Ch06_Wey_Fin_6e

Ch06_Wey_Fin_6e - CHAPTER 6 CHAPTER Inventories Financial...

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Unformatted text preview: CHAPTER 6 CHAPTER Inventories Financial Accounting, Sixth Edition Chapter 6 -1 Reporting and Analyzing Inventory Classifying Classifying Inventory Inventory Merchandising Merchandising inventory inventory Manufacturing Manufacturing inventory inventory Chapter 6 -2 Determining Determining Inventory Quantities Quantities Taking a Taking physical inventory inventory Determining Determining ownership of goods goods Inventory Inventory Costing Costing Specific Specific identification identification Cost flow Cost assumptions assumptions Financial Financial statement and tax effects effects Consistent Consistent use use Lower-ofcost-ormarket Inventory Inventory Errors Errors Income Income statement effects effects Balance sheet Balance effects effects Statement Statement Presentation and Analysis and Presentation Analysis Classifying Inventory Merchandising Company OneC lassification: Me rchandiseI nve ntory Manufacturing Company Thre C e lassifications: Raw Mate rials Work in Proce ss Finishe Goods d Re gardle of theclassification, com ss panie re all inve s port ntorie unde C nt s r urre Asse on thebalanceshe t. ts e Chapter 6 -3 Determining Inventory Quantities Physical I nve ntory take for two re n asons: Perpetual System 1. C ck accuracy of inve he ntory re cords. 2. De rm am te ine ount of inve ntory lost (waste raw m rials, d ate shoplifting, or e ploye the m e ft). Periodic System 1. De rm theinve te ine ntory on hand 2. De rm thecost of goods sold for thepe te ine riod. Chapter 6 -4 SO 1 Describe the steps in determining inventory quantities. Determining Inventory Quantities Determining Taking a Physical Inventory Involve counting, we s ighing, or m asuring e kind of inve e ach ntory on hand. Take n, whe thebusine is close or whe busine is slow. n ss d n ss at e of theaccounting pe nd riod. Chapter 6 -5 SO 1 Describe the steps in determining inventory quantities. Determining Inventory Quantities Determining Ownership of Goods Goods in Transit Purchase goods not ye re ive d t ce d. S goods not ye de re old t live d. Goods in transit should beinclude in theinve d ntory of thecom pany t hat has legal title t o thegoods. Le titleis de rm d by the gal te ine terms of sale. Chapter 6 -6 SO 1 Describe the steps in determining inventory quantities. Determining Inventory Quantities Terms of Sale I llustration 6-1 Owne rship of thegoods passe to s t hebuye whe thepublic carrie r n r acce thegoods fromthese r. pts lle Owne rship of thegoods re ains m with these r until thegoods re lle ach t hebuye r. Chapter 6 -7 SO 1 Describe the steps in determining inventory quantities. Determining Inventory Quantities Determining Ownership of Goods Consigned Goods Goods he for saleby oneparty although owne ld rship of thegoods is re taine by anothe party. d r Chapter 6 -8 SO 1 Describe the steps in determining inventory quantities. Inventory Costing Unit costs can be applied to quantities on hand using the following costing methods: S cific I de pe ntification First-in, first-out (FIFO) Last-in, first-out (LIFO) Cost Flow Assumptions Ave -cost rage Chapter 6 -9 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions Cost Flow Assumption does not need to equal Physical Movement of Goods Illustration 6-11 Useof cost flow m thods in m U.S e ajor . com panie s Chapter 6-10 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions Exam ple Young & Crazy Com pany m s thefollowing purchase ake s: 1. Oneite on 2/2/07 for $10 m 2. Oneite on 2/15/07 for $15 m 3. Oneite on 2/25/07 for $20 m Young & Crazy Com pany se oneite on 2/28/07 for $90. What lls m would bethebalanceof e nding inve ntory and cost of goods sold for the m onth e d Fe 2007, assum thecom nde b. ing pany use theFIFO, LIFO, d and Average cost flow assum ptions? Assum a tax rateof 30% e . Chapter 6-11 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “First-In-First-Out (FIFO)” Earliest goods purchase arefirst to besold. d Ofte paralle actual physical flow of m rchandise n ls e . Ge rally good busine practiceto se olde units first. ne ss ll st Chapter 6-12 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “First-In-First-Out (FIFO)” Inventory Balance = $ 45 Purchase on 2/25/07 for $20 Purchase on 2/15/07 for $15 Purchase on 2/2/07 for $10 Chapter 6-13 Young & Crazy Company Income Statement For the Month of Feb. 2007 Sales Cost of goods sold Gross profit Expenses: Administrative Selling Interest Total expenses Income before tax Taxes Net Income $ 90 0 90 14 12 7 33 57 17 $ 40 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “First-In-First-Out (FIFO)” Inventory Balance = $ 35 Purchase on 2/25/07 for $20 Purchase on 2/15/07 for $15 Purchase on 2/2/07 for $10 Chapter 6-14 Young & Crazy Company Income Statement For the Month of Feb. 2007 Sales Cost of goods sold Gross profit Expenses: Administrative Selling Interest Total expenses Income before tax Taxes Net Income $ 90 10 80 14 12 7 33 47 47 14 $ 33 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “Last-In-First-Out (LIFO)” Latest goods purchase arefirst to besold. d S ldomcoincide with actual physical flow of m rchandise e s e . Exce ptions includegoods store in pile such as coal or hay. d s, Chapter 6-15 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “Last-In-First-Out (LIFO)” Inventory Balance = $ 45 Purchase on 2/25/07 for $20 Purchase on 2/15/07 for $15 Purchase on 2/2/07 for $10 Chapter 6-16 Young & Crazy Company Income Statement For the Month of Feb. 2007 Sales Cost of goods sold Gross profit Expenses: Administrative Selling Interest Total expenses Income before tax Taxes Net Income $ 90 0 90 14 12 7 33 57 17 $ 40 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “Last-In-First-Out (LIFO)” Inventory Balance = $ 25 Purchase on 2/25/07 for $20 Purchase on 2/15/07 for $15 Purchase on 2/2/07 for $10 Chapter 6-17 Young & Crazy Company Income Statement For the Month of Feb. 2007 Sales Cost of goods sold Gross profit Expenses: Administrative Selling Interest Total expenses Income before tax Taxes Net Income $ 90 20 70 14 12 7 33 37 11 $ 26 26 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “Average Cost” Allocate cost of goods availablefor saleon thebasis of s weighted average unit cost incurre d. Assum s goods aresim in nature e ilar . Applie we s ighte ave unit cost to theunits on hand to d rage de rm cost of thee te ine nding inve ntory. Chapter 6-18 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “Average Cost” Inventory Balance = $ 45 Purchase on 2/25/07 for $20 Purchase on 2/15/07 for $15 Purchase on 2/2/07 for $10 Chapter 6-19 Young & Crazy Company Income Statement For the Month of Feb. 2007 Sales Cost of goods sold Gross profit Expenses: Administrative Selling Interest Total expenses Income before tax Taxes Net Income $ 90 0 90 14 12 7 33 57 17 $ 40 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions “Average Cost” Inventory Balance = $ 30 Purchase on 2/25/07 for $20 Purchase on 2/15/07 for $15 Purchase on 2/2/07 for $10 Chapter 6-20 Young & Crazy Company Income Statement For the Month of Feb. 2007 Sales Cost of goods sold Gross profit Expenses: Administrative Selling Interest Total expenses Income before tax Taxes Net Income $ 90 15 75 14 12 7 33 42 12 $ 30 30 SO 2 Explain the accounting for inventories and SO apply the inventory cost flow methods. apply Inventory Costing – Cost Flow Inventory Assumptions Assumptions Comparative Financial Statement Summary FI FO Ss ale Ave rage LI FO $90 $90 C of goods sold ost 10 15 20 Gross profit 80 75 70 Adm & se in. lling e nse xpe 33 33 33 I ncom be taxe e fore s 47 42 37 I ncom tax e nse e xpe 14 12 11 Ne incom t e $33 $30 $26 I nve ntory balance Chapter 6-21 $90 $35 $30 $25 LO 3 Explain the financial effects of the inventory cost flow assumptions. Inventory Costing – Cost Flow Inventory Assumptions Assumptions In Period of Rising Prices, FIFO Reports: FI FO Ss ale Ave rage LI FO C of goods sold ost 10 15 20 Gross profit 80 75 70 33 33 33 47 42 37 I ncom tax e nse e xpe 14 12 11 Ne incom t e $33 $30 $26 I nve ntory balance Chapter 6-22 $90 I ncom be taxe e fore s Highest $90 Adm & se in. lling e nse xpe Lowes t $90 $35 $30 $25 LO 3 Explain the financial effects of the inventory cost flow assumptions. Inventory Costing – Cost Flow Inventory Assumptions Assumptions In Period of Rising Prices, LIFO Reports: FI FO Ss ale Ave rage LI FO C of goods sold ost 10 15 20 80 75 70 33 33 33 I ncom be taxe e fore s 47 42 37 I ncom tax e nse e xpe 14 12 11 Ne incom t e $33 $30 $26 I nve ntory balance Chapter 6-23 $90 Adm & se in. lling e nse xpe Lowes t $90 Gross profit Highest $90 $35 $30 $25 LO 3 Explain the financial effects of the inventory cost flow assumptions. Inventory Costing – Cost Flow Inventory Assumptions Assumptions Review Question In a pe of inflation, thecost flow m thod that re riod e sults in the lowe incom taxe is the st e s : a. FI FO m thod. e b. LI FO m thod. e c. ave cost m thod. rage e d. gross profit m thod. e Chapter 6-24 LO 3 Explain the financial effects of the inventory cost flow assumptions. Inventory Costing Using Cost Flow Methods Consistently Me thod should beuse consiste d ntly, e nhance com s parability. Although consiste is pre rre a com ncy fe d, pany m changeits ay inve ntory costing m thod. e I llustration 6-14 Disclosure of change in cost flow method Chapter 6-25 LO 3 Explain the financial effects of the inventory cost flow assumptions. Inventory Costing Lower-of-Cost-or-Market Whe thevalueof inve n ntory is lowe than its cost r C panie can “writedown” theinve om s ntory to its m t arke valuein thepe in which thepricede riod clineoccurs. Marke value= Re t place e Cost m nt Exam of conservatism. ple Chapter 6-26 SO 4 Explain the lower-of-cost-or-market SO basis of accounting for inventories. basis Inventory Costing Lower-of-Cost-or-Market Exercise: Alou ApplianceC nte accum er ulate thefollowing cost and s m t data at De m r 31. arke ce be I nvent ory Cost Market Lower of Cat egories Dat a Dat a Cost or Market $ 12, 000 $ 1 2, 100 $ 12,000 9, 000 9 , 700 14, 000 1 2, 800 9,000 12,800 $ 33,800 Cameras Camcorders VCRs Com putethelowe r-of-cost-or-m t valuation for thecom arke pany’s total inve ntory. Chapter 6-27 SO 4 Explain the lower-of-cost-or-market SO basis of accounting for inventories. basis Inventory Errors CmC : om on ause Failureto count or priceinve ntory corre ctly. Not prope re rly cognizing thetransfe of le titleto goods r gal in transit. Errors affe both theincom state e and balanceshe t. ct e m nt e Chapter 6-28 SO 5 Indicate the effects of inventory errors on the financial statements. Inventory Errors Income Statement Effects I nve ntory e rrors affe thecom ct putation of cost of goods sold and ne t incom . e I llustration 6-16 I llustration 6-17 Chapter 6-29 SO 5 Indicate the effects of inventory errors on the financial statements. Inventory Errors Income Statement Effects Inve ntory e rrors affe thecom ct putation of cost of goods sold and ne t incom in two periods. e An e in e rror nding inve ntory of thecurre pe will havea nt riod reverse effect on net income of the next accounting period. Ove thetwo ye thetotal ne incom is corre be r ars, t e ct causethee rrors offset each other. Thee nding inve ntory de nds e ly on theaccuracy of taking and pe ntire costing theinve ntory. Chapter 6-30 SO 5 Indicate the effects of inventory errors on the financial statements. Inventory Errors 2008 I llustration 6-18 2009 I ncorrect Correct I ncorrect Correct $ 80, 000 $ 80, 000 $ 90, 000 $ 90, 000 Beginning invent ory 20, 000 20, 000 12, 000 15, 000 Cost of goods purchased 40, 000 40, 000 68, 000 68, 000 Cost of goods available 60, 000 60, 000 80, 000 83, 000 Ending invent ory 12, 000 15, 000 23, 000 23, 000 Cost of good sold 48, 000 45, 000 57, 000 60, 000 Gross prof it 32, 000 35, 000 33, 000 30, 000 Operat ing expenses 10, 000 10, 000 20, 000 20, 000 $ 22, 000 $ 25, 000 $ 13, 000 $ 10, 000 Sales N et income Com d incom for 2-ye bine e ar pe is corre riod ct. Chapter 6-31 ($3,000) Net Income understated $3,000 Net Income overstated SO 5 Indicate the effects of inventory errors on the financial statements. Inventory Errors Balance Sheet Effects Effe of inve ct ntory e rrors on thebalanceshe t is de rm d by using e te ine t hebasic accounting e quation:. I llustration 6-16 I llustration 6-19 Chapter 6-32 SO 5 Indicate the effects of inventory errors on the financial statements. Statement Presentation and Analysis Inventory turnover m asure thenum r of tim s on ave e s be e rage t heinve ntory is sold during thepe riod. Inventory Turnover C of Goods S ost old = Ave I nve rage ntory Days in inventory m asure theave num r of days e s rage be inve ntory is he ld. Days in Ye (365) ar Days in = Inventory I nve ntory Turnove r Chapter 6-33 SO 6 Compute and interpret the inventory turnover ratio. Statement Presentation and Analysis BE6-9 At De m r 31, 2008, thefollowing inform ce be ation was available f or J. Graff Com pany: e nding inve ntory $40,000, be ginning inve ntory $60,000, cost of goods sold $270,000, and sale re nue$380,000. s ve Calculateinve ntory turnove and days in inve r ntory f or J. Graff C pany. om Inventory Turnover Days in Inventory Chapter 6-34 $270,000 = 5.4 = 67.59 days ($60,000 + 40,000) / 2 365 5.4 SO 6 Compute and interpret the inventory turnover ratio. ...
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