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					Chapter 9         Power Notes
        Inventories


             Learning Objectives
  1. Internal Control of Inventories
  2. Effect of Inventory Errors                  C9
  3. Inventory Cost Flow Assumptions
  4. Perpetual Inventory Costing Methods
  5. Periodic Inventory Costing Methods
  6. Comparing Inventory Costing Methods
  7. Inventory Valuation Other Than Cost
  8. Balance Sheet Presentation of Merchandise
  9. Estimating Inventory Cost
  10. Financial Analysis and Interpretation

                                                 C9 - 1
Chapter 9              Power Notes
          Inventories


   Slide # Power Note Topics
        3   • Inventory Control and Relationships
        7   • Perpetual Inventory Accounting
       23   • LIFO and FIFO Cost Flow Assumptions
       31   • Inventory at Lower-of-Cost-or-Market
       33   • Retail and Gross Profit Methods
       37   • Inventory Turnover Ratio



  Note: To select a topic, type the slide # and press Enter.
                                                               C9 - 2
Why is Inventory Control Important?

   Inventory is a significant asset and for many
    companies the largest asset.
   Inventory is central to the main activity of
    merchandising and manufacturing companies.
   Mistakes in determining inventory cost can
    cause critical errors in financial statements.
   Inventory must be protected from external
    risks ( such as fire and theft) and internal fraud
    by employees.




                                                         C9 - 3
   Inventory Costs and Relationships

                                        LIABILITIES
   Merchandise            ASSETS         OWNER’S
    Inventory                             EQUITY

                                          Net Income

     Cost of               COSTS &      REVENUES
    Mdse. Sold            EXPENSES



If merchandise inventory is . . . . . . . overstated
Cost of merchandise sold is . . . . . . understated
Gross profit and net income are . . . overstated
Ending owner’s equity is . . . . . . . . . overstated

                                                        C9 - 4
   Inventory Costs and Relationships

                                             LIABILITIES
   Merchandise              ASSETS           OWNER’S
    Inventory                                 EQUITY

                                              Net Income

     Cost of                COSTS &          REVENUES
    Mdse. Sold             EXPENSES



If merchandise inventory is . . . . . . . understated
Cost of merchandise sold is . . . . . . overstated
Gross profit and net income are . . .        understated
Ending owner’s equity is . . . . . . . . .   understated

                                                           C9 - 5
      Merchandising and Inventory

   Merchandising involves selling inventory.
   Inventory is usually an important asset.
   Inventory must be accounted for periodically
    or perpetually.
   Traditional periodic method is often being
    replaced by perpetual inventory accounting.




                                                   C9 - 6
Advantages of Using Perpetual Inventory

    Continuous determination of inventory value
    Continuous determination of gross profit
    Affordable with computers, scanners, and bar
     codes on most products
    Perpetual inventory accounting provides
     management controls.
    Managers know which items are selling fastest
     and the profit margin on those items.




                                                     C9 - 7
    Perpetual Inventory Costs
 Inventory cost data to demonstrate
  FIFO and LIFO Perpetual Systems
Item 127B           Units   Cost   Price
Jan. 1 Inventory     10     $20
     4 Sale
     Cost of          7            $30
   10
  Mdse.Purchase
         Sold         8      21
   22 Sale            4             31
   28 Sale            2             32
   30 Purchase       10      22

   Sale price assumptions are added to
   demonstrate journal entries and ease
   of calculating gross profit.

                                           C9 - 8
                 FIFO Perpetual Inventory Account
 Item 127B

                Purchases           Cost of Mdse. Sold        Inventory Balance

                  Unit    Total            Unit    Total             Unit Total
Date     Qty.     Cost    Cost     Qty.    Cost    Cost       Qty.   Cost Cost
Jan. 1                                                         10      20     200
     4                               7       20      140        3      20      60

                         The sale of 7 units leaves a balance of 3 units.




                                                                            C9 - 9
                 FIFO Perpetual Inventory Account
 Item 127B

                Purchases       Cost of Mdse. Sold      Inventory Balance

                 Unit   Total          Unit   Total             Unit Total
Date     Qty.    Cost   Cost    Qty.   Cost   Cost       Qty.   Cost Cost
Jan. 1                                                   10      20     200
     4                           7       20     140       3      20      60
   10      8       21   168                               3      20      60
                                                          8      21     168

            Because the purchase price of $21 is different than the
            cost of the previous 3 units on hand, the inventory
            balance of 11 units is accounted for separately.




                                                                      C9 - 10
              FIFO Perpetual Inventory Account
 Item 127B

             Purchases         Cost of Mdse. Sold         Inventory Balance

               Unit   Total            Unit    Total               Unit Total
 Date Qty.     Cost   Cost     Qty.    Cost    Cost       Qty.     Cost Cost
Jan. 1                                                     10       20     200
     4                          7        20      140        3       20      60
   10    8      21    168                                   3       20      60
                                                            8       21     168
   22                           3        20       60
                                1        21       21        7       21     147

                         Of the 4 units sold, 3 come from the
                         first units in (FIFO) at a cost of $20.


                                                                         C9 - 11
              FIFO Perpetual Inventory Account
 Item 127B

             Purchases         Cost of Mdse. Sold       Inventory Balance

               Unit   Total            Unit   Total               Unit Total
 Date Qty.     Cost   Cost     Qty.    Cost   Cost       Qty.     Cost Cost
Jan. 1                                                   10        20     200
     4                          7        20     140       3        20      60
   10    8      21    168                                 3        20      60
                                                          8        21     168
   22                           3        20      60
                                1        21      21        7       21     147
   28                           2        21      42        5       21     105

                              Sold 2 units from the 7 units on
                              hand. No allocation is necessary.

                                                                        C9 - 12
               FIFO Perpetual Inventory Account
 Item 127B

                Purchases          Cost of Mdse. Sold     Inventory
Balance
               Unit   Total           Unit    Total            Unit Total
 Date Qty.     Cost   Cost    Qty.    Cost    Cost      Qty.   Cost Cost
Jan. 1                                                  10      20     200
     4                         7        20     140       3      20      60
   10     8     21     168                               3      20      60
                                                         8      21     168
   22                          3        20      60
                               1        21      21       7      21     147
   28                          2        21      42       5      21     105
   30     10    22     220                               5      21     105
                                                        10      22     220
Totals    18          $388    13              $263      15            $325

                                                                     C9 - 13
                 FIFO Perpetual Inventory Account
 Item 127B

                Purchases        Cost of Mdse. Sold    Inventory Balance

                  Unit   Total          Unit   Total           Unit Total
Date     Qty.     Cost   Cost    Qty.   Cost   Cost     Qty.   Cost Cost
Jan. 1                                                   10     20     200
     4                            7       20     140      3     20      60
   10      8       21     168                             3     20      60
                                                          8     21     168
   22                             3       20      60
                                  1       21      21      7     21     147
   28                             2       21      42      5     21     105
   30     10       22     220                             5     21     105
                                                         10     22     220
Totals    18             $388    13            $263      15           $325

                                                                     C9 - 14
 FIFO Perpetual Inventory Accounting

 Date             Description           Debit     Credit

Jan. 31 Accounts Receivable              390
            Sales                                   390
          To record January sales of item 127B.
        (7 units@$30, 4 units@$30, 2 units@$30)

Jan. 31 Cost of Merchandise Sold         263
            Merchandise Inventory                   263
    To record cost of January sales of item 127B.

        Gross Profit = Sales ($390) minus
        Cost of Merchandise Sold ($263) = $127


                                                           C9 - 15
                LIFO Perpetual Inventory Account
 Item 127B
                 Purchases              Cost of Mdse. Sold     Inventory
Balance
                Unit     Total              Unit   Total            Unit Total
 Date    Qty.   Cost     Cost    Qty.       Cost   Cost      Qty.   Cost Cost
Jan. 1                                                        10     20     200
     4                             7         20     140        3     20      60

                       The sale of 7 units leaves a balance of 3 units.




                                                                          C9 - 16
                  LIFO Perpetual Inventory Account
 Item 127B
                 Purchases        Cost of Mdse. Sold     Inventory Balance

                  Unit   Total           Unit    Total             Unit Total
 Date     Qty.    Cost   Cost    Qty.    Cost    Cost     Qty.     Cost Cost
Jan. 1                                                     10       20     200
     4                             7       20     140       3       20      60
   10       8      21    168                                3       20      60
                                                            8       21     168

         The purchase price of $21 is different than the cost of
         the previous 3 units on hand; therefore, the inventory
         balance of 11 units is accounted for separately.




                                                                         C9 - 17
                LIFO Perpetual Inventory Account
 Item 127B
              Purchases          Cost of Mdse. Sold       Inventory Balance

                Unit   Total              Unit   Total            Unit Total
 Date    Qty.   Cost   Cost      Qty.     Cost   Cost     Qty.    Cost Cost
Jan. 1                                                      10        20     200
     4                             7       20     140        3        20      60
   10     8      21    168                                   3        20      60
                                                             8        21     168
   22                              4       21      84        3        20      60
                                                             4        21      84
                             Of the 4 units sold, all come from the
                             last units in (LIFO) at a cost of $21.




                                                                           C9 - 18
                LIFO Perpetual Inventory Account
 Item 127B
              Purchases         Cost of Mdse. Sold        Inventory Balance

                Unit   Total            Unit    Total            Unit Total
 Date    Qty.   Cost   Cost     Qty.    Cost    Cost      Qty.   Cost Cost
Jan. 1                                                     10      20     200
     4                            7       20     140        3      20      60
   10     8      21    168                                  3      20      60
                                                            8      21     168
   22                             4       21      84        3      20      60
                                                            4      21      84
   28                             2       21      42        3      20      60
                                                            2      21      42

                  Of the 2 units sold, all come from the last units in
                  (LIFO) at a cost of $21, leaving 2 units from that group.


                                                                        C9 - 19
                LIFO Perpetual Inventory Account
 Item 127B
              Purchases        Cost of Mdse. Sold    Inventory Balance

                Unit   Total          Unit   Total          Unit Total
 Date    Qty.   Cost   Cost    Qty.   Cost   Cost    Qty.   Cost Cost
Jan. 1                                                10     20     200
     4                           7     20     140      3     20      60
   10     8      21    168                             3     20      60
                                                       8     21     168
   22                            4     21      84      3     20      60
                                                       4     21      84
   28                            2     21      42      3     20      60
                                                       2     21      42
   30    10      22    220                             3     20      60
                                                       2     21      42
                                                      10     22     220


                                                                  C9 - 20
                LIFO Perpetual Inventory Account
 Item 127B
               Purchases        Cost of Mdse. Sold     Inventory Balance

                 Unit   Total          Unit   Total          Unit Total
 Date    Qty.    Cost   Cost    Qty.   Cost   Cost    Qty.   Cost Cost
Jan. 1                                                 10     20     200
     4                           7      20     140      3     20      60
   10     8       21     168                            3     20      60
                                                        8     21     168
   22                            4      21      84      3     20      60
                                                        4     21      84
   28                            2      21      42      3     20      60
                                                        2     21      42
   30    10       22     220                            3     20      60
                                                        2     21      42
                                                       10     22     220
Totals    18            $388    13            $266     15           $322
                                                                   C9 - 21
 LIFO Perpetual Inventory Accounting

 Date             Description           Debit     Credit

Jan. 31 Accounts Receivable              390
            Sales                                   390
          To record January sales of item 127B.
        (7 units@$30, 4 units@$30, 2 units@$30)

Jan. 31 Cost of Merchandise Sold         266
            Merchandise Inventory                   266
    To record cost of January sales of item 127B.

        Gross Profit = Sales ($390) minus
        Cost of Merchandise Sold ($266) = $124


                                                           C9 - 22
        First-In, First-Out Flow of Costs

                   Merchandise
                    Available
  Purchases          for Sale
    Jan. 1
200 units at $9      $1,800

    Mar. 10
300 units at $10     $3,000
    Sep. 21
400 units at $11     $4,400
    Nov. 18                        Using FIFO costing,
100 units at $12     $1,200
                                 which units are assumed
                     $10,400         to be sold first?




                                                           C9 - 23
        First-In, First-Out Flow of Costs
                                   Cost of
                   Merchandise   Merchandise
                    Available       Sold
  Purchases          for Sale
                                   $1,800      200 units at $9
    Jan. 1
200 units at $9      $1,800
                                   $3,000      300 units at $10
    Mar. 10
300 units at $10     $3,000                    200 units at $11
                                   $2,200
    Sep. 21
                                   $7,000
400 units at $11     $4,400
    Nov. 18                      FIFO cost flow assumes
100 units at $12     $1,200
                                  merchandise acquired
                     $10,400        first is sold first.




                                                            C9 - 24
        First-In, First-Out Flow of Costs
                                   Cost of
                   Merchandise   Merchandise
                    Available       Sold
  Purchases          for Sale
                                   $1,800      200 units at $9
    Jan. 1
200 units at $9      $1,800
                                   $3,000      300 units at $10
    Mar. 10
300 units at $10     $3,000                    200 units at $11
                                   $2,200
    Sep. 21
                                   $7,000
400 units at $11     $4,400
                                 Merchandise
    Nov. 18
                                  Inventory
100 units at $12     $1,200
                                   $2,200      200 units at $11
                     $10,400
                                   $1,200      100 units at $12

                                   $3,400

                                                            C9 - 25
        First-In, First-Out Flow of Costs
                                        Cost of
                        Merchandise   Merchandise
                         Available       Sold
  Purchases               for Sale
                                        $1,800      200 units at $9
    Jan. 1
200 units at $9           $1,800
                                        $3,000      300 units at $10
    Mar. 10
300 units at $10          $3,000                    200 units at $11
                                        $2,200
    Sep. 21
                                        $7,000      700 units
400 units at $11          $4,400
                                      Merchandise
    Nov. 18
                                       Inventory
100 units at $12          $1,200
                                        $2,200      200 units at $11
          1,000 units     $10,400
                                        $1,200      100 units at $12

                                        $3,400      300 units

                                                                 C9 - 26
        Last-In, First-Out Flow of Costs

                    Merchandise
                     Available
  Purchases           for Sale
                                    Using LIFO costing,
    Jan. 1                        which units are assumed
200 units at $9       $1,800          to be sold first?
    Mar. 10
300 units at $10      $3,000
    Sep. 21
400 units at $11      $4,400
    Nov. 18
100 units at $12      $1,200

1,000 units total     $10,400




                                                            C9 - 27
        Last-In, First-Out Flow of Costs

                    Merchandise
                     Available
  Purchases           for Sale
                                  LIFO cost flow assumes
    Jan. 1                         merchandise acquired
200 units at $9       $1,800          last is sold first.
    Mar. 10
300 units at $10      $3,000        Cost of
                                  Merchandise
    Sep. 21                          Sold
400 units at $11      $4,400
                                    $2,000      200 units at $10
    Nov. 18
100 units at $12      $1,200
                                    $4,400      400 units at $11
1,000 units total     $10,400
                                    $1,200   100 units at $12

                                    $7,600

                                                             C9 - 28
        Last-In, First-Out Flow of Costs
                                 Merchandise
                   Merchandise    Inventory
                    Available
  Purchases          for Sale       $1,800     200 units at $9
    Jan. 1                          $1,000     100 units at $10
200 units at $9      $1,800
                                    $2,800
    Mar. 10
300 units at $10     $3,000        Cost of
                                 Merchandise
    Sep. 21                         Sold
400 units at $11     $4,400
                                   $2,000      200 units at $10
    Nov. 18
100 units at $12     $1,200
                                    $4,400     400 units at $11
                     $10,400
                                   $1,200      100 units at $12

                                    $7,600

                                                            C9 - 29
        Last-In, First-Out Flow of Costs
                                      Merchandise
                        Merchandise    Inventory
                         Available
  Purchases               for Sale       $1,800     200 units at $9
    Jan. 1                               $1,000     100 units at $10
200 units at $9           $1,800
                                         $2,800     300 units
    Mar. 10
300 units at $10          $3,000        Cost of
                                      Merchandise
    Sep. 21                              Sold
400 units at $11          $4,400
                                        $2,000      200 units at $10
    Nov. 18
100 units at $12          $1,200
                                         $4,400     400 units at $11
          1,000 units     $10,400
                                        $1,200      100 units at $12

                                         $7,600     700 units

                                                                 C9 - 30
Valuation of Inventory at Lower-of-Cost-or-Market
                  Unit     Unit
     Inventory    Cost    Market   Total    Total    Lower
Item Quantity     Price   Price    Cost    Market    C or M

 A      400      $10.25   $ 9.50 $ 4,100 $ 3,800    $ 3,800
 B      120       22.50    24.10   2,700   2,892      2,700
 C      600        8.00     7.75   4,800   4,650      4,650
 D      280       14.00    14.75   3,920   4,130      3,920
Total                             $15,520 $15,472 $15,070
 The market decline is either:
 1. Based on total inventory ($15,520 – $15,472) = $48
 2. Based on individual items ($15,520 – $15,070) = $450
 The decline is reported on the income statement as a
 separate item or included in the cost of merchandise sold.
                                                        C9 - 31
                      Afro-Arts
                    Balance Sheet
                  December 31, 2004

                       Assets
Current assets:
 Cash                                       $ 19,400
 Accounts receivable              $80,000
    Less allowance                  3,000     77,000
 Merchandise inventory
 at lower of cost (first-in,
 first-out method) or market                 216,300




                                                       C9 - 32
Retail Method of Estimating Inventory Cost

   Retail method is based on relationship between cost
    of merchandise available for sale and the retail price.
   Retail prices of all merchandise must be accumulated.
   Inventory at retail is calculated as retail price of
    merchandise available for sale less sales.
   Ratio is calculated as cost divided by retail price.
   Inventory at retail price times cost ratio equals
    estimated cost of inventory.




                                                              C9 - 33
       Retail Inventory Method Calculation
                                         Cost       Retail
Merchandise inventory, January 1        $19,400    $36,000
Purchases in January (net)               42,600     64,000
Merchandise available for sale          $62,000   $100,000
Ratio of cost to retail price:
      ($62,000 / $100,000 = 62%)
Sales for January (net)                             70,000
Merchandise inventory, January 31, at retail       $30,000
Merchandise inventory, January 31, at est. cost
      ($30,000 x 62%)                              $18,600




                                                        C9 - 34
Gross Profit Method of Estimating Inventory Cost

    1. A gross profit percentage rate is estimated based on
       previous experience adjusted for known changes.
    2. Estimated gross profit is calculated by multiplying the
       estimated gross profit rate times the actual net sales.
    3. Estimated cost of merchandise sold is calculated by
       subtracting the gross profit from actual sales.
    4. The cost of merchandise sold estimate is deducted
       from actual merchandise available for sale to determine
       the estimated cost of merchandise inventory.




                                                                 C9 - 35
          Gross Profit Method Calculation

Merchandise inventory, January 1                  $ 57,000
Purchases in January (net)                         180,000
Merchandise available for sale                    $237,000
Sales in January (net)                $250,000
Less: Estimated gross profit
   ($250,000 x 30%)                      75,000
Estimated cost of merchandise sold                 175,000
Estimated merchandise inventory, January 31        $ 62,000


Many firms generate a surprisingly stable and predictable
gross profit as a percentage of sales.


                                                            C9 - 36
             Inventory Turnover Ratios

                       SUPERVALU             Zale
Cost of goods sold     $15,620,127,000   $ 737,188,000
Inventories:
   Beginning of year    $1,115,529,000   $478,467,000
   End of year           1,067,837,000    571,669,000
   Average              $1,091,683,000   $525,068,000




                                                    C9 - 37
             Inventory Turnover Ratios

                       SUPERVALU             Zale
Cost of goods sold     $15,620,127,000   $ 737,188,000
Inventories:
   Beginning of year    $1,115,529,000   $478,467,000
   End of year           1,067,837,000    571,669,000
   Average              $1,091,683,000   $525,068,000



 Inventory turnover        14.3 times       1.4 times




                                                    C9 - 38
             Inventory Turnover Ratios

                       SUPERVALU            La-Z-Boy
Cost of goods sold     $15,620,127,000     $ 737,188,000
Inventories:
   Beginning of year      $1,115,529,000   $478,467,000
   End of year             1,067,837,000    571,669,000
   Average                $1,091,683,000   $525,068,000



 Inventory turnover          14.3 times       1.4 times
 Average selling period       25 days         283 days

 Use: To assess the efficiency in the
      management of inventory

                                                       C9 - 39
Chapter 9             Power Notes
      Inventories




  This is the last slide in Chapter 9.
     Note: To see the topic slide, type 2 and press Enter.




                                                             C9 - 40

				
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