retail inventory chapter 9 horngren ♦ harrison ♦ bamber ♦ best ♦ fraser ♦ willett

Retail Inventory

Chapter 9

HORNGREN ♦ HARRISON ♦ BAMBER ♦ BEST ♦ FRASER ♦ WILLETT

9 - 2Horngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education AustraliaHorngren ♦ Harrison ♦ Bamber ♦ Best ♦ Fraser ♦ Willett, Accounting 4e Copyright © 2004 Pearson Education Australia

Objectives

1 Account for inventory by the physical and perpetual systems.

2. Apply the inventory costing methods: specific unit cost, weighted average cost, FIFO and LIFO

3. Identify the profit effects of the inventory costing methods


Objectives

4. Apply the lower-of-cost-and-net-reliable-value rule to inventory

5. Determine the effects of inventory errors on cost of goods sold and net profits

6. Estimate ending inventory by the gross profit and retail inventory method


Account for inventory

by the periodic and perpetual systems

Objective 1


Perpetual systems maintain a running recordto show the inventory on hand at all times.

Perpetual systems maintain a running recordto show the inventory on hand at all times.

Periodic systems do not keep acontinuous record of inventory on hand.

Periodic systems do not keep acontinuous record of inventory on hand.

Inventory Accounting Systems


Debit Cash or Accounts ReceivableCredit Sales Revenue

Debit Cash or Accounts ReceivableCredit Sales Revenue

Debit Cost of Goods SoldCredit Inventory

Debit Cost of Goods SoldCredit Inventory

Perpetual System

Debit Inventory Credit Cash or Accounts PayableDebit Inventory Credit Cash or Accounts Payable


Perpetual System(see page 369 text)

Item: SandalsQuantity Quantity Quantity

Date Received Sold on HandNov. 1

5 7

12 26 30

Totals

25

25

50

6

13

2140

10 42916412020


Periodic SystemCost of Goods Sold

BeginningInventory$100,000

NetPurchases$560,000

Cost of GoodsAvailable forSale $660,000

+ =

EndingInventory$120,000

=Cost of Goods

Sold$540,000

–


Sales revenues – Cost of goods sold =Gross profit (before operating expenses)

Sales revenues – Cost of goods sold =Gross profit (before operating expenses)

Gross profit – Operating expenses =Net profit

Gross profit – Operating expenses =Net profit

Gross Profit


Cost-of-Goods-Sold Model

Budgeted Cost of Goods Sold

Budgeted Ending Inventory+

=

Actual Beginning Inventory

= Purchases

–

Budgeted Cost of Goods Available for Sale


Cost of inventory on hand = Quantity × unit cost Cost of inventory on hand = Quantity × unit cost

Calculating the Cost of Inventory

Physical count is made at least once a year, even with a perpetual system.

Consigned goods are excluded.


Periodic System

At the end of the period make a physical count and apply unit cost to determine ending inventory.

Inventory purchases are debited to the purchases account.

The inventory account carries the beginning inventory balance until adjusted at period end.


Accounts Payable

Inventory

120,000Ending

Balance

Purchases

560,000Purchases

100,000BeginningBalance

Cost of Goods Sold100,000560,000540,000

120,000EndingBalance560,000

Purchases

560,000Purchases

100,000Beginning

Balance

Periodic System


Apply the inventory costingmethods: specific unit cost,

weighted-average cost,FIFO and LIFO

Objective 2


January 8 20 units @ $20 = $ 400May 19 55 units @ $30 = $1,650October 23 25 units @ $31 = $ 775Total units 100 Units sold 70Units left 30

January 8 20 units @ $20 = $ 400May 19 55 units @ $30 = $1,650October 23 25 units @ $31 = $ 775Total units 100 Units sold 70Units left 30

Units Purchased in 2004


Units sold by date:Jan 5 17May 19 33Oct 23 20Total sales 70

Units sold by date:Jan 5 17May 19 33Oct 23 20Total sales 70

30 units left in inventory30 units left in inventory

Units Sold and in Ending Inventory


Cost of Goods SoldOct 23 $ 620May 19 990Jan 5 340Total $1,950

Specific Identification

20 Units @ $31

5 Units @ $31

33 Units @ $30

22 Units @ $30

17 Units @ $20

3 Units @ $20


Ending InventoryOct $155May 660Jan 60Total $875

Specific Identification

20 Units @ $31

5 Units @ $31

33 Units @ $30

22 Units @ $30

17 Units @ $20

3 Units @ $20


Weighted Average

25 Units @ $31 (Oct)

55 Units @ $30 (May)

20 Units @ $20 (Jan)

= $ 775

= 1,650

= 400

= $2,825 Total Cost100 Total Units


Weighted Average

$2,825 total cost/100 units = $28.25/unit$2,825 total cost/100 units = $28.25/unit

Cost of goods sold = 70 × $28.25 = $1977.50Cost of goods sold = 70 × $28.25 = $1977.50

Ending inventory = 30 × $28.25 = $847.50Ending inventory = 30 × $28.25 = $847.50


Cost of Goods SoldJan $ 400May 1,500Total $1,900

First-In, First-Out


5 Units @ $30 (May)

50 Units @ $30



Ending InventoryOct $775May 150Total $925

First-In, First-Out


5 Units @ $30 (May)

50 Units @ $30



Cost of Goods SoldOct $ 775May 1,350Total $2,125

Last-In, First-Out



10 Units @ $30



Ending InventoryOct $300May 400Total $700

Last-In, First-Out



10 Units @ $30



Ending Inventory Specific identification $875.00 FIFO $925.00 LIFO $700.00 Weighted-average $847.50

Comparison of Methods


Cost of Goods Sold Specific identification $1,965.00 FIFO $1,900.00 LIFO $2,125.00 Weighted-average $1,977.50



When prices are rising LIFO producesthe lowest income and lowest income tax.


Gross Profit from Sales:

Specific identification $1,035.00

FIFO $1,100.00

LIFO $ 875.00

Weighted-average $1,022.50


Identify the profit effectsof the

inventory costing methods

Objective 3


The Income TaxAdvantage of LIFO

During periods of inflation, LIFO’s income is the lowest.

The most attractive feature of LIFO is reduced income tax payments.

That is probably why it cannot be used not tax (and financial reporting purposes) in Australia!


Perpetual System FIFO Example

Many companies keep their perpetual inventory records in quantities only.

Other companies keep perpetual records in both quantities and dollar cost.



(see page 379 text

Item: Wambat Sandals Received Sold Balance on Hand

Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov. 1 10 $30 $300 5 6 $30 $180 4 30 120 7 25 $31 $775 4 30 120

25 31 775 12 4 30 120

9 31 279 16 31 496

Deckers Outdoor



Item: Teva Sandals Received Sold Balance on Hand

Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov. 26 25 $32 $ 800 16 $31 $496

25 32 800 30 16 $31 496 25 32 800

5 32 160 20 32 640Totals 50 $1,575 40 $1,235 20 $32 $640

Deckers Outdoor


The business should use the same accountingmethods and procedures from one period to the next.

The business should use the same accountingmethods and procedures from one period to the next.

A company may change inventory methods, but itmust disclose the effects of the change on net profits.

A company may change inventory methods, but itmust disclose the effects of the change on net profits.

Accounting Principles: Comparability


The financial statementsshould report sufficientinformation to enablean outsider to make

knowledgeable decisionsabout the company.

Accounting Principles: Relevance


Accounting Principles: Materiality

An item is material if it has the potentialto alter a statement user’s decision.

An item is material if it has the potentialto alter a statement user’s decision.

Materiality is specific tothe entity being evaluated.

Materiality is specific tothe entity being evaluated.


Err on the sideof caution when

reporting any item inthe financial statements.

Accounting Principles: Conservatism


Apply the lower-of-cost-and-net-realisable-value

rule to inventory

Objective 4


Lower-of-Cost-and-N-R-V

An asset is reported at the lower of its historical cost or market (replacement) value.

If the replacement cost falls below its historical cost, the business must write down the value of its inventory.


June 30

Loss on Inventory (or COGS) 800Inventory 800

Write down inventory to LCNRV

June 30

Loss on Inventory (or COGS) 800Inventory 800

Write down inventory to LCNRV

Lower-of-Cost-and-N-R-V Example

Cost of inventory: $3,000 Market value at balance sheet date:

$2,200 What is the journal entry?


Determine the effects ofinventory errors on cost

ofgoods sold and net profit

Objective 5


Inventory Errors

If inventory is calculated incorrectly, how many years of financial statements will it affect?

Two years The current year’s ending inventory is

next year’s beginning inventory.


Estimate ending inventoryby the gross profit and retail inventory method

Objective 6


Net Sales $150,000Gross Profit Margin 31.5%Beginning Inventory $ 18,500Net Purchases $110,500

Net Sales $150,000Gross Profit Margin 31.5%Beginning Inventory $ 18,500Net Purchases $110,500

Gross Profit Method Example

Net Sales $150,000– Gross Profit of 31.5% 47,250= Cost of Goods Sold $102,750

Net Sales $150,000– Gross Profit of 31.5% 47,250= Cost of Goods Sold $102,750


Gross Profit Method Example

BeginningInventory$18,500

NetPurchases$110,500

Cost of GoodsAvailable forSale $129,000

+ =

EndingInventory$26,250

=Cost of Goods

Sold$102,750

–


Retail Inventory Method

Businesses with high turnover, low cost inventory, AASB 1019 allows the use of the retail inventory method.

Like the gross profit method it is based on the COGS model.

Requires the recording of inventory purchases at cost and at retail (selling) price.

See exhibit 9-13 page 385 of you text book.


Internal Control over Inventory

Physically counting inventory (stocktake) Safe storage Separate inventory and accounting records Keeping perpetual inventory records Sufficient inventory to prevent stock-outs Not too much inventory – avoid obsolesce Economic order quantities Investigate just-in-time inventory systems.


End of Chapter 9

retail inventory chapter 9 horngren ♦ harrison ♦ bamber ♦ best ♦ fraser ♦ willett

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