1 Financial Accounting: Tools for Business Decision Making, 4th Ed. Kimmel, Weygandt, Kieso CHAPTER 6 Prepared by Ellen L. Sweatt Georgia Perimeter College

2 Chapter 6 REPORTING AND ANALYZING INVENTORY

3 Chapter 6 Reporting and Analyzing Inventory Describe the steps in determining inventory quantities. Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. Explain the financial statement and tax effects of each of the inventory cost flow assumptions. Explain the lower of cost or market basis of accounting for inventories. Compute and interpret the inventory turnover ratio. Describe the LIFO reserve and explain its importance for comparing results of different companies.

4 Inventory-Merchandiser Consists of many different items Owned by the company In a form ready for sale to customers One inventory classification: Merchandise Inventory

5 Inventory - Manufacturing Finished goods inventory Work in process Raw materials

6 Finished Goods Inventory Manufactured items that are complete and ready for sale.

7 Work in Process Manufactured inventory that has been placed into production but is not yet complete.

8 Raw Materials The basic goods that will be used in production, but have not been placed in production.

9 Determine Inventory Quantities Determine inventory quantities by counting, weighting or measuring each type of inventory. Determine ownership of goods, including goods in transit, consigned goods. 11 1

10 Questions Concerning Ownership Do all the goods included in the count belong to the company? Does the company own any goods not included in the count?

11 Goods in Transit These are goods on board a truck, train, ship, or plane at the end of the period. 36 Who includes these in inventory? zBuyer? zSeller? The Company with Legal Title

Terms of Sale- FOB (free-on-board)

13 Consigned Goods Goods of others you hold. You do not pay for the goods until they sell. The company does not take ownership.

14 Inventory Costing - Periodic 1. Determine quantity of units of inventory 2. Apply unit costs to the quantities 3. Determine total cost of inventory 4. Determine cost of goods sold Process can be complicated if units are purchased at different times and at different prices! 11 2

15 Illustrative Data – Crivitz TV Co. Purchases February 3 1 set $ 700 March 51 set $ 750 May 22 1 set $ 800 Sales June 12 sets $2,400

16 Inventory Costing Specific Identification method Cost Flow Assumptions FIFO- First-in, First-Out- earliest goods purchased are the first to be sold LIFO- Last-in,First-Out- latest goods purchased are the first to be sold Average Cost Method- costs are charged on the basis of weighted average unit cost

Specific Identification An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of ending inventory.

18 Is Specific Identification Possible? Yes – with bar coding, electronic product codes and radio frequency identification However, it is rarely used

19 What Is a Cost Flow Assumption? To presume the order in which goods are sold even if flow of costs is unrelated to the physical flow of goods. What Makes Cost Flow Assumptions Necessary? Changing Inventory Costs

The FIFO method assumes the earliest goods purchased are the first to be sold. FIFO

The LIFO method assumes the last goods purchased are the first to be sold. LIFO

Weighted-Average Cost The average cost method allocates the cost of goods available for sale on the basis of weighted-average unit cost incurred.

The average cost method allocates the cost of goods available for sale on the basis of weight- average unit cost incurred. Weighted Average

24 Factors Used in Selecting an Inventory Cost Method zIncome statement effects zBalance sheet effects zTax effects