Inventories and Cost of Goods Sold PowerPoint Authors Brandy Mackintosh Lindsay Heiser Learning Objective 71 Describe the issues in managing different types of inventory Inventory Management Decisions ID: 274611
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Slide1
Chapter 7
Inventories and Cost of Goods Sold
PowerPoint Authors:
Brandy Mackintosh
Lindsay
HeiserSlide2
Learning Objective 7-1
Describe the issues in managing different types of inventory.Slide3
Inventory Management Decisions
The primary goals of inventory managers are to:
1. Maintain a sufficient
quantity
to meet customers’ needs
2. Ensure
quality
meets customers’ expectations and company standards3. Minimize the costs of acquiring and carrying the inventory Slide4
Types of Inventory
Merchandisers . . .
Buy finished goods.
Sell finished goods.
Manufacturers . . .
Buy raw materials.
Produce and sell finished goods.
Raw Materials
Work in Process
Finished goods
Merchandise inventory
Materials waiting to
be processed
Partially
complete products
Completed products awaiting sale Slide5
Learning Objective 7-2
Explain how to report Inventory and Cost of Goods Sold.Slide6
Balance Sheet and Income Statement ReportingSlide7
Cost of Goods Sold Equation
BI + P – CGS = EI
National Outfitters’ beginning inventory was $4,800. During the period, the company purchased inventory for $10,200. The cost of goods sold for the period is $9,000. Compute the ending inventory.
Cost of Goods Sold Calculation
+
=
-
=
Beginning Inventory
Purchases
Cost of Goods Available for Sale
Cost of Goods sold
Ending Inventory
$ 4,800
10,200
15,000
9,000
$ 6,000Slide8
Cost of Goods Sold Equation
beginning
Inventory
$4,800
+
goods available
for sale
$15,000
purchases
$10,000
ending
Inventory
$6,000
Still
Here
(Balance Sheet)
Cost of
Goods Sold
$9,000
Sold
(Income Statement)Slide9
Learning Objective 7-3
Compute costs using four inventory costing methods.Slide10
Inventory Costing Methods
First-in, first-out
(FIFO)
Last-in, first-out
(LIFO)
Weighted
average
Specific
identificationSlide11
Inventory Costing Methods
Consider the following information
This method individually identifies and records the cost of each item sold as part of cost of goods sold. If the items sold were identified as the ones that cost $70 and $95, the total cost of those items ($70 + 95 = $165) would be reported as Cost of Goods Sold. The cost of the remaining item ($75) would be reported as Inventory on the balance sheet at the end of the period.
Specific Identification
May 5
$75 cost
May 3
$70 cost
May 6
$95 cost
M
ay 3
May 5
May 6
May 8
Purchased 1 unit for $70
Purchased 1 more unit for $75
Purchased 1 more unit for $95
Sold 2 units for $125 eachSlide12
Inventory Costing Methods
FIFO
LIFO
Weighted average
May 6
$95 cost
May 5
$75 cost
May 3
$70 cost
May 6
$95 cost
May 5
$75 cost
May 3
$70 cost
Sold
Still there
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
$250
145
$105
Balance Sheet
Inventory
$95
May 6
$95 cost
May 5
$75 cost
May 3
$70 cost
Sold
Still there
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
$250
170
$ 80
Balance Sheet
Inventory
$70
$80
per unit
Sold
Still
there
$240
3
=
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
$250
160
$ 90
Balance Sheet
Inventory
$80Slide13
Inventory Costing Methods
Summary
Cost of Goods sold (Income Statement)
Inventory (Balance sheet)
FIFO
Oldest cost
Newest cost
LIFO
Newest cost
Oldest cost
Weighted
Average
Average cost
Average cost
Let’s consider a more complex example.
Date
Oct 1
Oct 3
Oct 5
Oct 6
DescriptionBeginning InventoryPurchasePurchaseSalesEnding Inventory
# of Units1030
10(35)15Cost per Unit$ 7$ 8$10To calculateTo calculateTotal Cost$ 70
240100To calculateTo calculateSlide14
Inventory Cost Flow Computations
FIFO
+
-
=
beginning Inventory
purchases
cost of goods available for sale
ending Inventory
Cost of Goods Sold
10 units x $ 7 = $ 70
30 units x $ 8 = 240 10 units x $ 10 = 100
$ 410
140
$ 270
(10 units @ $10) + (5 units @ $8)
(10 units @ $7) + (25 units @ $8)Slide15
Inventory Cost Flow Computations
LIFO
+
-
=
beginning Inventory
purchases
cost of goods available for sale
ending Inventory
Cost of Goods Sold
10 units x $ 7 = $ 70
30 units x $ 8 = 240 10 units x $ 10 = 100
$ 410
110
$ 300
(10 units @ $7) + (5 units @ $8)
(10 units @ $10) + (25 units @ $8)Slide16
Inventory Cost Flow Computations
Weighted Average
Weighted
Average Cost
=
Cost of goods Available for Sale
Number of Units Available for Sale
Weighted
Average Cost
=
$410
50 units
= $8.20 per unit
Description
beginning Inventory
purchase
purchase
cost of goods available for sale
# of Units
10
30
10
50Cost per Unit$ 7$ 8$10
Total Cost$ 70
240
100
$ 410Slide17
Inventory Cost Flow Computations
Weighted Average
+
-
=
Beginning Inventory
Purchases
Cost of Goods Available for Sale
Ending Inventory
Cost of Goods Sold
10 units x $ 7 = $ 70
30 units x $ 8 = 240 10 units x $ 10 = 100
$ 410
123
$ 287
15 units @ $8.20
35 units @ $8.20Slide18
Financial Statement Effects
Effects on the Income Statement
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Income from Operations
Other Revenue (Expenses)Income before Income Tax ExpenseIncome Tax Expense (30%)Net Income
Effects on the Balance Sheet
Inventory
Weighted
Average
$ 525
287
238
1251132013340
$ 93$ 123
LIFO$ 525300225
12510020
12036$ 84$ 110
FIFO$ 5252702551251302015045$ 105$ 140Slide19
Financial Statement EffectsSlide20
Financial Statement Effects
Advantages of Methods
Smoothes out price changes.
Better matches current costs in cost of goods sold with revenues.
Ending inventory approximates current replacement cost.
First-In, First-Out
Weighted Average
Last-In, First-OutSlide21
Tax Implications and Cash Flow Effects
Effects on the Income Statement
Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Income from Operations
Other Revenue (Expenses)Income before Income Tax ExpenseIncome Tax Expense (30%)
Net IncomeEffects on the Balance Sheet
Inventory
Weighted
Average
$ 525
287
238
12511320133
40$ 93$ 123
LIFO$ 525300225
12510020
12036$ 84
$ 110FIFO$ 5252702551251302015045$ 105
$ 140Slide22
Learning Objective 7-4
Reporting inventory at the
lower of cost or market.Slide23
The value of inventory can fall below its recorded cost for two reasons:
it’s easily replaced by identical goods at a
lower cost, or
it’s become outdated or damaged.
Lower of Cost or Market
When the value of inventory falls below its recorded cost, the amount recorded for inventory is written down to its lower market value. This is known as the lower of cost or market (LCM) rule.Slide24
Lower of Cost or Market
Item
Leather coats
Vintage jeans
Cost
per
Item
$16520
Market
Value
per Item
$150
25
LCM
per
Item
$15020
Quantity
1,000
400
Total Lowerof costor Market$150,0008,000Total
cost$165,0008,000
Write-down$15,0000
1,000 items @ $165
2
Record
dr Cost of Goods Sold (+E, -SE)
cr Inventory (-A)
15,000
15,000
1,000 items @ $150
400 items @ $20
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Inventory -$15,000
Cost of Goods
Sold (+E) -$15,000Slide25
Lower of Cost or MarketSlide26
Learning Objective 7-5
Analyze and record inventory purchases, transportation, returns and allowances, and discounts.Slide27
Recording Inventory Transactions
We will now look at the accounting for purchases, transportation costs, purchase returns and allowances, and purchase discounts. We will record all inventory-related transactions in the Inventory account. Slide28
Inventory Purchases
American Eagle Outfitters purchases
$10,500 of vintage jeans on credit.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Inventory (+A) +$10,500
Accounts
Payable (+L) $10,500
2
Record
dr Inventory (+A)
cr Accounts Payable (+L)
10,500
10,500Slide29
Transportation Cost
American Eagle pays $400 cash to a trucker who
delivers the $10,500 of vintage jeans to one of its stores.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -$400
Inventory (+A) +$400
2
Record
dr Inventory (+A)
cr Cash (-A)
400
400Slide30
Purchase Returns and Allowances
American Eagle returned some of the vintage jeans to the
supplier and received a $500 reduction in the balance owed.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Inventory (-A) -$500
Accounts
Payable (-L) -$500
2
Record
dr Accounts Payable (-L)
cr Inventory (-A)
500
500Slide31
Purchase Discounts
American Eagle’s vintage jeans purchase for $10,500 had terms of 2/10, n/30. Recall that American Eagle returned inventory costing $500 and received a $500 reduction in its Accounts Payable. American Eagle paid within
the discount period.
1
Analyze
Liabilities
Assets
=
Stockholders’ Equity
+
Cash (-A) -$9,800
Inventory (-A) -$200
Accounts
Payable (-L) -10,000
2
Record
dr Accounts Payable (-L)
cr Cash (-A)
cr Inventory (-A)
9,800
200
10,000Slide32
Summary of Inventory TransactionsSlide33
Learning Objective 7-6
Evaluate inventory management by computing and interpreting the inventory turnover ratio.Slide34
Inventory Turnover AnalysisSlide35
Comparison to BenchmarksSlide36
Supplement 7A
FIFO, LIFO, and Weighted Average in a Perpetual Inventory SystemSlide37
Perpetual Inventory System
This is the same information that we used earlier in the chapter to illustrate a periodic inventory system. The only difference is that we have assumed the sales occurred on October 4, prior to the final inventory purchase.Slide38
FIFO (First-in, First-Out)Slide39
LIFO (Last-in, First-Out)Slide40
Weighted Average Cost
$310 ÷ 40 units
= $7.75 per unitSlide41
Financial Statement Effects
Summary of Perpetual Inventory System Cost Flow Assumptions on Financial StatementsSlide42
Supplement 7B
The Effects of Errors in Ending InventorySlide43
The Effects of Errors in Ending Inventory
Cost of Goods Sold Equation
BI + P – CGS = EI
Errors in Ending
Inventory will affect
the Balance Sheet and
the Income Statement.
Assume that Ending Inventory was overstated in 2012 by
$10,000 due to an error that was not discovered until 2013.
2012
+
-
=
Beginning Inventory
Purchases
Ending Inventory
Cost of Goods Sold
Accurate
Accurate
Overstated $10,000
Understated $10,000Slide44
The Effects of Errors in Ending Inventory
Now let’s examine the effects of the
2012 Ending Inventory Error on 2013.
Assume that Ending Inventory was overstated in 2012 by
$10,000 due to an error that was not discovered until 2013.
2013
+
-
=
Beginning Inventory
Purchases
Ending Inventory
Cost of Goods Sold
Overstated $10,000
Accurate
Accurate
Overstated $10,000Slide45
Supplement 7C
Recording Inventory Transactions in a Periodic SystemSlide46
Recording Inventory Transactions in a Periodic System
A local cell phone dealer stocks and sells one item.
The following events occurred in the past year:
We will record these events assuming the company uses
a periodic inventory system and then compare the
periodic inventory system to a perpetual inventory system.Slide47
Recording Inventory Transactions in a Periodic System
Periodic Inventory System
Perpetual Inventory SystemSlide48
Recording Inventory Transactions in a Periodic System
Periodic Inventory System
BI + P – CGS = EI
End-of-year adjustment entries are not required using a perpetual inventory system.Slide49
Recording Inventory Transactions in a Periodic System
Periodic Inventory System
Perpetual Inventory System
Summary of the Effects on the Accounting EquationSlide50
Chapter 7
Solved Exercises
M7-6, M7-7, E7-2, E7-5, E7-10, E7-17Slide51
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
Given the following information, calculate cost of goods available for sale and ending inventory, then sales, cost of goods sold, and gross profit, under (a) FIFO, (b) LIFO, and (c) weighted average. Assume a periodic inventory system is used.Slide52
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
FIFO
Beginning Inventory 50 units x $10 = $ 500
+ Purchase 250 units x $13 =
$3,250
Cost of Goods Available for Sale $3,750
- Ending Inventory (200 x $13) = $2,600 = Cost of Goods Sold (50 x $10) + (50 x $13)
$1,150 Slide53
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
b. LIFO
Beginning Inventory 50 units x $10 = $ 500
+ Purchase 250 units x $13 =
$3,250
Cost of Goods Available for Sale $3,750
- Ending Inventory (150 x $13) + (50 x $10) = $2,450 = Cost of Goods Sold (100 x $13)
$1,300 Slide54
Weighted
Average Cost
=
$3,750
300 units
= $12.50 per unit
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
c. Weighted Average
Beginning Inventory 50 units x $10 = $ 500
+ Purchase 250 units x $13 =
$3,250
Cost of Goods Available for Sale $3,750
- Ending Inventory (200 x $12.50) =
$2,500
= Cost of Goods Sold (100 x $12.50)
$1,250 Slide55
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
FIFO LIFO Weighted
Avg
Sales (100 units at $15) $1,500 $1,500 $1,500
Cost of Goods Sold
1,150 1,300 1,250
Gross Profit
$ 350 $ 200 $ 250 Slide56
M7-7
Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory)
Aircard
Corporation tracks the number of units purchased and sold throughout each accounting period, but applies its inventory costing method at the end of each period as if it uses a periodic inventory system. Given the following information, calculate the cost of goods available for sale, ending
inventory, and cost of goods sold, if
Aircard
uses (a) FIFO, (b) LIFO, or (c) weighted average cost.Slide57
M7-7
Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory)
Goods Available for Sale – same for all methods
Units Unit Total
Cost Cost
Beginning Inventory 2,000 $40 $ 80,000
+ Purchase (July 13) 6,000 $44 264,000+ Purchase (July 25) 8,000 $50 400,000 Goods Available for Sale 16,000 $744,000Slide58
M7-7
Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory)
a. FIFO
Ending Inventory (7,000 units x $50) = $350,000
Cost of Goods Sold (2,000 units x $40)
(6,000 units x $44) (1,000 units x $50) = $394,000 b. LIFO Ending Inventory (2,000 units x $40) (5,000 units x $44) = $300,000Cost of Goods Sold (8,000 units x $50) (1,000 units x $44) = $444,000 Slide59
M7-7
Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory)
c. Weighted Average
Average Unit Cost $744,000 / 16,000 = $46.50
Ending Inventory (7,000 units x $46.50) = $325,500
Cost of Goods Sold (9,000 units x $46.50) = $418,500 Slide60
E7-2 Inferring Missing Amounts Based on Income Statement Relationships
Supply the missing dollar amounts for the income statement of Lewis Retailers for each of the following independent cases.
Case
A
B
C
D
E
Sales Revenue
$700
900
?
800
1,000
Beginning Inventory
$100
200
100
?
50
Purchases$800800?600900
Cost of Goods Available
Cost of Goods SoldCost of Ending Inventory??
???
$300
?
200
650
?
$?
150
300
250
?
Gross Profit
$?
?
400
?
500Slide61
E7-2 Inferring Missing Amounts Based on Income Statement Relationships
Supply the missing dollar amounts for the 2010 income statement of Lewis Retailers for each of the following independent cases.
$300
?
200
650
?
Case
A
B
C
D
E
Sales Revenue
$700
900
?8001,000
Beginning Inventory
$100
200100
?50Purchases$800800
?600900
Cost of Goods AvailableCost of Goods SoldCost of Ending Inventory
$?150
300
250
?
?
?
?
?
?
Gross Profit
$?
?
400
?
500
900
600
400
850
1,000
50
500
400
600
150
900
300
500
950
450Slide62
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average
Oahu Kiki tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each month, as if it uses a periodic inventory system. Assume Oahu Kiki’s records show the following for the month of January. Sales totaled 240 units.
Required
:
Calculate the number and cost of goods available for sale.
Goods Available for Sale – same for all methods
Units Unit Total
Cost Cost
Beginning Inventory 120 $80 $ 9,600
+ Purchase (Jan 15) 380 $90 34,200
+ Purchase (Jan 24)
200
$110
22,000
Goods Available for Sale 700
$65,800Slide63
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units.
Required
:
2. Calculate the number of units in ending inventory.
Units in Ending Inventory = Units Available – Units Sold
Units in Ending Inventory = 700 – 240 = 460 unitsSlide64
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units.
Required
:
3. Calculate the cost of ending Inventory and Cost of Goods Sold using the
(
a)
FIFO, (b) LIFO, and (c) weighted average cost methods.a. FIFO
ending Inventory (200 units x $110) (260 units x $ 90) = $45,400Cost of Goods Sold (120 units x $80) (120 units x $90) = $20,400 Slide65
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units.
Required
:
3. Calculate the cost of ending inventory and cost of goods sold using the
(
a)
FIFO, (b) LIFO, and (c) weighted average cost methods.b. LIFO
Ending Inventory (120 units x $80) (340 units x $90) = $40,200Cost of Goods Sold (200 units x $110) ( 40 units x $ 90) = $25,600 Slide66
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted Average
Assume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units.
Required
:
3. Calculate the cost of ending inventory and cost of goods sold using the
(
a)
FIFO, (b) LIFO, and (c) weighted average cost methods.c. Weighted Average
Average Unit Cost $65,800 / 700 units = $94Ending Inventory (460 units x $94) = $43,240Cost of Goods Sold (240 units x $94) = $22,560 Slide67
E7-10 Reporting Inventory at Lower of Cost or Market
Peterson Furniture Designs is preparing the annual financial statements dated December 31, 2012. Ending inventory information about the five major items stocked for regular sale follows:
Required:
1. Complete the final two columns of the table and then compute the
amount that should be reported for the 2012 ending inventory using the
LCM rule applied to each item.
$1,500
Total
$11,900
$10,400
Item
Alligator Armoires
Bear Bureaus
Cougar Beds
Dingo Cribs
Elephant Dressers
Qty
50
75
10
30
400Total Costx $30 = $1,500x $40 = $3,000x $50 = $ 500x $30 = $ 900
x $15 = $6,000
Total Market
x $24 = $1,200
x $40 = $3,000
x $52 = $ 520
x $30 = $ 900
x $12 = $4,800
LCM Per Item
LCM Valuation
$24
40
50
30
12
$1,200
3,000
500
900
4,800Slide68
E7-10 Reporting Inventory at Lower of Cost or Market
Peterson Furniture Designs is preparing the annual financial statements dated December 31, 2012. Ending inventory information about the five major items stocked for regular sale follows:
Required:
2. Prepare the journal entry that Peterson Furniture Designs would record
on December 31, 2012.
dr
Cost of Goods Sold (E+, -SE) 1,500
cr
Inventory (-A) 1,500Slide69
E7-17 Analyzing and Interpreting the Inventory Turnover Ratio
Polaris Industries Inc. is the biggest snowmobile manufacturer in the world. It reported the following amounts in its financial statements (in millions):
Required:
1. Calculate to one decimal place the inventory turnover ratio and average
days to sell inventory for 2010, 2009, and 2008.
*7.0 = $1,461
÷
$208 **5.8 = $1,173 ÷ $201 ***6.8 = $1,502 ÷ $220
2010 2009 2008
Inventory
Turnover
Ratio
Days to
Sell
=
=
Cost of Goods Sold
Average Inventory
365 Days
Inventory Turnover
==
7.0* 5.8** 6.8***
51.9 62.5 53.4 Times per yeardaysSlide70
E7-17 Analyzing and Interpreting the Inventory Turnover Ratio
Polaris Industries Inc. is the biggest snowmobile manufacturer in the world. It reported the following amounts in its financial statements (in millions):
Required:
2. Comment on any trends, and compare the effectiveness of inventory
managers at Polaris to inventory managers at its main competitor, Arctic
Cat, where inventory turns over 3.6 times per year (101.4 days to sell).
Both companies use the same inventory costing method (FIFO).
The inventory turnover ratio reflects how many times average inventory was made and sold during the year. The inventory turnover ratio for Polaris Industries has increased in 2010 over 2009, leading to a decrease in the average days to sell. This trend suggests that Polaris is selling its inventory more quickly. This is generally considered to be a positive performance. Polaris is performing better than Arctic Cat, where the inventory turnover is 3.6 times per year or every 101.4 days.Slide71
End of Chapter 7