Chapter 8

Chapter 8 - CHAPTER 8 - INVENTORIES: PART I 1.InvenTory...

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Unformatted text preview: CHAPTER 8 - INVENTORIES: PART I 1.InvenTory Issues 2.Physical Goods Included in InvenTory 3.CosTs Included in InvenTory 4.CosT Flow Assumptions 5.LIFO Special Issues 6.Basis for SelecTion 1.InvenTory Issues a. Classification — Two Types: 1) ITems held for resale (Merchandiser), or 2) Goods To be used in The producTion of goods To be sold (ManufacTurer). Merchandiser - one invenTory accounT (Merchandise InvenTory) ManufacTurer — Three accounTs - 1) rams-rmaTe-rials, 2) work in process, and 3) finished goods. b. ConTrol - Two sysTems for mainTaining invenTory records: 1) PerpeTual sysTem, and 2) Periodic sysTem. PerpeTual SysTem: o Purchases of merchandise are debiTed To InvenTory. o FreighT—in is debiTed To InvenTory. Purchase reTurns and allowances and purchase discounTs are crediTed To InvenTory. 0 COST of goods sold is debiTed and InvenTory is crediTed for each sale. ' CHAPTER 8 - INVENTORIES: PART I o Subsidiary records show quam‘i’ry and cos’r of each Type of inventory on hand. 7 o The perpe fua/ in ven Tory sysfem pro vides a can finuous record of Inventory and 6057‘ of Goods Sold. InvenTor CosT of Goods Sold Discoun’rs Refurns Allowances Purchases FreighT-in Ending alance PerpeTuaE Invenfory Periodic Sys’rem: o Purchases of merchandise are debited To Purchases. o Ending InvenTory defermined by physical coum’. InvenTor CosT of Goods Sold ’l’ififldfi at“ 2m 1'» r Purchases (1/5)? L CHAPTER 8 - INVENTORIES: PART I o CalculaTion of CosT of Goods Sold: Beginning invenTory $ 100,000 + Purchases, neT 800 000 = Goods available for sale QUOst - Ending invenTory 125 000 {3;}??? 2 COST of goods sold 7 AdJ'USTing EnTr'y: InveiaTQ fit) i c. ValuaTion oT InvenTor-ies Companies musT allocaTe The cosT of all The goods available for sale (or' use) beTween The goods ThaT were sold or used and Those ThaT are sTill on hand. ValuaTion requires: a The physical goods (goods on hand, goods in TransiT, consigned goods, special sales agreemenTs). o The cosTs To include (producT vs. period cosTs). - The cosT flow assumpTion (FIFO, LIFO, Average cosT, Specific IdenTificaTion, ReTail, eTc.). CHAPTER 8 - INVENTORIES: PART I Physical Goods - A company should record invenTory purchases when iT obTains legal TiTle To The goods. Special consideraTions: ' General Rule: InvenTory is buyer's when received, excepT: o FOB shipping poinT — Buyer's aT Time of delivery To common carrier 0 ConsignmenT goods — Seller's, noT buyer's - Sales wiTh buybacks =- Seller‘s, noT buyer's a Sales wiTh high raTes of reTurns - Buyer's, if you can esTimaTe reTurns 0 Sales on insTallmenTs» Buyer's, if you can esTimaTe collecTabiliTy. FOB DesTinaTion - TiTle passes To buyer when goods are Cl‘l' desTinaTion - Goods in TransiT are The “viii-'2? invenTory of The Mesa 0 Seller records The sale ‘i when goods are {7? if". weir-i3" by The FOB Shi ping PoinT o TiTle passes To buyer when goods are fihig Dec: 0 Goods in TransiT are invenTory of Thebviéi’fi‘s’” - Seller records The sale when goods are To The {WW p v ’1 ‘. .i a _ w" beg m‘f‘ 1“ PL”- _“ €711" iij mg; _ ’1”; “2:; CHAPTER 8 — INVENtoRIEs: PART I we It! . \Ox‘“ ‘1 knights | \J d. Inventory Errors Ending Inventory Misstated ’1 [l . y mi waéfigmfifli Balance Sheet Inventory Understated Overstated ; . Retained Understated Net Income Understated Earnings £59“th it?) in! ~ 6W 7 n {ii—{3:3 i‘vié‘a h? \r .3 \l :3 v Working ’ lgnderstated capital Kw a Current Ratigfgéilnderstated g The effect of an error on net income in one year (2010) will It be counterbalanced in the next (2011); however, the income statement will be misstated for both years. _. E.g. Assume that Revenue is $100,000 per year, 2010 beginning inventory is $25,000, and purchases are $45,000 per year, 2010 ending inventory is incorrectly reported at $20,000 (should be $30,000), but 2011 ending inventory is correctly stated at $40,000. Compute Net income for each year for the following scenarios. 2010 2011 EE- 714* . ,1 \ , 'h,» w r .«gnin: _4 A 2 _ F,” _ _ U W l X T {:5 “:3 £ {{3- m it“??? \f £93133 3 CHAPTER 8 — INVENTORIES: PART I Purchases and Inventory Missfa'red Income Sfo’remen’r Invenfory Undersfa’red COGS No Effec’r Retained No Effec’r Nef Income No Effec’r Earlmlilgs 003} ff { _ F.— {29535; Working No Effecl’ m :5 w’ ' JVOO 0 25?»; 3 IOKflfl—E lgw if” V‘, Currenf Rafio Overs’ra’red Accounfs Undersfafed Payable E.g. The following journal enfry was not recorded: Dr. Invenfory $10,000 Cr. Accoun‘rs Payable $10,000 Compu‘re The effecf on Cost of Goods Sold: — CHAPTER 8 - INVENTORIES: PART I 1. After a physical count of inven’rory on December 31, 2010, The Know—I’r-All Company de‘l‘ermined Tho’r ending inven’rory was $200,000. They had Two shipmen’rs in TronsiT no’r included in The physical counl’. The firs’r was may $15,000 of goods mow-IT—All pggghgggd fob. shipping e poin’r and $22,000 (cos?) of goods sold fob. des’rina’rion poin’r. Who’r is The correcf amounT of ending inventory Know—IT—All should report of December 31, 2010? e: cow/"2‘? .5 l”): m J ( M1 ._ , , ' .. r' x: n. - ; N - r. m“ m. n x _‘ r or -. mas/‘11}. “3635’; §§’§ '1 v .4 s 31:”: [new germ 01:?“ c; “’5 _i_‘ ~ “ wng gin-Ag, “" lT’fiKfi’lG‘y’} e- fifiif’j g 5;, 3f: 5.“, game‘s-air,“ : 3 «.va w"\,. x... unifirwgmkg‘j 6'1 000m £32227, CHAPTER 8 — INVENTORIES: PART I erchandise purchased on accounT in 2009 was noT recorded unTil 2010, when The company‘s bookkeeper received an invoice for $5,430. The shipmenf had arrived and was counTed in physical invenTory aT The end of 2009. WhaT is The effecT of This error on currenT asseTs, currenT liabiliTies, neT income, and reTained earnings for 2009? CHAPTER 8 - INVENTORIES: PART I 3. Goods cosTing $22,000 were shipped f.o.b. shipping poinT by a supplier on December 28, 2009. The company We 9:“ received The invoice and recorded ET on December 29: rjfifif” however, The goods were noT included in The physical counT of invenTory since They were in TronsiT. WhoT is The effecT of This error on currenT osseTs, currenT liabiliTies, neT income, and reToined earnings for 2009? @1920]? km 1T1 es? “"1” “r CC)th 0 0H ‘ aneo Wflnéy'n‘wa—FVN‘ mm W mm”.— “21 N53,. €.$I’E”§‘?"ifl In if“ 2'" :n—‘K ! 75”? ago; 1w.- “ 7 7 K if} a? 2:; T '"i- “ 1‘ if“ . ; \dfitfihgfiu‘} 0k Z 0er CL : name. CO N1 L WW?” 1““ ~?:%"T”c:}:i” :‘e l U o. :3: an“ e» T e2? ii CHAPTER 8 — INVENTORIES: PART I 4. Cioudy Day En’rer'prises reporfed cos‘r of goods sold for 2010 ofm‘m:$in1fiv,b400,000 and re’rained earnings (offer closing 2010 neT income) of $5,200,000 aT December 31, 2010. Cloudy Day la’rer' discovered ThaT endiflg inven’ror'y a‘r December 31, 2009 was oversTaTed $110,000 and “ending invenfor'y a’r December 31, 2010 was over's’ra’red by @3345000. Wha’r are The correc’r amounts for cost of goods sold and ending re‘famed earnings for 2010? @PGWLEQS m 9x r‘ v. a .. 030 3 0 m g, ’s'sgv ‘33-} :,.j\. 1-...) ,‘.,.W‘-w_-_V.~ j, .\ 7,: . I: _ 1’ g m 47 . s I ‘ M o s » voided a,” ,0 r . ; Qua-‘».:m\u - s -- r7 »—- 7-» “+1 = _. r ' ~ ‘ a “ ‘w’w‘QvN-fi‘ww Q15: fibfiuoggg g LEGCO O “Fay: m [’1 Keg/«‘1 g 035“; {it E 7 J .M.‘ ,«w—‘gq 9‘4"?” “"2 21.3 was“; r . . 0, w @551”?! Jr 1391/, WW 3 {<ng 9 ‘ ' g ,2 r 1-» ' Safari}; ‘23"12‘} 4‘- .-' “a 5'3 " . HO,on “mow HG;— QQ no.000 a m‘ n; . w" M" m +913 1'00 an:qu ; avg-J 3 L: ff» 1:65} “hi 97'“: Cigf¥€§fi KER. r «‘WLEA X. ._ ,. V" :- W§H§1ud<yj sow 10 CHAPTER 8 — INVENTORIES: PART I 3. Costs Included in InvenTory \/e ProducT CosTs — costs directly connected with bringing The goods To The buyer's place of business and converting such goods To a salable condiTion (i.e., direct materials, direcT labor, and overhead). X 0 Period CosTs - costs incurred during an accounTing period 1'0 support The activities of The firm, {pi connected wiTh Mgoducfion process, and result from The purchase or GEE? something ThaT was consumed during The period (e.g., selling, general, and administrative expenses). — noT included in invenTory a Purchase Discounts - Gross vs. NeT MeThod Gross Method vs. NeT MeThod gee m i m, -i3€:?’:9£fii’i£ ears?“ 4 .J i I Purchase cost $20,000, terms 2I10, net 30: s i N Inventory 20,000 I inventory 19,600 Accounts payable 20,000 1 Accounts payable 19,600 l Invoices oi$15,000 are paid within discount period: I Accounts payable 15,000 | Accounts payabie 14,700 Inventory Tao-oases, 300 | Cash 14,700 Cash 14,700 i I Invoices of $5,000 are paid after discount period: Accounts payable 5,000 | Accounts payabie 4,900 Cash 5,000 |- Purchase discount East 100 - : LCash 5,000 it A P». " HS {I {pavem— igigz, _, ‘ i' ::.'x -§ "1, w”, J, fi-r)‘ 9., i i '2' " r. I" \J ‘ 1 1 CHAPTER 8 - INVENTORIES: PART I 4. Cost Flow Assumptions 0 These are methods for allocating “gotcal inventory acquisition costs between goods sold (income 5%tement) and goods remaining (bafificgiheet) 0 These are also the valuation methods for accounting purposes and may not be realistic given physical flow. The method adopted should be one that clearly reflects periodic net income, not necessarily physical flow. 1. Specific identification - usually used only when inventory consists of a few large, high-end items (ex: yachts, custom furniture) Least Common 2. Average cost - assigns same average cost to each unit. This is a weighted average if using periodic anda movin . . 5 ’ ,fi 7-9 4.. average If usmg perpetual APE-(192%? 59-? ii» '- «3r 3. FIFO - first—ih—iirst—out — assumes the oldest unitsfih inventory are sold first. Periodic and perpetual amounts are the same for FIFO. Most Common w 4. LIFO - last~in-—first—out - assumes the newest units in inventory are sold first. Periodic and perpetual amounts are nof the same for LIFO. W Example - TV Store C_os_i; Beginning Inventory - TV#1 $250 Purchase TV#2 290 TV#3 3_O_O_ Goods Available for Sale $840 12 a 5 » a ,L 7. M. If 9ng y 33,;- ,3: - yum, beta, .1“: Average cos’r per TV (840/3) $280 Sales a 1 TV $450 LIFO Average Cost Iwfiflflm If average sales prices based on.150°/o of Le lacemen cost, ff“ m... , which me’rhod be’r’rer ma‘rches revenue To cosT of goods sold? EOOxLéfiqgfl - m COQCE; Wzflfféfi ‘ .M 3-13 .51. "my 5. LIFO Special Issues W rug-:5 44? Lisa; Vgfifi m -- a, LIFO Reserve “ Many companies use / 1» LIFO for Tax and exTernal financial reporting purposes 0 FIFO, average COST, or s’randard cosT sys’rem for infernal reporTing purposes (g3? a; «- LIFO Reserve is The difference between The inven’rory meThod used for infernal repor‘ring purposes and LIFO. 13 CHAPTER 8 - INVENTORIES: PART I 0 Example: ewdlmv FIFO‘ value per books $160,000 , IQQ-V'K LIFO value 145 000 e LIFO Reserve $ 3513(1) Journal entry "to reduce Inventor-y 1'0 LIFO: Nl‘v"“ls§‘--3 f @0653» l5 , oaa / 'P‘llO Wall/“2:6 “l6 K“££t§%.)C-c-z é k} a i; 3-“ {‘53 L f y .1 5‘ ix i/"Ja'wu" . x ‘ x .1 9 .‘s Ix JV . GYBI‘S We; ‘2‘ 5 * '= ‘ “ " If you purchase more Than you sell, you add ano‘lher layer in LIFO inventory -= you have To keep Track of each layer'. Example: 2002 2003 2004 W9 ‘l‘v‘v’ F?- : o; 3mm Purchases 120 uni’rs ' 150 uni’rsq 2 160 uni‘rs @ $5 @ $10 @ $15 Sales 9533230100 uni’rs 120 uniTs 120 unifs @$1O @ $20 90 15% \v Compute LIFO Ending Inven'ror-y Hazind COGS for 2002. 5: 90x51 :laa $03 14 aoaa CHAPTER 8 - INVENTORIES: PART I Campus-m LIFO Ending Invem'ory and COGS far 2003. A? l 1““ r .,_ . _ : n ‘. ,m fl { “‘“‘ 3 *‘“ F‘ s A. .7 ‘~. r’ ‘: _,_., 2‘__ f" V ’1 Mn 4 K- Compm‘a LIFO Ending Imanfory and C065 far 2004. U) (5% 3' ’f 2w 1 ., my » u z x» Q3 ‘ €53 Ki £28 a may) ,3; m my; \/ ,_ Cir, fl”): 1:: #3,", ..= 15 CHAPTER 8 -- INVENTORIES: PART I e. LIFO Liquida‘i‘ion Older, low cos’r invenTory is sold resuh‘ing in a lower' cos’r of goods sold, higher ne1° income, and higher Taxes. Assume Then“ for 2005 The following fads: low}. 350 $13 _ Purchases 60 unth @$ 20/ um'l” Sales 120 units @25/uniT ~3- i‘ompufe LIE-EFO Endifig Invenfor'y and floES for- 2005. a ‘a‘mr‘ it; d‘w A f- »«q— A‘ : . H M} X 90 : EGG; m H lava y; w‘ ‘31, l .-—»- ,w-x ’iv QC) ” to M does 6%": 20x9 . 4 “MW wwmm P 10' 7% lg M. Q61; En? H _16 d. i l . .3 e. CHAPTER 8 — INVENTORIES: PART I Comparison of LIFO Approaches o Specific-goods LIFO — cosTing goods on a uniT basis is expensive and Time consuming. ‘ i Q?" r" ‘ 3.»: =1 ‘- \ U" i m‘ y a?“ b l ’ 63(0 a? x . 5,». - Specific—goods Pooled LIFO approach 0 reduces record keeping and clerical cosTs. o more difficulT To erode The layers. 0 using quanTiTies as measuremenT basis can lead To unTimely LIFO liquidaTions. ies‘. ,2, Dollar—value LIFO 0 Changes in a pool are measured in Terms of ToTal dollar value, noT physical quanTiTy. o AdvanTage: o Broader range of goods in pool. 0 PermiTs replacemenT of goods ThaT are similar. 0 Helps proTecT LIFO layers from erosion. f' ‘-s J 17 CHAPTER 8 - INVENTORIES: PART I 1‘. Advantages and Disadvantages of LIFO Advantages Disadvantages I 0 Matching 0 Reduced earnings 0 Tax 7 0 Inventory Benefits/Improved understated COSh Flow doeen‘i 0 Future Earnings 0 Physical Flow Hedge o Involuntary : Liquidation/Poor Buying habits 6. Basis for selection of Inventory Method LIFO is generally preferred: 7 1. if selling prices are increasing faster than costs and 2. if a company has a fairly constant “base stock." LIFO is not appropriate: 1. if prices tend to lag behind costs, 2. if specific identification traditionally used, and 3. when unit costs tend to decrease as production increases. 18 $25215! CHAPTER 8 - INVENTORIES: PART I Remember to: 1. Read the textbook actively before each class or otherwise read after each lecture. Make a list of questions to ask in class. 2. After class, do these problems: a. in-class problems from these notes, b. the Wiley Plus recommended assignments, and c. the extra exercises posted on Moodle. Prepare for the next quiz - to be announced in class. 4. Keep up with these assignments each week, and try not to fall behind. w 19 413%....” aw, -‘ " 3“ , . .|, , 23%» ' ‘ .. _£0erannuaxpggq ?;,,‘1,a., ,7 - {s/m r'fi _,§Q_flC/hfl 5 a? r" A ._ _. ._.::th'émfiWWthéugjim._m_Em“ 7 ‘ ’ __ . r. . . W \m .3 f - IE 1::- int. KN a k d“! .. .7 r. r“, "7777..., W "77",, iriflkriifliwk ,- if" 7 “VA - r 1- Hum _,.. ._ _, ,.. .,.,. .. -_.._ ._... _. .... _._ . ...
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This note was uploaded on 02/27/2012 for the course ECON 2035 taught by Professor Stahl during the Fall '08 term at LSU.

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Chapter 8 - CHAPTER 8 - INVENTORIES: PART I 1.InvenTory...

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