Bus201-POA_Ch05ForCh06FinMan-ForPresentation.pptx

Bus201-POA_Ch05ForCh06FinMan-ForPresentation.pptx - Chapter...

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Chapter 6 Inventories and Cost of Goods Sold
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Managing Inventories Merchandise Inventory is a Current Asset . Management chooses an: (1) Inventory System ( Periodic or Perpetual ), an (2) Inventory Costing system ( Specific Identification, Average Cost, FIFO, or LIFO ), and a (3) Method of Valuing Inventory ( at Cost or Market ) .
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Managing Inventories In managing Inventory levels, it is important to take into consideration all the costs of (1) Handling , (2)Storing , and (3) Financing inventories and the (4) cost of Lost Sales . Inventory levels are minimized by using supply-chain management in a Just-In-Time (JIT) operating environment . Error(s) in calculation of Ending Inventory will effect Income Statement and Balance Sheet .
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Managing Inventories Merchandise inventory is a current asset. The matching principle is applied to inventory valuation. The HIGHER the Ending Inventory , the lower the Cost of Goods Sold and the higher the Gross Margin (or Gross Profit) and Net Income .
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Effects of Inventory Errors on Financial Statements Income Statement Effects 5-6
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Effects of Inventory Errors on Financial Statements Balance Sheet Effects
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Inventory Cost Flow Assumptions First-In, First-Out (FIFO) Assumes costs flow in the order incurred. Last-In, First-Out (LIFO) Assumes costs flow in the reverse order incurred. Weighted Average Assumes costs flow at an average of the costs available. 5-8
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Inventory Costing Illustration 5-9 Cost of Goods Available for Sale Aug. 1 Beg. Inventory 10 units @ 91 $ = 910 $ Aug. 3 Purchased 15 units @ 106 $ = 1,590 $ Aug. 17 Purchased 20 units @ 115 $ = 2,300 $ Aug. 28 Purchased 10 units @ 119 $ = 1,190 $ Retail Sales of Goods Aug. 14 Sales 20 units @ 130 $ = 2,600 $ Aug. 31 Sales 23 units @ 150 $ = 3,450 $
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Specific Identification originally costing $91 and twelve The above purchases were made in August. On August 14, a company sold eight bikes originally costing $91 and twelve bikes originally costing $106. 5-10 Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 8 @ 91 $ = 728 $ 12 @ 106 $ = 1,272 $ 500 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,800 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,990 $ Aug. 31 2 @ 91 $ = 182 $ 3 @ 106 $ = 318 $ 14 @ 115 $ = 1,610 $ 4 @ 119 $ = 476 $ 1,404 $
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The Cost of Goods Sold for the 20 bikes sold on the August 14 sale is $2,000. 8 bikes @ 91 = $ 728 12 bikes @ 106 = $1,272 After this sale, there are five units in inventory at $500: 2 bikes @ $91 = $ 182 3 bikes @ $106 = $ 318 Specific Identification 5-11
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Additional purchases were made on August 17 and 28. The cost of the 23 items sold on August 31 were as follows: 2 @ $91 3 @ $106 15 @ $115 3 @ $119 Specific Identification 5-12 Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 8 @ 91 $ = 728 $ 12 @ 106 $ = 1,272 $ 500 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,800 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,990 $ Aug. 31 2 @ 91 $ = 182 $ 3 @ 106 $ = 318 $ 14 @ 115 $ = 1,610 $ 4 @ 119 $ = 476 $ 1,404 $
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Specific Identification Cost of Goods Sold for August 31 = $2,582 5-13
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