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Reporting _amp; Analyzing Inventory

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					Reporting & Analyzing Inventory

            Chapter 5
     Determining Inventory Items

 Merchandise inventory includes all goods
  that a company owns and holds for sale
 Regardless of where the goods are located
  when inventory is counted
               Goods in Transit

 If ownership has
  passed to the
  purchaser, the goods
  are included in the
  purchaser’s inventory
 FOB shipping point
Goods on Consignment

          Are goods shipped by
           the owner, to another
           party.
          No change in
           ownership of the goods
      Goods Damaged or Obsolete

 Are not counted in
  inventory if they
  cannot be sold.
 If they can be sold at a
  reduced price, then
  included in inventory
  at net realizable value
 NRV = Sales price –
  Cost of making sale
      Determining Inventory Costs

 Merchandise inventory
  includes cost of
  expenditures necessary,
  directly or indirectly, to
  bring at item to a
  salable condition and
  location.
 Freight, storage,
  insurance, etc.
                Internal Control

 Inventory account under a perpetual system
  is updated for each purchase and sale, but the
  events can cause the account balance to be
  different from the actual inventory available.
     Physical inventory
     Prenumbered inventory tickets
     Counters assigned
         Inventory Costing under a
             Perpetual System
 Four methods
     Specific Identification
     First in, First out (FIFO)
     Last in, First out (LIFO)
     Weighted Average
                         Illustration

Date    Activity        Units at Cost   Units at     Units
                                         Retail       Inv.
Aug 1 Beg Inv 10units @ $91 = $910                 10 units
Aug 3 Purch        15 @ $106 = $1,590              25 units
8/14    Sales                           20 units   5 units
8/ 17   Purch      20 @ $115 = $2300               25
8/28    Purch      10 @ $119 = $1190               35
8/31    Sales                           23         12 units
                   55units for $5990    43 sold    12 inv.
           Specific Identification

 Each item in inventory    Suppose that 8/31 was
  can be identified with    2 @ $91
  a specific purchase and   3@$106
  invoice.                  15@ $115
                            3 @ $119
 Suppose for prior
  example company
  identified that Aug 14
  is 8 from $91 purchase
  and 12 for $106.
               Specific Identification
 Date  Activity Units @ Cost   COGS       Inv.
 1-Aug Beg      10 @ $91                         10
 3-Aug Purch    15 @$106                         25
14-Aug Sale                  8 @$91     2 @ 91
                             12 @ 106   3 @ 106
17-Aug Purch    20 @ $115               2 @ 91
                                        3 @ 106
                                        20 @ 115
28-Aug Purch    10 @ 119                3 @ 106
                                        2 @ 91
                                        3 @ 106
                                        20 @ 115
                                        10 @ 119
31-Aug Sale     2 @ 91
                3 @ 106                 5 @ 115
                15 @ 115                7@ 119
                3 @ 119
            Specific Identification

 Cost of goods sold
   8 @ $91         = $ 728
 12@ 106           = $ 1,272
                               $2,000
   2 @ $91         = $ 182
   3 @ $106        =    318
 15 @ 115              1,725
   3 @ 119               357
                               2,582
 Total                                  4,582
           Specific Identification

 Ending Inventory
     5 @ $115 =     $575
     7 @ $119 =      833
        TOTAL       $1,408
             First in, First out

 Assigning costs to both inventory and cost of
  goods sold that assumes that inventory items
  are sold in the order acquired.
              First in, First out
 Date  Activity Units @ Cost COGS       Inv.
 1-Aug Beg      10 @ $91                     10
 3-Aug Purch 15 @$106                        25
14-Aug Sale                 10 @ 91           0
                            10 @ 106 5 @ $106
17-Aug Purch 20 @ $115               5 @ $106
                                     20 @ $115
28-Aug Purch 10 @ 119                5 @ $106
                                     20 @ $115
                                     10 @ 119
31-Aug Sale     5 @ $106
                18 @ $115            2 @ $115
                                     10 @ $119
                          FIFO

 Cost of Goods sold
   10 @ $91 = $ 910
   10 @ $106 = 1060
       Total Aug 14           $1970
        5@ $106 =     $ 530
       18@ $115=       2070
       Total Aug 31           2600
       TOTAL                  4570
             Last in, First out

 Method of assigning costs assumes that the
  most recent purchases are sold first
                    LIFO
Activity Units @ Cost     COGS         Inv.
Beg         10 @ $91                10@$91
Purch      15 @$106                 10@$91
                                   15@$106
Sale                    15@$106
                          5@$91      5@$91
Purch     20 @ $115                 5 @ $91
                                  20 @ $115
Purch      10 @ 119                 5 @ $91
                                  20 @ $115
                                   10 @ 119
Sale      10 @ $119
          13 @ $115                 5 @ $91
                                   7 @ $115
                        LIFO

 Cost of goods sold
   8/14     15@$106      $1,590
             5@$455                   455
                                        2,045
   8/31     10@$119          $1,190
            13@$115          1,495
                                        2,685
  Total cost of goods sold              4,730
                  LIFO

 Ending Inventory
 5 @ $91          = 455
 7 @ $115         = 805
                          $1,260
            Weighted Average

 Method of assigning cost requires that we
  compute the weighted average cost per unit
  of inventory at the time of each sale.
 W.A.C. = Cost of goods available for sale
               Units available for sale
                   Weighted Average
Date     Activity Units @ Cost     COGS                 Inv.   Avg

 1-Aug Beg         10 @ $91                 10@$91 = $ 910     $91

         Purch     15 @$106                   10@$91 = 910

 3-Aug                                       15@$106 = 106 $100

14-Aug Sale                      20@$100

                                             5@$100 = $500

17-Aug Purch      20 @ $115                 5 @ $100 = $500

                                           20@$115 = $2300 $112

28-Aug Purch       10 @ 119                  5 @ $100=$500

                                           20@$115 = $2300

                                           10@$119= $1190 $114

31-Aug Sale

                   23@$114                 12@$114 = $1368
       Financial Statement Effects of
             Costing Methods
                         Specific   FIFO      LIFO      W/Avg
Sales                      $6,050    $6,050    $6,050     $6,050
Cost of goods sold         $4,582    $4,570    $4,730     $4,622
Gross profit               $1,468    $1,480    $1,320     $1,428
Expenses                     $450      $450      $450       $450
Income before taxes        $1,018    $1,030      $870       $978
Income tax expense 30%       $305      $309      $261       $293
Net income                   $713      $721      $609       $695

Merchandise Inventory      $1,408    $1,420   $1,260      $1,368
                    Effect

 FIFO assigns the lowest amount to cost of
  goods sold – highest gross profit
 LIFO assigns the highest amount to cost of
  goods sold – yielding lowest gross profit
 Weighted average – yields the results
  between the two above
 Specific id – depends on units sold
         Lower of Cost or Market

 Accounting
  principles require
  that inventory be
  reported at the
  market value
  (cost) of replacing
  inventory when
  market value is
  lower than cost.
         Lower of cost or market

 Select the lower cost or market price as the
  value of ending inventory
                  Per Unit
  Items Units   Cost Market LCM       End Inv
Tulips    100    $15    $16   $15 $15x100=$1500
Roses      75    $25    $23   $23 $23x75 = $1725
Lily       80    $16    $16   $16 $16X80 =$1280
Daisy     125    $10    $11   $10 $10X125=$1250
Sunflower  26     $5     $4    $4 $4X26=      104
                                   $     5,859.00
        Effects of Inventory Errors

  Inventory Error Cost of Goods Sold Net Income
Understate End Inv    Overstated     Understated
Understate Beg Inv   Understated     Overstated
Overstate End Inv    Understated     Overstated
Overstate Beg Inv     Overstated Understated
          Effects of Inventory Errors

                      2004        2005        2006
Sales                  $100,000    $100,000    $100,000
Cost of goods sold
 Beg inv               $20,000     $16,000     $20,000
 Purchases             $60,000     $60,000     $60,000
 Goods available       $80,000     $76,000     $80,000
 Ending Inv            $16,000     $20,000     $20,000
 Cost of goods sold    $64,000     $56,000     $60,000
Gross profit           $36,000     $34,000     $40,000
                     Homework

 Perpetual
      Ex 5-1, 5-3
 LCM
      Ex 5-5
 Retail
      Ex 5-14

				
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posted:1/27/2012
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