Lecture12 - Lecture 12 Inventory Accounting 1 Key Issues 1)...

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1 Lecture 12 Inventory Accounting
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2 Key Issues 1) When should the cost of goods sold (used) be determined? 2) How should the inventory be valued at acquisition? 3) How should the inventory be valued subsequent to acquisition? 4) What costs are included in inventory?
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3 Basic Inventory Accounting Journal Entries Acquisition Inventory XXX Cash (Accounts Payable) XXX Sale (use) Cost of Goods Sold (Expense) YYY Inventory YYY
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4 Since historical cost is used as the basis for valuing inventories, then identical goods purchased at different times may have different values associated with them. Cost of Beginning Inventory + Cost of Acquisitions = Cost of Ending Inventory + Cost of Goods Sold/Used
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5 Inventory T-Account Inventory Cost of Acquisitions Cost of Beginning Inventory Cost of Goods Sold / Used Cost of Ending Inventory Cost of goods available for sale While, in general, the quantity of goods sold and the quantity of goods held in the ending inventory are known, the cost of goods sold and the cost of the ending inventory must be determined
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6 If there are identical items included in goods available for sale that were purchased at different costs, then we need to answer the following question: Which costs are to be associated with the ending inventory and which are to be associated with the goods sold? How does the answer to this question affect financial reporting?
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7 Example Date Transaction Quantity Cost/unit Selling Price/unit Year 1 1/1/1 Beginning Inv. 100 0.20 12/30/1 Purchase 100 0.45 12/31/1 Sale 70 0.70 Year 2 3/1/2 Purchase 20 0.50 12/2/2 Sale 130 0.80 12/31/2 Purchase 40 0.60 Year 3 12/30/3 Purchase 20 0.65 12/31/3 Sale 20 0.90
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8 How is the cost of goods sold to be determined? How is the cost of the goods remaining after the sale to be determined? First-in, first-out Last-in, first-out Weighted average Specific Cost FIFO is the most common inventory valuation method in the US.
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9 FIFO The cost of goods sold is derived using relatively older costs . The inventory costs are those which were incurred later in the period and, therefore, are more current relative to the end of the period (the date of the financial reports).
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10 FIFO Cost of Goods Sold Cost of Ending Inventory Year 1 Year 2 Year 3 70 x .20 = 14 30 x .20 = 6 100 x .45 = 45 130 51 20 x .50 = 10 30 x .20 = 6 100 x .45 = 45 130 51 20 x .50 = 10 40 x .60 = 24 60 34 40 x .60 = 24 20 x .65 = 13 60 37
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11 Thus, using FIFO, the reported income would be: FIFO Sales Revenue COGS FIFO Income
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This note was uploaded on 05/20/2010 for the course ACCT 101 taught by Professor Briancadman during the Spring '10 term at Penn College.

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Lecture12 - Lecture 12 Inventory Accounting 1 Key Issues 1)...

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