1. Chapter 6-1 CHAPTER 6 INVENTORIES Accounting Principles, Eighth Edition

2. Chapter 6-2 Inventory Errors LO 5 Indicate the effects of inventory errors on the financial statements. Inventory errors affect the computation of cost of goods sold and net income in two periods. An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period. Over the two years, the total net income is correct because the errors offset each other. The ending inventory depends entirely on the accuracy of taking and costing the inventory. Income Statement Effects

3. Chapter 6-3 Inventory Errors LO 5 Indicate the effects of inventory errors on the financial statements. ($3,000) Net Income understated $3,000 Net Income overstated Combined income for 2-year period is correct. Illustration 6-18

4. Chapter 6-4 Understating ending inventory will overstate: a.assets. b.cost of goods sold. c.net income. d.owner's equity. Review Question Inventory Errors LO 5 Indicate the effects of inventory errors on the financial statements.

5. Chapter 6-5 Inventory Errors LO 5 Indicate the effects of inventory errors on the financial statements. Effect of inventory errors on the balance sheet is determined by using the basic accounting equation:. Balance Sheet Effects Illustration 6-16 Illustration 6-19

6. Chapter 6-6 Statement Presentation and Analysis Balance Sheet - Inventory classified as current asset. Income Statement - Cost of goods sold subtracted from sales. There also should be disclosure of 1) major inventory classifications, 2) basis of accounting (cost or LCM), and 3) costing method (FIFO, LIFO, or average). Presentation LO 5 Indicate the effects of inventory errors on the financial statements.

7. Chapter 6-7 Statement Presentation and Analysis Inventory management is a double-edged sword 1. High Inventory Levels - may incur high carrying costs (storage, insurance, obsolescence, and damage). 2. Low Inventory Levels – may lead to stockouts and lost sales. Analysis LO 6 Compute and interpret the inventory turnover ratio.

8. Chapter 6-8 Inventory turnover measures the number of times on average the inventory is sold during the period. Cost of Goods Sold Average Inventory Inventory Turnover = Statement Presentation and Analysis Days in inventory measures the average number of days inventory is held. Days in Year (365) Inventory Turnover Days in Inventory = LO 6 Compute and interpret the inventory turnover ratio.

9. Chapter 6-9 BE6-9 At December 31, 2008, the following information was available for J. Graff Company: ending inventory $40,000, beginning inventory $60,000, cost of goods sold $270,000, and sales revenue $380,000. Calculate inventory turnover and days in inventory for J. Graff Company. Statement Presentation and Analysis LO 6 Compute and interpret the inventory turnover ratio. $270,000 ($60,000 + 40,000) / 2 5.4 = Inventory Turnover 365 5.4 67.59 days = Days in Inventory