1. Reporting & Analyzing Inventory Chapter 5

2. 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

3. Goods in Transit  If ownership has passed to the purchaser, the goods are included in the purchaser’s inventory  FOB shipping point

4. Goods on Consignment  Are goods shipped by the owner, to another party.  No change in ownership of the goods

5. 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

6. 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.

7. 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

8. Inventory Costing under a Perpetual System  Four methods Specific Identification First in, First out (FIFO) Last in, First out (LIFO) Weighted Average

9. Illustration DateActivityUnits at CostUnits at Retail Units Inv. Aug 1Beg Inv10units @ $91 = $91010 units Aug 3Purch15 @ $106 = $1,59025 units 8/14Sales20 units5 units 8/ 17Purch20 @ $115 = $230025 8/28Purch10 @ $119 = $119035 8/31Sales2312 units 55units for $599043 sold12 inv.

10. 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 2 @ $91 3@$106 15@ $115 3 @ $119

11. Specific Identification

12.  Cost of goods sold  8 @ $91 = $ 728  12@ 106 = $ 1,272  $2,000  2 @ $91 = $ 182  3 @ $106 = 318  15 @ 115 1,725  3 @ 119 357  2,582  Total 4,582

13. Specific Identification  Ending Inventory 5 @ $115 = $575 7 @ $119 = 833 TOTAL $1,408

14. 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.

15. First in, First out

16. FIFO  Cost of Goods sold  10 @ $91 = $ 910  10 @ $106 = 1060 Total Aug 14$1970  5@ $106 = $ 530  18@ $115= 2070 Total Aug 31 2600 TOTAL 4570

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

18. LIFO

19.  Cost of goods sold 8/14 15@$106 $1,590 5@$455 455 2,045 8/31 10@$119 $1,190 13@$115 1,495 2,685 Total cost of goods sold 4,730

20. LIFO  Ending Inventory  5 @ $91 = 455  7 @ $115 = 805  $1,260

21. 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

22. Weighted Average

23. Financial Statement Effects of Costing Methods

24. 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

25. 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.

26. Lower of cost or market  Select the lower cost or market price as the value of ending inventory

27. Effects of Inventory Errors

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