Lecture 6 Accounting for Inventory (II)

Lecture 6 Accounting for Inventory (II) - Lecture 6...

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Unformatted text preview: Lecture 6 Accounting for Inventory (II) - The Valuation of Inventory The Flow of Inventory Costs BALANCE SHEET Purchase costs (or manufacturing costs) Asset Inventory as goods are sold INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income The Flow of Inventory Costs In a perpetual inventory system, inventory entries parallel the flow of costs. G E N E R AL JOU R N AL Da te Account Title s a nd Ex pla na tion Entry on P urcha se Da te Inve ntory Accounts P a ya ble Entry on S a le Da te Cost of Goods S old Inve ntory $$$$ $$$$ $$$$ $$$$ De bit Cre dit Which Unit Did We Sell? Which When identical units of inventory have different unit costs, a question naturally arises as to which of these costs should be used in recording a sale of inventory. GENERAL JOURNAL Date Account Titles and Explanation Entry on Sale Date Cost of Goods Sold Inventory $$$$ $$$$ Debit Credit Inventory Subsidiary Ledger A separate subsidiary account is maintained A separate subsidiary account is maintained for each item in inventory. for each item in inventory. Item LL002 Description Laser Light Location Storeroom 2 P urchased Unit Cost $ 30 50 Primary supplier Electronic City Secondary supplier Electric Company Inventory level: Min: 25 M ax: 200 Balance Cost of Goods Unit Sold Units Cost Total 100 $ 30 $ 3,000 100 30 3,000 75 50 3,750 ? ? ? ? ? ? ? Sold Unit Cost Date Sept. 5 Sept. 9 Sept. 10 Units 100 75 Total $ 3,000 3,750 Units 10 ? How can we determine the unit cost for the Sept. 10 sale? Inventory Cost Flows We use one of these inventory valuation methods to determine cost of inventory sold. e rag Ave st Co FIFO LIFO Specific Identification Data for an Illustration The Bike Company (TBC) Cost of Goods Available for Sale Cost of Goods Available for Sale Aug. Aug. 1 Beg. Inventory 10 units @ 1 Beg. Inventory 10 units @ Aug. 15 units @ Aug. 3 Purchased 3 Purchased 15 units @ Aug. 17 Purchased 20 units @ Aug. 17 Purchased 20 units @ Aug. 28 Purchased 10 units @ Aug. 28 Purchased 10 units @ Retail Sales of Goods Retail Sales of Goods Aug. 14 Sales Aug. 14 Sales Aug. 31 Sales Aug. 31 Sales $ 91 $ 91 $ 106 $ 106 $ 115 $ 115 $ 119 $ 119 = = = = = = = = $ $ $ $ $ $ $ $ 910 910 1,590 1,590 2,300 2,300 1,190 1,190 20 units @ 20 units @ 23 units @ 23 units @ $ 130 $ 130 $ 150 $ 150 = $ 2,600 = $ 2,600 = $ 3,450 = $ 3,450 Specific Identification Date Aug. 1 Aug. 3 Purchases 10 15 @ @ $ 91 $ 106 = = $ 910 $ 1,590 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 On August 14, TBC sold 20 bikes for $130 each. On August 14, TBC sold 20 bikes for $130 each. On Of the bikes sold 9 originally cost $91 and Of the bikes sold 9 originally cost $91 and Of 11 cost $106. 11 cost $106. Specific Identification Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 819 9 11 @ @ $ 91 $ 106 = = $ $ 1,166 $ 515 The Cost of Goods Sold for the August 14 sale is The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in inventory. $1,985, leaving $515 and 5 units in inventory. Let’s look at the entries for the Aug. 14 sale. Let Specific Identification GENERAL GENERAL JOURNAL Date Account Titles and Explanation Debit 2,600 2,600 Credit Aug. 14 Cash Sales Retail (20 × $103) Retail (20 × $103) 14 Cost of Goods Sold Inventory Cost Cost 1,985 1,985 A similar entry is made after each sale. A similar entry is made after each sale. Specific Identification Specific Date Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 819 Aug. 17 Aug. 28 Aug. 31 Additional purchases were made on$August 17$and 28. 1@ 91 = 91 Additional purchases were made on August 17 and 28. 3 @ $ 106 = $ 318 Costs associated with sales on August 31 were as follows: 1 @ $91, Costs associated with sales on August 31$ 115 as follows: 1 @ $91, were = $ 1,725 15 @ 3 @ $106, 15 @ $115, & 4 @ $119. 3 @ $106, 15 @ $115,@ 4$@ $119. $ 476 $ 1,395 & 4 119 = Cost of Goods Cost of Goods Sold for Sold for August 31 = August 31 = 20 @ $ 115 = $ 2,300 $2,610 $ 1,190 $2,610 10 @ $ 119 = 9 11 @ @ $ 91 $ 106 = = $ $ 1,166 $ 515 $ 2,815 $ 4,005 Specific Identification Specific Cost of Goods Sold Inventory Balance $ 910 $ 2,500 819 Income Statement COGS = $4,595 9 11 @ @ $ 91 $ 106 = = $ $ 1,166 $ $ $ 515 2,815 4,005 1 3 15 4 @ @ @ @ $ 91 $ 106 $ 115 $ 119 = = = = $ $ $ 91 318 476 $ 1,725 Balance Sheet $ 1,395 Inventory = $1,395 1 1 5 5 6 6 @ $ 106 @ $ 106 @ $ 115 @ $ 115 @ $ 119 @ $ 119 End. Inv. End. Inv. = $ 106 = $ 106 = 575 = 575 = 714 = 714 $ 1,395 $ 1,395 Specific Identification Specific Can we use specific identification approach to compute cost of goods sold all the time? Average-Cost Method When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Goods Units on hand Available for ÷ on the date of Sale sale Average-Cost Method Date Aug. 1 Aug. 3 Purchases 10 15 @ @ $ 91 $ 106 =$ 910 = $ 1,590 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 The average cost per unit The average cost per unit must be computed prior must be computed prior to each sale. to each sale. $2,500 ÷ 25 = $100 $2,500 ÷ 25 = $100 On August 14, TBC sold 20 bikes for $130 each. On August 14, TBC sold 20 bikes for $130 each. Average-Cost Method Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Inventory Balance Cost of Goods Sold $ 910 $ 2,500 500 20 @ $ 100 = $ 2,000 $ The average cost per The average cost per The unit is $100. unit is $100. unit $100 = $2,500 ÷ 25 $100 = $2,500 ÷ 25 Let’s look at the entries for the Aug. 14 sale. Average-Cost Method GENERAL JOURNAL Date Account Titles and Explanation Debit 2,600 2,600 Credit Aug. 14 Cash Sales 14 Cost of Goods Sold Inventory Retail Retail Cost Cost 2,000 2,000 A similar entry is made after each sale. A similar entry is made after each sale. Average-Cost Method Average-Cost Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28 Purchases 10 15 20 10 @ @ @ @ $ 91 $ 106 $ 115 $ 119 =$ 910 = $ 1,590 = $ 2,300 = $ 1,190 Inventory Balance Cost of Goods Sold $ 910 $ 2,500 500 20 @ $ 100 = $ 2,000 $ $ 2,800 $ 3,990 Additional purchases were made on August 17 Additional purchases were made on August 17 Additional and August 28. and August 28. and On August 31, an additional 23 units were sold. On August 31, an additional 23 units were sold. Average-Cost Method Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28 Purchases 10 15 20 10 @ @ @ @ $ 91 $ 106 $ 115 $ 119 =$ 910 = $ 1,590 = $ 2,300 = $ 1,190 Inventory Balance Cost of Goods Sold $ 910 $ 2,500 500 20 @ $ 100 = $ 2,000 $ $ 2,800 $ 3,990 Total Purchases Less: Sales to Date Units on Hand 55 -20 35 $114 = $3,990 ÷ 35 $114 = $3,990 ÷ 35 Average-Cost Method Date Aug. 1 Aug. 3 Aug. 14 Aug. 17 Aug. 28 Aug. 31 Purchases 10 15 20 10 @ $ 91 @ $ 106 @ $ 115 @ $ 119 =$ 910 = $ 1,590 = $ 2,300 = $ 1,190 Inventory Balance Cost of Goods Sold $ 910 $ 2,500 500 20 @ $ 100 = $ 2,000 $ $ 2,800 $ 3,990 23 @ $ 114 = $ 2,622 $ 1,368 The average cost per The average cost per unit is $114. unit is $114. $114 = $3,990 ÷ 35 $114 = $3,990 ÷ 35 Average-Cost Method Inventory Balance Cost of Goods Sold $ 910 $ 2,500 500 20 @ $ 100 = $ 2,000 $ $ 2,800 $ 3,990 23 @ $ 114 = $ 2,622 $ 1,368 Income Statement COGS = $4,622 Balance Sheet Inventory = $1,368 $114 × 12 = $1,368 $114 × 12 = $1,368 First-In, First-Out Method (FIFO) Oldest Oldest Costs Costs Costs of Costs of Goods Sold Goods Sold Recent Recent Costs Costs Ending Ending Inventory Inventory First-In, First-Out Method (FIFO) First-In, Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 910 10 10 @ @ $ 91 $ 106 = = $ $ 1,060 $ 530 The Cost of Goods Sold for the August 14 sale is $1,970, The Cost of Goods Sold for the August 14 sale is $1,970, lleaving $530 and 5 units in inventory. eaving $530 and 5 units in inventory. On August 14, TBC sold 20 bikes for $130 each. On August 14, TBC sold 20 bikes for $130 each. First-In, First-Out Method (FIFO) GENERAL JOURNAL Date Account Titles and Explanation Debit 2,600 2,600 Credit Aug. 14 Cash Sales 14 Cost of Goods Sold Inventory Retail Retail Cost Cost 1,970 1,970 A similar entry is made after each sale. A similar entry is made after each sale. First-In, First-Out Method (FIFO) Date Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Aug. 17 20 @ Aug. 28 10 @ Aug. 31 $ 115 $ 119 = = $ 2,300 $ 1,190 5 18 @ @ $ 106 $ 115 = = $ 530 $ 2,070 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 910 10 10 @ @ $ 91 $ 106 = = $ $ 1,060 $ 530 $ 2,830 $ 4,020 $ 1,420 Additional purchases were made on Aug. 17 and Aug. 28. Additional purchases were made on Aug. 17 and Aug. 28. Cost of Goods Sold for Augustwere sold. 31 = $2,600 Cost of Goods Sold for August were = $2,600 On August 31, an additional 23 units 31 sold. On August 31, an additional 23 units First-In, First-Out Method (FIFO) Cost of Goods Sold Inventory Balance $ 910 $ 2,500 910 Income Statement COGS = $4,570 10 10 @ @ $ 91 $ 106 = = $ $ 1,060 $ 530 $ 2,830 $ 4,020 $ 1,420 5 18 @ @ $ 106 $ 115 = = $ 530 $ 2,070 Balance Sheet Inventory = $1,420 2 @ $ 115 2 @ $ 115 10 @ $ 119 10 @ $ 119 End. Inv. End. Inv. = $ 230 = $ 230 = = 1,190 1,190 $ 1,420 $ 1,420 Last-In, First-Out Method (LIFO) Recent Recent Costs Costs Costs of Costs of Goods Sold Goods Sold Oldest Oldest Costs Costs Ending Ending Inventory Inventory Last-In, First-Out Method (LIFO) Last-In, Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 455 15 5 @ @ $ 106 $ 91 = = $ 1,590 $ $ 455 The Cost of Goods Sold for the August 14 sale is The Cost of Goods Sold for the August 14 sale is $2,045, leaving $455 and 5 units in inventory. $2,045, leaving $455 and 5 units in inventory. On August 14, TBC sold 20 bikes for $130 each. On August 14, TBC sold 20 bikes for $130 each. Last-In, First-Out Method (LIFO) GENERAL JOURNAL Date Account Titles and Explanation Debit 2,600 2,600 Credit Aug. 14 Cash Sales 14 Cost of Goods Sold Inventory Retail Retail Cost Cost 2,045 2,045 A similar entry is made after each sale. Last-In, First-Out Method (LIFO) Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Aug. 17 20 @ Aug. 28 10 @ $ 115 $ 119 = = $ 2,300 $ 1,190 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 455 15 5 @ @ $ 106 $ 91 = = $ 1,590 $ $ 455 $ 2,755 $ 3,945 Additional purchases were made on Aug. 17 and Aug. 28. Additional purchases were made on Aug. 17 and Aug. 28. On Aug. 31, an additional 23 units were sold. On Aug. 31, an additional 23 units were sold. Last-In, First-Out Method (LIFO) Date Purchases Aug. 1 10 @ $ 91 = $ 910 Aug. 3 15 @ $ 106 = $ 1,590 Aug. 14 Aug. 17 20 @ Aug. 28 10 @ Aug. 31 $ 115 $ 119 = = $ 2,300 $ 1,190 10 13 @ @ $ 119 $ 115 = = $ 1,190 $ 1,495 Cost of Goods Sold Inventory Balance $ 910 $ 2,500 455 15 5 @ @ $ 106 $ 91 = = $ 1,590 $ $ 455 $ 2,755 $ 3,945 $ 1,260 Cost of Goods Sold for August 31 = $2,685 Cost of Goods Sold for August 31 = $2,685 Last-In, First-Out Method (LIFO) Cost of Goods Sold Inventory Balance $ 910 $ 2,500 455 Income Statement COGS = $4,730 15 5 @ @ $ 106 $ 91 = = $ 1,590 $ $ 455 $ 2,755 $ 3,945 $ 1,260 10 13 @ @ $ 119 $ 115 = = $ 1,190 $ 1,495 Balance Sheet Inventory = $1,260 5 @ $ 91 5 @ $ 91 7 @ $ 115 7 @ $ 115 E n d . . In v . . E n d In v = $ 455 = $ 455 = 805 = 805 $ 1 ,2 6 0 $ 1 ,2 6 0 I nventory Valuation Methods: A Summary Costs Allocated to: Valuation Cost of Goods Method 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 Number of units on Assigns all units the same sold times the hand times the average unit cost average unit cost average unit cost Current costs are averaged in with older costs First-in, First-out Cost of earliest Cost of most Cost of goods sold is based (FIFO) purchases on recently on older costs hand prior to the purchased units Inventory valued at current sale costs May overstate income during periods of rising prices; may increase income taxes due Last-in, First-out Cost of most Cost of earliest Cost of goods sold shown at (LIFO) recently purchases recent prices purchased units (assumed still in Inventory shown at old (and inventory) perhaps out of date) costs Most conservative method during periods of rising prices; often results in lower income taxes LCM and Other Write-Downs LCM and Other Write-Downs of Inventory of Inventory Obsolescence Obsolescence Reduces the value Reduces the value of the inventory. of the inventory. Adjust inventory Adjust inventory value to the lower value to the lower of historical cost or of historical cost or current current replacement cost replacement cost ((market). market). Lower of Cost Lower of Cost or Market or Market (LCM) (LCM) LCM and Other Write-Downs LCM and Other Write-Downs of Inventory of Inventory LCM Applied on the Basis of . . . Cost Bicycles: Boy's bicycles Girls bicycles Junior bicycle Total Bicycle accessories: Training wheels Headlamps Protective helmets Gloves Kneepads Total Total inventory $ 4,200 3,800 5,700 $ 13,700 $ 485 312 700 245 195 $ 1,937 $ 15,637 Market $ 4,600 3,100 5,000 $ 12,700 $ 525 400 600 212 145 $ 1,882 $ 14,582 Individual Items 4,200 3,100 5,000 12,700 485 312 600 212 145 $ 14,054 1,882 $ 14,582 $ 14,582 Inventory Category Total Inventory Goods In Transit A sale should be recorded when title to A sale should be recorded when title to the merchandise passes tto the buyer. the merchandise passes o the buyer. F.O.B. F.O.B. F.O.B. shipping shipping point title point title point passes to passes to buyer at the buyer at the point of point of shipment. shipment. F.O.B. F.O.B. F.O.B. destination destination point title point title point passes to passes to buyer at the buyer at the point of point of destination. destination. Year End Periodic Inventory Systems In a periodic inventory system, inventory entries are as follows. GENERAL JOURNAL Date Account Titles and Explanation Entry on Purchase Date Purchases Accounts Payable $$$$ $$$$ Debit Credit Note that an entry is not Note that an entry is not made to inventory. made to inventory. Periodic Inventory Systems In a periodic inventory system, inventory entries are as follows. GENERAL JOURNAL Date Account Titles and Explanation Entry on Sale Date No entry to inventory. Accounts Receivable Sales $$$$ $$$$ Debit Credit Periodic Inventory Systems We use one of these inventory valuation methods in a periodic inventory system. Specific identification Average cost FIFO LIFO Information for the Following Inventory Information for the Following Inventory Examples Examples Date Beginning Inventory Purchases: Jan. 3 June 20 Sept. 15 Nov. 29 Goods Available for Sale Ending Inventory Cost of Goods Sold Computers, Inc. Mouse Pad Inventory Units $/Unit 1,000 $ 300 150 200 150 5.25 5.30 5.60 5.80 5.90 Total $ 5,250.00 1,590.00 840.00 1,160.00 885.00 1,800 1,200 600 $ 9,725.00 ? ? Specific Identification By reviewing actual purchase invoices, Computers, Inc. determines that the 1,200 mouse pads on hand at year-end have an actual total cost of $6,400. Determine the cost of goods sold for the year. Specific Identification Date Beginning Inventory 1,000 $ Purchases: Jan. 3 300 June 20 150 Sept. 15 Goods Sold 200 Cost of Goods Sold Cost of Nov. 29 150 $9,725 $6,400 = $3,325 Goods $9,725 $6,400 = $3,325 Available for Sale 1,800 Computers, Inc. Mouse Pad Inventory Units $/Unit 5.25 5.30 5.60 5.80 5.90 Total $ 5,250.00 1,590.00 840.00 1,160.00 885.00 -- $ 9,725.00 $ 6,400.00 $ 3,325.00 Ending Inventory Cost of Goods Sold 1,200 600 Average-Cost Method Average-Cost Avg. Cost $9,725 ÷ 1,800 = Avg. Cost $9,725 ÷ 1,800 = $5.40278 $5.40278 Ending Inventory Ending Inventory Avg. Cost $5.40278 × 1,200 = Avg. Cost $5.40278 × 1,200 = $6,483 $6,483 Cost of Goods Sold Cost of Goods Sold Avg. Cost $5.40278 × 600 = Avg. Cost $5.40278 × 600 = $3,242 $3,242 Date Beginning Inventory Purchases: Jan. 3 June 20 Sept. 15 Nov. 29 Goods Available for Sale Ending Inventory Cost of Goods Sold Computers, Computers, Inc. Mouse Pad Inventory Units $/Unit 1,000 $ 300 150 200 150 5.25 5.30 5.60 5.80 5.90 Total $ 5,250.00 1,590.00 840.00 1,160.00 885.00 1,800 1,200 1,200 600 $ 9,725.00 $ 6,483.00 ? $ 3,242.00 ? First-In, First-Out Method (FIFO) Remember: Remember: Start with the Start 11/29 purchase and then add other purchases until you reach the number of units in ending inventory. Date Beginning Inventory Purchases: Jan. 3 June 20 Sept. 15 Nov. 29 Goods Available for Sale Ending Inventory Cost of Goods Sold Computers, Inc. Mouse Pad Inventory Units $/Unit 1,000 $ 300 150 200 150 5.25 5.30 5.60 5.80 5.90 Total $ 5,250.00 1,590.00 840.00 1,160.00 885.00 1,800 1,200 600 $ 9,725.00 ? ? First-In, First-Out Method (FIFO) Date Date Beg. Inv. Purchases 1,000@$5.25 300@$5.30 150@$5.60 200@$5.80 150@$5.90 End. Inv. 400@$5.25 300@$5.30 150@$5.60 200@$5.80 150@$5.90 150 1,200 $6,575 Cost of Goods Sold 600@$5.25 Jan. 3 June 20 Sept. 15 Nov. 29 Units 600 $3,150 Now, we have allocated Costs 1,200 let’s the cost to allNow, units complete the table. Cost in ending inventory. Sale of Goods Available for table. $9,725 Now, let’s complete the First-In, First-Out Method (FIFO) First-In, Completing Completing the table summarizes the computations just made. Date Beginning Inventory Purchases: Jan. 3 June 20 Sept. 15 Nov. 29 Goods Available for Sale Ending Inventory Cost of Goods Sold Computers, Inc. Mouse Pad Inventory Units $/Unit 1,000 $ 300 150 200 150 5.25 5.30 5.60 5.80 5.90 Total $ 5,250.00 1,590.00 840.00 1,160.00 885.00 1,800 1,200 600 $ 9,725.00 $ 6,575.00 $ 3,150.00 Last-In, First-Out Method (LIFO) Remember: Start Remember: with beginning inventory and then add other purchases until you reach the number of units in ending inventory. Date Beginning Inventory Purchases: Jan. 3 June 20 Sept. 15 Nov. 29 Goods Available for Sale Ending Inventory Cost of Goods Sold Computers, Inc. Mouse Pad Inventory Units $/Unit 1,000 $ 300 150 200 150 5.25 5.30 5.60 5.80 5.90 Total $ 5,250.00 1,590.00 840.00 1,160.00 885.00 1,800 1,200 600 $ 9,725.00 ? ? Last-In, First-Out Method (LIFO) Date D ate Jan. 3 June 20 Sept. 15 Nov. 29 Units Beg. Inv. Purchases End. Inv. 1,000@$5.25 1,000@$5.25 300@$5.30 200@$5.30 150@$5.60 200@$5.80 150@$5.90 1,000 1,200 Cost of Goods Sold 100@$5.30 150@$5.60 200@$5.80 150@$5.90 600 100 Now, we have allocated Costs the cost to all 1,200 units Cost in endingAvailable for Sale of Goods inventory. $6,310 $3,415 Next, let’s Next, let’s complete the complete the $9,725 table. table. Last-In, First-Out Method (LIFO) Last-In, Completing the Completing table summarizes the computations just made. Date Beginning Inventory Purchases: Jan. 3 June 20 Sept. 15 Nov. 29 Goods Available for Sale Ending Inventory Cost of Goods Sold Computers, Inc. Mouse Pad Inventory Units $/Unit 1,000 $ 300 150 200 150 5.25 5.30 5.60 5.80 5.90 Total $ 5,250.00 1,590.00 840.00 1,160.00 885.00 1,800 1,200 600 $ 9,725.00 $ 6,310.00 $ 3,415.00 Importance of an Accurate Valuation of Importance of an Accurate Valuation of Inventory Inventory The Gross Profit Method Determine cost of goods Determine cost of goods available for sale. available for sale. available Estimate cost of goods sold by Estimate cost of goods sold by multiplying the net sales by the multiplying the net sales by the cost ratio. cost ratio. cost Deduct cost of goods sold Deduct cost of goods sold ffrom cost of goods available rom cost of goods available ffor sale to determine ending or sale to determine ending inventory. iinventory. nventory. The Gross Profit Method The In March of 2007, Matrix Company’s In March of 2007, Matrix Company’s inventory was destroyed by fire. Matrix inventory was destroyed by fire. Matrix normal gross profit ratio is 30% of net normal gross profit ratio is 30% of net sales. At the time of the fire, Matrix sales. At the time of the fire, Matrix showed the following balances: showed the following balances: Sales $ 31,500 Sales returns 1,500 Beginning Inventory 12,000 Net cost of goods purchased 20,500 The Gross Profit Method Estimating Inventory The Gross Profit Method Goods Available for Sale: Goods Beginning Inventory Net cost of goods purchased Goods available for sale Less Less estimated cost of goods sold: Sales $ 31,500 Less sales returns (1,500) Net sales $ 30,000 Estimated cost goods sold Estimated Estimated cost ofof goods sold Estimated March inventory loss Step 1 $ 12,000 20,500 $ 32,500 Step 2 × 70% (21,000) $ 11,500 Step 3 The Retail Method The The retail method of estimating inventory requires The retail method of estimating inventory requires The retail of tthat management determine the value of ending hat management determine the value of ending inventory at retail prices. iinventory at retail prices. nventory In March of 2007, Matrix Company’s iinventory was nventory In March of 2007, Matrix Company’s inventory was destroyed by fire. At the time of the fire, Matrix’s destroyed by fire. At the time of the fire, Matrix’s destroyed management collected the following information: management collected the following information: management I nformation for Matrix Company The Retail Method Goods available for sale at cost Goods available for sale at retail Physical count of ending inventory priced at retail $ 32,500 50,000 22,000 The Retail Method Matrix would follow the steps below to estimate Matrix would follow the steps below to estimate their ending inventory using the retail method. their ending inventory using the retail method. their Estimating Inventory The Retail Method a b c d e Goods available for sale at cost Goods available for sale at retail Cost ratio [a ÷ b] Physical count of ending inventory priced at retail Estimated ending inventory at cost [ c × d] $ 32,500 50,000 65% 22,000 $ 14,300 Financial Analysis Measures how quickly a company Measures how quickly a company sells its merchandise inventory. sells its merchandise inventory. Inventory Turnover Rate = Cost of Goods Sold Average Inventory Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2 Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2 A ratio that is low compared to competitors A ratio that is low compared to competitors suggests inefficient use of assets. suggests inefficient use of assets. Financial Analysis Avg. Number of Days to Sell Inventory = Days in the Year Inventory Turnover Measures how many days on Measures how many days on average it takes to sell its average it takes to sell its inventory. inventory. ...
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Lecture 6 Accounting for Inventory (II) - Lecture 6...

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