1. Describe the issues in managing different types of inventory. 7-1

2. The primary goals of inventory managers are to: 1. Maintain a sufficient quantity to meet customers’ needs 2. Ensure quality meets customers’ expectations and company standards 3. Minimize the costs of acquiring and carrying the inventory 7-2

3. Merchandisers...  Buy finished goods.  Sell finished goods. Manufacturers...  Buy raw materials.  Produce and sell finished goods. Raw Materials Work in Process Finished goods Merchandise inventory Materials waiting to be processed Partially complete products Completed products awaiting sale 7-3

4. Explain how to report inventory and cost of goods sold. 7-4

5. 7-5

6. BI + P – CGS = EI American Eagle Outfitters’ beginning inventory was $4,800. During the period, the company purchased inventory for $10,200. The cost of goods sold for the period is $9,000. Compute the ending inventory. 7-6

7. Beginning Inventory $4,800 + Goods Available for Sale $15,000 Purchases $10,000 Ending Inventory $6,000 (Balance Sheet) Cost of Goods Sold $9,000 (Income Statement) 7-7

8. Compute costs using four inventory costing methods. 7-8

9. First-in, first-out (FIFO) Last-in, first-out (LIFO) Weighted average Specific identification 7-9

10. Consider the following information This method individually identifies and records the cost of each item sold as part of cost of goods sold. If the items sold were identified as the ones that cost $70 and $95, the total cost of those items ($70 + 95 = $165) would be reported as Cost of Goods Sold. The cost of the remaining item ($75) would be reported as Inventory on the balance sheet at the end of the period. Specific Identification May 5 $75 cost May 3 $70 cost May 6 $95 cost 7-10

11. FIFOLIFOWeighted average May 6 $95 cost May 5 $75 cost May 3 $70 cost May 6 $95 cost May 5 $75 cost May 3 $70 cost May 6 $95 cost May 5 $75 cost May 3 $70 cost Sold Still there Sold Still there Sold Still there $240 3 = $80 per unit 7-11

12. Summary Let’s consider a more complex example. 7-12

13. (10 units @ $10) + (5 units @ $8) (10 units @ $7) + (25 units @ $8) 7-13

14. (10 units @ $7) + (5 units @ $8) (10 units @ $10) + (25 units @ $8) 7-14

15. Weighted Average Weighted Average Cost = Cost of goods Available for Sale Number of Units Available for Sale Weighted Average Cost = $410 50 units = $8.20 per unit 7-15

16. 15 units @ $8.20 35 units @ $8.20 7-16

17. 7-17

18. 7-18

19. Advantages of Methods First-In, First-Out Weighted Average Last-In, First-Out 7-19

20. 7-20

21. Report inventory at the lower of cost or market. 7-21

22. The value of inventory can fall below its recorded cost for two reasons: 1. it’s easily replaced by identical goods at a lower cost, or 2. it’s become outdated or damaged. The value of inventory can fall below its recorded cost for two reasons: 1. it’s easily replaced by identical goods at a lower cost, or 2. it’s become outdated or damaged. When the value of inventory falls below its recorded cost, the amount recorded for inventory is written down to its lower market value. This is known as the lower of cost or market (LCM) rule. 7-22

23. Record 2 400 items @ $20 1,000 items @ $150 1,000 items @ $165 Analyze 1 7-23

24. Analyze and record inventory purchases, transportation, returns and allowances, and discounts. 7-24

25. We will now look at the accounting for purchases, transportation costs, purchase returns and allowances, and purchase discounts. We will record all inventory- related transactions in the Inventory account. 7-25

26. American Eagle Outfitters purchases $10,500 of vintage jeans on credit. 1 Analyze 2 Record 7-26

27. American Eagle pays $400 cash to a trucker who delivers the $10,500 of vintage jeans to one of its stores. 1 Analyze 2 Record 7-27

28. American Eagle returned some of the vintage jeans to the supplier and received a $500 reduction in the balance owed. 1 Analyze 2 Record 7-28

29. American Eagle’s vintage jeans purchase for $10,500 had terms of 2/10, n/30. Recall that American Eagle returned inventory costing $500 and received a $500 reduction in its Accounts Payable. American Eagle paid within the discount period. 1 Analyze 2 Record 7-29

30. 7-30

31. Evaluate inventory management by computing and interpreting the inventory turnover ratio. 7-31

32. 7-32

33. 7-33

34. The Effects of Errors in Ending Inventory

35. Cost of Goods Sold Equation BI + P – CGS = EI Errors in Ending Inventory will affect the Balance Sheet and the Income Statement. Assume that Ending Inventory was overstated in 2009 by $10,000 due to an error that was not discovered until 2010. 7-35

36. Now let’s examine the effects of the 2009 Ending Inventory Error on 2010. Assume that Ending Inventory was overstated in 2009 by $10,000 due to an error that was not discovered until 2010. 7-36