Lecture 5b- Inventories - Accounting for Managers...

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Chapter 6 / Exercise 2
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Accounting for Managers 1 Short-Term Assets: Inventories
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Chapter 6 / Exercise 2
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Short-Term Assets: Inventories Definition : Goods that are owned by the company and held for sale in the ordinary course of business. What is Included in the Value of Inventory? All costs necessary to place the inventory as ready-to-sell-goods. 2
Accounting for Inventories: Increases in Inventories The typical journal entry for a retailer’s purchase of inventory is: Dr. Inventory $X Cr. Accounts payable / Cash $X Manufacturers buy raw materials, but they also have value- added costs that accumulate in inventory (e.g., wages of line workers): Dr. Inventory $X Cr. Wages payable / Cash $X 3
Accounting for Inventories: Cost of Goods Sold (COGS) - COGS is a product expense and is an income statement account. - Since BB and purchases are already known, how the firm calculates the value of its ending balance of inventory determines the COGS reported on the income statement. 4
Accounting for Inventories: Cost of Goods Sold How to determine the ending inventory (and, accordingly, COGS)? Suppose you have three million identical cans of coke purchased at five different price levels. You sold one million of them. - How would you calculate the value of your ending inventory and your COGS? - Is it practical to keep track of each individual can? 5 Inventory on Quantity on hand Price per unit balance sheet Based on Based on physical count accounting assumptions 1 4 442 4 4 43 1 442 4 43
Accounting for Inventories: Cost Flow Assumptions Three common methods for determining which purchase prices apply to the units remaining in inventory: Cost flow assumption Ending inventory Sold inventory First-in, first-out ( FIFO ) Newest purchases Beginning inventory + Oldest purchases Last-in, first out ( LIFO ) Beginning inventory + Oldest purchases Newest purchases Average cost Mix of beginning inventory and new purchases Mix of beginning inventory and new purchases 6
Accounting for Inventories:

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