BMGT 220, Chapter 6 Discussion Kristian Sooklal (cell) | (text)

Plan for today Quiz 5 back ---  Finish lecture material Practice Problem Practice Quiz Quiz 6

Key Topics in Chapter 6 Inventory Operations Merchandising Inventory (more in BMGT220) vs. Manufacturing inventory (more in BMGT221) Periodic vs. Perpetual Goods in transit FOB Shipping: buyer owns goods FOB Destination: seller owns goods Consignment Goods: ex. Bookholders Inventory Methods (aka cost flow assumptions): Specific ID: most accurate, least practical FIFO: earliest purchased goods are sold first LIFO: latest purchased goods are sold first Average Cost: average the costs of goods purchased

Key Topics in Chapter 6 (Continued) Effects of LIFO vs. FIFO on: Income Tax Cost of Goods Sold Balance Sheet Consistency Principle Lower of Cost or Market Inventory Errors Inventory Errors: Understatement or overstatement of: Beginning Inventory Cost of Goods Sold Ending Inventory Effect on: Income Statement Balance Sheet Inventory Turnover/Days in Inventory

Useful Equations Beginning Inventory + Cost of Goods Purchased – Ending Inventory = Cost of Goods Sold Cost of Goods Available for Sale / Total Units Available for Sale = Weighted-Average Unit Cost Cost of Goods Sold / Average Inventory = Inventory Turnover Average Inventory = Beginning Inventory + Ending Inventory / 2 Days in Inventory = 365 days / Inventory Turnover ratio Net Sales – Cost of Goods Sold = Gross Profit Beginning Inventory + Goods Purchased = Cost of Goods Available for Sale Ending Inventory + Cost of Goods Sold = Cost of Goods Available for Sale

On hand, January 1:10 each PurchasesSales January 8: 25 $23 eachJanuary 4: 8 each January 22: 50 eachJanuary 15: 20 each January 28: 15 $29 eachJanuary 26: 52 $75 each Calculate the company’s Cost of Goods Sold using FIFO for the month of January: 1.$1,930 2.$1,945 3.$1,966 4.$2,080 Knowledge Check:

On hand, January 1:10 each PurchasesSales January 8: 25 $23 eachJanuary 4: 8 each January 22: 50 eachJanuary 15: 20 each January 28: 15 $29 eachJanuary 26: 52 $75 each Calculate the company’s Ending Inventory on January 31 using LIFO: 1.$430 2.$454 3.$544 4.$565 Knowledge Check:

On hand, January 1:10 each PurchasesSales January 8: 25 $23 eachJanuary 4: 8 each January 22: 50 eachJanuary 15: 20 each January 28: 15 $29 eachJanuary 26: 52 $75 each Calculate the company’s Cost of Goods Sold using Weighted Average for the month of January (round to the nearest cent): 1.$1,946 2.$1,966 3.$1,972 4.$2,008 Knowledge Check:

1.$450 2.$825 3.$1,275 4.$1,150 Using the information below for a sporting goods store, calculate the amount of inventory adjustment using the Lower of Cost or market method applied to the inventory on an individual item basis: UnitsCost/unitMarket value/unit Football itemsHelmets20$30$25 Cleats10$50$20 Pads30$20$25 Baseball items:Gloves40$10$15 Jerseys50$40$25 Knowledge Check:

Exercise 6-12

My Solution Ending Inventory Overstated in 2011  Cost of goods sold is understated – Ending Inventory should be $39,000 – Cost of Goods sold should be $166,000 – Gross Profit should be $44,000 Ending Inventory Overstatement in 2011  Beginning Inventory Overstatement in 2012 – Beginning Inventory should be $39,000 – Cost of Goods Available should be $241,000 – Cost of Goods Sold should be $189,000 – Gross Profit should be $61,000

My Income Statements Sales $210,000$250,000 Cost of Goods Sold: Beginning Inventory $32,000 $39,000 + Cost of Goods Purchased $173,000$202,000 = Cost of Goods Available for Sale $205,000 $241,000 - Ending Inventory $39,000 $52,000 = Cost of Goods Sold $166,000$189,000 Gross Profit $44,000$61,000

Answer The original gross profit before correcting the mistake was $49,000 + $56,000 = $105,000 The new gross profit after correcting the mistake is $44,000 + $61,000 = $105,000 Note that the cumulative gross profit over 2 years is the same – Mistakes in inventory affect 2 years – Mistakes in one year’s inventory are balanced by the equal but opposite mistake in the next year’s inventory

Letter to Staley Company An error in ending inventory of the current period will have a reverse effect on the net income of the next accounting period Over two years, the mistake in the current period is offset by the effect in the next year However, this mistake caused Staley Company to have $5,000 of gross profit overstated in 2011, and $5,000 of gross profit understated in 2012 Thus, mistakes in ending inventory effect two accounting periods

Practice Quiz #5