ACC 201 Ch. 8 PowerPoint - CHAPTER 8 Inventories the Cost...

This preview shows page 1 - 8 out of 40 pages.

ACC 201CHAPTER 8Inventories + the Cost of Goods Sold
1.In a perpetual inventory system, determine COGS using [a] specific identification, [b] average cost, [c] FIFO, and [d] LIFO. Discuss advantages and shortcomings of each method.2.Explain the need for taking a physical inventory.3.Record shrinkage losses and other year-end adjustments to inventory.4.In a periodic inventory system, determine ending inventory and COGS using [a] specific identification, [b] average cost, [c] FIFO, and [d] LIFO.5.Explain the effects on the income statement of errors in inventory valuation.6.Estimate COGS and ending inventory by the gross profit method and by the retail method.7.Compute inventory turnover and explain its uses.2CHAPTER 8 LEARNING OBJECTIVES
INCOME STATEMENTRevenueCost of goods sold= Gross profitExpenses= Net incomeas goods are soldBALANCE SHEETAssetInventoryPurchase costs (or manufacturing costs)The Flow of Inventory Costs THROUGH FINANCIAL STATEMENTS3
oIn a PERPETUAL INVENTORY SYSTEM, journal entries in the parallel this flow of costs. When merchandise is purchased, its net cost is added to the asset account INVENTORY. As merchandise is sold, its cost is removed from Inventory and transferred to COST OF GOODS SOLD.The Flow of Inventory Costs THROUGH FINANCIAL STATEMENTS4GENERAL JOURNALDateAccount Titles and ExplanationDebitCreditEntry on Purchase DateInventory$$$Accounts Payable$$$Entry on Sale DateCost of Goods Sold$$$Inventory$$$
DATA FOR AN ILLUSTRATIONoMead Electric Co. sells electrical equipment and supplies. Included in Mead’s inventory are 5 Elco AC-40 generators. Though identical, 2 were purchased on Jan. 5 for $1,000per unit, and the other 3 were purchased a month later at for $1,200per unit.5
oValuation of inventory and COGS is vital to managers and external users of financial statements. Inventory is often a company's largest asset, and COGS its largest expense.oSeveral different methods of pricing inventory and of measuring COGS are acceptable under GAAP. These different methods may produce significantly different results, both in financial statements and income tax returns. Managers and investors should understand the effects of the different inventory valuation methods.6VALUATION METHODS + COGS
1. VALUATION METHODS + COGS IN A PERPETUAL SYSTEM: 4 METHODS7SPECIFIC IDENTIFICATION is acceptable only when actual costs of individual units of merchandise can be determined. If items in inventory are homogeneous, the seller may follow the more convenient practice of using a COST FLOW ASSUMPTION, which involves making an assumption as to the sequence in which units are withdrawn from inventory:AVERAGE COST assumes that units are withdrawn from inventory in random order.It values all merchandise—units sold and units remaining in inventory—at average per-unit cost.

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture