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 DateActivityUnits at CostUnits at Retail Units Inv. Aug 1Beg $91 = $91010 units Aug $106 = $1,59025 units 8/14Sales20 units5 units 8/ $115 = $ $119 = $ /31Sales2312 units 55units for $ sold12 inv.

Specific Identification  Each item in inventory can be identified with a specific purchase and invoice.  Suppose for prior example company identified that Aug 14 is 8 from $91 purchase and 12 for $106. Suppose that 8/31 was $91 $115 $119

Specific Identification

 Cost of goods sold  $91 = $ 728  106 = $ 1,272  $2,000  $91 = $ 182  $106 = 318  115 1,725   2,582  Total 4,582

Specific Identification  Ending Inventory $115 = $575 $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

FIFO  Cost of Goods sold  $91 = $ 910  $106 = 1060 Total Aug 14$1970  $106 = $ 530  $115= 2070 Total Aug TOTAL 4570

Last in, First out  Method of assigning costs assumes that the most recent purchases are sold first

LIFO

 Cost of goods sold 8/14 $1, ,045 8/31 $1,190 1,495 2,685 Total cost of goods sold 4,730

LIFO  Ending Inventory  $91 = 455  $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

Financial Statement Effects of Costing Methods

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

Effects of Inventory Errors

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