DETERMINING INVENTORY Chapter 6. Terms Consigned Goods Consistency Principle Days in Inventory Finished Goods FIFO FOB Destination FOB Shipping Point.

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Presentation transcript:

DETERMINING INVENTORY Chapter 6

Terms Consigned Goods Consistency Principle Days in Inventory Finished Goods FIFO FOB Destination FOB Shipping Point Inventory Turnover JIT Inventory LIFO LCM Raw Materials Specific Identification Weighted Average Unit Cost Work in Process

Inventory Determining Inventory  Physical Count  Who Owns It

Physical Count Even with a system of recording purchases and sales at the point of the event, companies do a physical count at the end of their accounting period. Stores close or take inventory at night Companies often hire temporary workers to take inventory. Think about how many items in Target or Meijer, each has to be counted or weighed

Who Owns It ? Goods in Transit FOB Shipping Point  Ownership passes to buyer when it gets on the delivery vehicle, car, truck, bus, airplane, etc. FOB Destination  Ownership passes to buyer when delivered and accepted by the buyer.

Consignment Goods that an owner sells through a dealer Ownership belongs to the seller

Inventory Costing Four GAAP methods of costing inventory  Specific Identification  FIFO (First In First Out)  LIFO (Last In Last Out)  Average Cost

Problem ATA Warehouse – Jan 2 purchased 100 – Feb 2 purchased 100 – Mar 1 purchased 50 – Jun 5 purchased 75 TOTAL AVAILABLE: 153, 625 – June 30 prepared semi-annual financial statements. They sold 250 TV’s. What is their ending inventory and what are the C of G?

Specific Identification We can track that 100 TV’s came from Jan 2 50 came from Feb 2 and 50 came from Mar 1 and 50 came from Jun 5 So Cost of Goods are: 45045, , , ,750 Total C of G117,500 Ending Inventory (153, ,500) = $36,125

FIFO FIRST IN-FIRST OUT Jan 1, 450$45,000 Feb 2, 47,500 Mar 2, ,000  COST OF GOODS SOLD$116,500  ENDING INVENTORY 37,125

LIFO LAST IN- LAST OUT Jun 5, $495$37,125 Mar 1, 24,000 Feb 2, 47,500 Jan 2, 11,250  COST OF GOODS SOLD $119,875  ENDING INVENTORY 33,750

AVERAGE $153,625/250 = $ EACH C OF G.S. = $118, ENDING INVENTORY *NEED TO ROUND TO MAKE AMOUNT EVEN

COMPARE WHICH SHOULD ATA PICK? METHODCOST OF GOODS SOLD ENDING INVENTORY SPECIFIC IDENTIFICATION $117,500$ 36, 125 FIFO $116,500$ 37,125 LIFO $119,875$33,750 AVERAGE$ $35,452.50

ANOTHER METHOD LCM For goods that have high fluctuations in price, IRS allows the Lower of Cost or Market to determine inventory costs: Example: Our flat screen TV’s have dropped in price over the last three 3 months therefore we can take lower of cost of market  Our Cost was $153,625  The Market price has dropped 10%

Financial Analysis Inventory Turnover Stakeholders want to know how much inventory is left in the warehouse which may mean the company is either purchasing two much or their sales are down. Formula is: Cost of Goods Sold/Beg Inventory+End Inv (2)

Your Problem Walmart reported in its 2008 annual report a beginning inventory of $33,685 million, and ending inventory of $35,180 million, and cost of goods sold for the year ended January 31 of $286,515 million. What is their inventory turnover ratio?

Assignments BE6-10 (Page 280) - Complete E6-5 (Page 283) - Complete E6-6 (Page 283) - Complete E6-14 (Page 285) - Complete P6-2A (Page 287) - Thur P6-5A(Page 188) - Fri Test - Monday