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2. 2 Chapter 6 REPORTING AND ANALYZING INVENTORY

3. 3 Chapter 6 Reporting and Analyzing Inventory Describe the steps in determining inventory quantities. Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. Explain the financial statement and tax effects of each of the inventory cost flow assumptions. Explain the lower of cost or market basis of accounting for inventories. Compute and interpret the inventory turnover ratio. Describe the LIFO reserve and explain its importance for comparing results of different companies.

4. 4 Inventory-Merchandiser Consists of many different items Owned by the company In a form ready for sale to customers One inventory classification: Merchandise Inventory

5. 5 Inventory - Manufacturing Finished goods inventory Work in process Raw materials

6. 6 Finished Goods Inventory Manufactured items that are complete and ready for sale.

7. 7 Work in Process Manufactured inventory that has been placed into production but is not yet complete.

8. 8 Raw Materials The basic goods that will be used in production, but have not been placed in production.

9. Terms of Sale- FOB (free-on-board)

10. 10 Consigned Goods Goods of others you hold. You do not pay for the goods until they sell. The company does not take ownership.

11. 11 Inventory Costing Specific Identification method Cost Flow Assumptions FIFO- First-in, First-Out- earliest goods purchased are the first to be sold LIFO- Last-in,First-Out- latest goods purchased are the first to be sold Average Cost Method- costs are charged on the basis of weighted average unit cost

12. Specific Identification An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of ending inventory.

13. 13 Is Specific Identification Possible? Yes – with bar coding, electronic product codes and radio frequency identification However, it is rarely used

14. The FIFO method assumes the earliest goods purchased are the first to be sold. FIFO

15. The LIFO method assumes the last goods purchased are the first to be sold. LIFO

16. Weighted-Average Cost The average cost method allocates the cost of goods available for sale on the basis of weighted-average unit cost incurred.

17. The average cost method allocates the cost of goods available for sale on the basis of weight- average unit cost incurred. Weighted Average

18. 18 Factors Used in Selecting an Inventory Cost Method zIncome statement effects zBalance sheet effects zTax effects

19. Balance Sheet Effects of Cost Flow Methods

20. 20 Income Statement Effects COGAS is the same

21. 21 Ending Inventory is different Income Statement Effects

22. 22 COGS is different Income Statement Effects

23. 23 Gross Profit is different Income Statement Effects

24. 24 Net Income is different Income Statement Effects

25. 25 Income Tax Effects Taxes are different Taxes are different

26. 26 Consistency Whatever cost flow method a company chooses, it must use it consistently… OR Disclose the change and its effects on net income in the financial statement.

27. 27 Using the above data, assume there are 9,000 units on hand at Dec. 31, what is the cost of ending inventory under FIFO? Review 5,000 Units @ $13 = $ 65,000 4,000 Units @$12 = $ 48,000 TOTAL $113,000

28. 28 Review Using the above data, assume there are 9,000 units on hand at Dec. 31, what is the cost of ending inventory under LIFO? 8,000 Units @ $11 = $ 88,000 1,000 Units @$12 = $ 12,000 TOTAL $100,000

29. 29 Review Using the above data, assume there are 9,000 units on hand at Dec. 31, what is the cost of ending inventory under Weighted-average costs? 309,000/26,000 = $11.88 9,000 units X $11.88 = $106.92 = 88,000 =156,000 = 65,000 309,000 26,000

30. 30 Inventory Turnover Ratio = Cost of Goods Sold Average Inventory An indication of how quickly a company sells its goods. Higher is better. 11 5

31. 31 Days in Inventory= 365 days Inventory Turnover Ratio Lower is better. Measures average number of days inventory is held.

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