ 106$ 2 @ 115$

18 @ 115$ 10 @ 119$

@ 106$

= 2,830$

= 4,020$

= 2,600$ = 1,420$

Inventory Balance

= 2,500$

= 1,970$ = 530$5

Balance Sheet

Inventory = $1,420

Income Statement

COGS = $4,570


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Date Units

Unit

Cost Total Units

Unit

Cost Total Units

Unit

Cost Total

Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$

Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$

15 @ 106$

Aug. 14 15 @ 106$

5 @ 91$

= 455$= 2,045$ 5 @ 91$

Inventory Balance

= 2,500$

On August 14, TBC sold 20 bikes for$130 each.

Last-In, First-Out Method (LIFO)

The Cost of Goods Sold for the August 14 sale is $2,045,leaving 5 units, with a total cost of $455, in inventory.


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Date Units

Unit

Cost Total Units

Unit

Cost Total Units

Unit

Cost Total

Aug. 1 10 @ 91$ = 910$ 10 @ 91$ = 910$

Aug. 3 15 @ 106$ = 1,590$ 10 @ 91$

15 @ 106$

Aug. 14 15 @ 106$

5 @ 91$

Aug. 17 20 @ 115$ = 2,300$ 5 @ 91$20 @ 115$

Aug. 28 10 @ 119$ = 1,190$ 5 @ 91$

20 @ 115$

10 @ 119$

Aug. 31 10 @ 119$ 5 @ 91$

13 @ 115$ 7 @ 115$= 2,685$ = 1,260$

= 455$

= 2,755$

= 3,945$

= 2,045$ 5 @ 91$

Inventory Balance

= 2,500$


Additional purchases were made on Aug. 17 and Aug.28. On Aug. 31, an additional 23 units were sold.


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Balance Sheet

Inventory = $1,260


Cost of Goods Sold

Units

Unit

Cost Total Units

Unit

Cost Total

10 @ 91$ = 910$

10 @ 91$

15 @ 106$

15 @ 106$

5 @ 91$

5 @ 91$

20 @ 115$

5 @ 91$

20 @ 115$

10 @ 119$

10 @ 119$ 5 @ 91$

13 @ 115$ 7 @ 115$= 2,685$ = 1,260$

= 455$

= 2,755$

= 3,945$

= 2,045$ 5 @ 91$

Inventory Balance

= 2,500$

Income Statement

COGS = $4,730


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Inventory Valuation Methods: A Summary

Costs Allocated to:

Valuation

Method

Cost of Goods

Sold Inventory Comments

Specific Actual cost of Actual cost of units Parallels physical flow

identification the units sold remaining Logical method when unitsare unique

May be misleading for

identical units

Average cost Number of units

sold times the

Number of units on

hand times the

Assigns all units the same

average unit cost

average unit cost average unit cost Current costs are averaged

in with older costs

First-in, First-out

(FIFO)

Cost of earliest

purchases on

Cost of most

recently

Cost of goods sold is based

on older costs

hand prior to the

sale

purchased units Inventory valued at current

costs

May overstate income during

periods of rising prices; may

increase income taxes due

Last-in, First-out

(LIFO)

Cost of most

recently

Cost of earliest

purchases

Cost of goods sold shown at

recent prices

purchased units (assumed still in

inventory)

Inventory shown at old (and

perhaps out of date) costs

Most conservative method

during periods of rising

prices; often results in lower

income taxes

Inventory Valuation Methods: A Summary

Costs Allocated to:

Valuation

Method

Cost of Goods

Sold Inventory Comments

Specific Actual cost of Actual cost of units Parallels physical flow

identification the units sold remaining Logical method when units

are unique

May be misleading for

identical units

Average cost Number of units

sold times the

Number of units on

hand times the

Assigns all units the same

average unit cost

average unit cost average unit cost Current costs are averaged

in with older costs

First-in, First-out

(FIFO)

Cost of earliest

purchases on

Cost of most

recently

Cost of goods sold is based

on older costs

hand prior to the

sale

purchased units Inventory valued at current

costs

May overstate income during

periods of rising prices; may

increase income taxes due

Last-in, First-out(LIFO)

Cost of mostrecently

Cost of earliestpurchases

Cost of goods sold shown atrecent prices

purchased units (assumed still in

inventory)

Inventory shown at old (and

perhaps out of date) costs

Most conservative method

during periods of rising

prices; often results in lower

income taxes


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22/478-22

GENERAL JOURNAL


Dec. 31 Cost of Goods Sold $$$$

Inventory $$$$

The primary reason for taking a physicalinventory is to adjust the perpetual inventory

records for unrecorded shrinkage losses,

such as theft, spoilage, or breakage.

Taking a Physical Inventory


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Reduces the valueof the inventory.

Obsolescence

Adjust inventoryvalue to the lower

of historical cost orcurrent

replacement cost(market).

Lower of Costor Market

(LCM)

LCM and Other Write-Downsof Inventory


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8-24

LCM and Other Write-Downsof Inventory

Cost Market

Individual

Items

Inventory

Category

Total

Inventory

Bicycles:

Boy's bicycles 4,200$ 4,600$ 4,200

Girls bicycles 3,800 3,100 3,100Junior bicycle 5,700 5,000 5,000

Total 13,700$ 12,700$ 12,700

Bicycle accessories:

Training wheels 485$ 525$ 485

Headlamps 312 400 312

Protective helmets 700 600 600

Gloves 245 212 212Kneepads 195 145 145

Total 1,937$ 1,882$ 1,882Total inventory 15,637$ 14,582$ 14,054$ 14,582$ 14,582$

LCM Applied on the Basis of . . .


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YearEnd

A sale should be recorded when title tothe merchandisepasses to the buyer.

F.O.B.shipping

point titlepasses to

buyer at thepoint of

shipment.

F.O.B.destinationpoint title

passes tobuyer at the

point ofdestination.

Goods In Transit


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GENERAL JOURNAL


Entry on Purchase Date

Purchases $$$$

Accounts Payable $$$$

In a periodicinventory system, inventoryentries are as follows.

Note that an entry is notmade to inventory.

Periodic Inventory Systems


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GENERAL JOURNAL


Entry on Sale Date

No entry to inventory.

Accounts Receivable $$$$

Sales $$$$

In a periodicinventory system, inventoryentries are as follows.

Periodic Inventory Systems


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8-28

Computers, Inc.Mouse Pad Inventory

Date Units $/Unit Total

Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00

June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Availablefor Sale 1,800 9,725.00$

Ending

Inventory 1,200 ?

Cost of

Goods Sold 600 ?

Information for the FollowingInventory Examples


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8-29

Computers, Inc.

Mouse Pad Inventory


Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00

June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00

Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 6,400.00$

Cost of

Goods Sold 600 3,325.00$

Cost of Goods Sold

$9,725 - $6,400 = $3,325



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8-30



Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 ?

Cost of

Goods Sold 600 ?

Avg. Cost $9,725 1,800 =$5.40278

Average-Cost Method



Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 6,483.00$

Cost of

Goods Sold 600 3,242.00$

Ending InventoryAvg. Cost $5.40278 1,200 =

$6,483

Cost of Goods SoldAvg. Cost $5.40278 600 =

$3,242


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Remember: Startwith the Nov. 29

purchase andthen add otherpurchases untilyou reach the

number of units

in endinginventory.




Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 ?

Cost of

Goods Sold 600 ?


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Date Beg. Inv. Purchases End. Inv.Cost of

Goods Sold

Nov. 29 150@$5.90 150@$5.90

Units 150



Goods Sold

1,000@$5.25 600@$5.25

400@$5.25

Jan. 3 300@$5.30 300@$5.30June 20 150@$5.60 150@$5.60

Sept. 15 200@$5.80 200@$5.80

Nov. 29 150@$5.90 150@$5.90

Units 1,200 600

Now, we have allocated a cost toall 1,200units in ending

inventory.


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Goods Sold

Nov. 29 150@$5.90 150@$5.90

Units 150



Goods Sold

1,000@$5.25 600@$5.25

400@$5.25

Jan. 3 300@$5.30 300@$5.30June 20 150@$5.60 150@$5.60

Sept. 15 200@$5.80 200@$5.80

Nov. 29 150@$5.90 150@$5.90

Units 1,200 600


Goods Sold

1,000@$5.25 600@$5.25

400@$5.25

Jan. 3 300@$5.30 300@$5.30June 20 150@$5.60 150@$5.60

Sept. 15 200@$5.80 200@$5.80

Nov. 29 150@$5.90 150@$5.90

Units 1,200 600

Costs $6,575 $3,150

Cost of Goods Available for Sale $9,725


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8-34

Completingthe table

summarizesthecomputationsjust made.




Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 6,575.00$

Cost of

Goods Sold 600 3,150.00$


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8-35

Remember:Start withbeginning

inventory and

then add otherpurchases untilyou reach the

number of units

in endinginventory.




Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 ?

Cost of

Goods Sold 600 ?


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Goods Sold

1,000@$5.25 1,000@$5.25

Units 1,000



Goods Sold

1,000@$5.25 1,000@$5.25

Jan. 3 300@$5.30 200@$5.30

100@$5.30

Units 1,200 100


Goods Sold

1,000@$5.25 1,000@$5.25

Jan. 3 300@$5.30 200@$5.30

100@$5.30June 20 150@$5.60 150@$5.60

Sept. 15 200@$5.80 200@$5.80

Nov. 29 150@$5.90 150@$5.90

Units 1,200 600

Costs $6,310 $3,415

Cost of Goods Available for Sale $9,725


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8-37

Completingthe table

summarizes

thecomputationsjust made.




Beginning

Inventory 1,000 5.25$ 5,250.00$

Purchases:

Jan. 3 300 5.30 1,590.00June 20 150 5.60 840.00

Sept. 15 200 5.80 1,160.00

Nov. 29 150 5.90 885.00Goods

Available

for Sale 1,800 9,725.00$

Ending

Inventory 1,200 6,310.00$

Cost of

Goods Sold 600 3,415.00$


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International Financial ReportingStandards

Internationalaccountingstandards

prohibit the use

of LIFO.


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8-39

Importance of an AccurateValuation of Inventory


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8-41

The Gross Profit Method

In March of 2011, Matrix Companysinventory was destroyed by fire.

Matrix normal gross profit ratio is 30%of net sales. At the time of the fire,

Matrix showed the following balances:

Sales 31,500$

Sales returns 1,500

Beginning Inventory 12,000

Net cost of goods purchased 20,500


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8-42

Goods Available for Sale:

Beginning Inventory 12,000$

Net cost of goods purchased 20,500Goods available for sale 32,500$

Less estimated cost of goods sold:

Sales 31,500$

Less sales returns (1,500)

Net sales 30,000$

Estimated cost of goods sold (21,000)

Estimated March inventory loss 11,500$

Estimating InventoryThe Gross Profit Method





Sales 31,500$


Net sales 30,000$




The Gross Profit Method





Sales 31,500$


Net sales 30,000$




70%

Step1

Step2

Step3


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8-43

The Retail Method

The retail methodof estimating inventoryrequires that management determine thevalue of ending inventory at retail prices.

Goods available for sale at cost 32,500$

Goods available for sale at retail 50,000

Physical count of ending inventory priced at retail 22,000

Information for Matrix CompanyThe Retail Method

In March of 2011, Matrix Companys inventory wasdestroyed by fire. At the time of the fire, Matrixs

management collected the following information:


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8-44

The Retail Method

a Goods available for sale at cost 32,500$

b Goods available for sale at retail 50,000

c Cost ratio [a b] 65%

d Physical count of ending inventory priced at retail 22,000e Estimated ending inventory at cost [ c d] 14,300$

Estimating InventoryThe Retail Method

Matrix would follow the steps below to estimatetheir ending inventory using the retail method.


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8-45

(Beginning Inventory + Ending Inventory) 2

Financial Analysis

Cost of Goods Sold

Average Inventory=

Inventory

Turnover

365

Inventory Turnover

Average Days to

Sell Inventory=


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Financial Analysis

(Beginning Receivables + Ending Receivables) 2

Net Sales

Average Accounts Receivable=

Receivables

Turnover

365

Receivables Turnover

Average Days to

Collect Receivables=


47/47

End of Chapter 8

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