1 Chapter 8: Inventory Valuation. 2 Class Problem Dallas Company had the following inventory transactions at the end of 2012. Indicate whether Dallas.

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Presentation transcript:

1 Chapter 8: Inventory Valuation

2 Class Problem Dallas Company had the following inventory transactions at the end of Indicate whether Dallas should show the inventory in its financials as of 12/31/ On 12/28, purchased inventory, FOB Destination. Shipped 12/28, did not arrive until Jan. 2. Not part of Dallas inventory 2. On Dec. 29, purchased inventory, FOB Shipping Point. Shipped 12/29, did not arrive until Jan. 2 Part of Dallas inventory 3. On 12/28, sold inventory to Houston Company, FOB Destination. Shipped 12/28; Houston received on Jan. 2. Part of Dallas inventory

3 Class Problem 4. On 12/28, sold inventory to Amarillo Company, FOB Shipping Point. Shipped 12/28; Amarillo received on Jan. 2. Not part of Dallas inventory. 5. On 12/28, sold inventory to Amarillo Company, FOB Shipping Point. Shipped 12/28; Amarillo received on Dec. 29. This inventory included a buyback agreement available for 60 days. Still part of Dallas inventory.

4 Class Problem Analysis (O = overstated, U = understated): BI + P - EI = COGS NI A = L + SE 14:9u9o9u 15:9u 9oXX Why no effect on 2015 ending SE? NI 2014 understated by $9,000 NI 2015 overstated by $9,000 Both closed to RE, so no net effect at end.

5 Journal Entries - Example Journal Entries - Example Example - assume the following balance in the Unadjusted Trial Balance of Raider Co.: DRCR Merch. Inv. (1/1/14) 2,600 Purchases 12,000 Freight-in 500 Purchase Discounts900 Purchase R & A 1,400 At the end of 2014, Raider calculated its ending inventory to be $1,900, based on the FIFO technique.

6 Journal Entries - Periodic System Journal Entries - Periodic System Part 1: What is the value of Cost of Goods Sold? BI + P (net) - EI = COGS 2,600 + [12, ,400] - 1,900 = COGS 10,900 = COGS Part 2, AJE: Cost of Goods Sold10,900 Inventory-Ending 1,900 Purchase Discounts 900 Purchase Rt. & Allow. 1,400 Purchases12,000 Transportation-in 500 Inventory-Beginning 2,600

7 Class Problem - Cost Flows Given the following activity for January: Cost Total Units per Unit Cost Begin Inventory 20 $ 9.00 $180 Purchase 1/ Purchase 1/ Total available 90 units $910 Sales on Jan units Sales on Jan units Total units sold: 55 Total units in EI 35

8 Periodic FIFO(LISH) FIFO for COGS (top down) 55 units $9 = $180 $10 = $350 Total = $530 LISH for EI (bottom up) 35 units $11 = $330 $10 = $ 50 Total $380

9 Periodic LIFO(FISH) LIFO for COGS (bottom up) 55 units $11 = $330 $10 = $250 Total =$580 FISH for EI (top down) 35 units $ 9 = $180 $10 = $150 Total = $330

10 Average Periodic First calculate average: Goods available cost = $910 Goods available units = 90 units Avg. = $10.11 per unit Now COGS: 55 units x $10.11 per unit = $ 556 Now EI: 35 units x $10.11 per unit = $354

11 Comparison of FIFO, LIFO, and Average In times of rising prices: highest COGS: lowest COGS highest EI lowest EI highest Net Income lowest Net Income LIFO FIFO