# 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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 views: 8 posted: 1/27/2012 language: English pages: 29