Yönetim Temelleri Inventories And Cost of Goods Sold © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin INVENTORIES AND COST OF GOODS SOLD Chapter 8© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Inventory Goods owned and held for sale to customers Current asset Inventory Defined© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income Purchase costs (or manufacturing costs) as goods are sold BALANCE SHEET Asset Inventory The Flow of Inventory Costs© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Entry on Purchase Date Inventory $$$$ Accounts Payable $$$$ Entry on Sale Date Cost of Goods Sold $$$$ Inventory $$$$ In a perpetual inventory system, inventory entries parallel the flow of costs. The Flow of Inventory Costs© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Entry on Sale Date Cost of Goods Sold $$$$ Inventory $$$$ When identical units of inventory have different unit costs , a question naturally arises as to which of these costs should be used in recording a sale of inventory. Which Unit Did We Sell? © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin A separate subsidiary account is maintained for each item in inventory. How can we determine the unit cost for the Sept. 10 sale? Item LL002 Primary supplier Electronic City Description Laser Light Secondary supplier Electric Company Location Storeroom 2 Inventory level: Min: 25 Max: 200 Purchased Sold Balance Date Units Unit Cost Total Units Unit Cost Cost of Goods Sold Units Unit Cost Total Sept. 5 100 30 $ 3,000 $ 100 30 $ 3,000 $ Sept. 9 75 50 3,750 100 30 3,000 75 50 3,750 Sept. 10 10 ? ? ? ? ? ? ? ? Inventory Subsidiary Ledger© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO1 In a perpetual inventory system, you are to determine the cost of goods sold using specific identification, (a) average cost, (b) FIFO, and (c) LIFO (d)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin We use one of these inventory valuation methods to determine cost of inventory sold. Inventory Cost Flows Specific Identification A v e r a g e C o s t L I F O F I F O© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Cost of Goods Available for Sale Aug. 1 Beg. Inventory 10 units @ 91 $ = 910 $ Aug. 3 Purchased 15 units @ 106 $ = 1,590 $ Aug. 17 Purchased 20 units @ 115 $ = 2,300 $ Aug. 28 Purchased 10 units @ 119 $ = 1,190 $ Retail Sales of Goods Aug. 14 Sales 20 units @ 130 $ = 2,600 $ Aug. 31 Sales 23 units @ 150 $ = 3,450 $ The Bike Company (TBC) Data for an Illustration© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Specific Identification When a unit is sold, its specific cost is added to cost of goods sold.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ On August 14, TBC sold 20 bikes for $130 each. Of the bikes sold 9 originally cost $91 and 11 cost $106. Specific Identification© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in inventory. Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 9 @ 91 $ = 819 $ 11 @ 106 $ = 1,166 $ 515 $ Let’s look at the entries for the Aug. 14 sale. Specific Identification C O G S : $ 1 9 8 5© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin G E N E R A L J O U R N A L D a t e A c c o u n t T i t l e s a n d E x p l a n a t i o n P R D e b i t C r e d i t A u g . 1 4 C a s h 2 , 6 0 0 S a l e s 2 , 6 0 0 1 4 C o s t o f G o o d s S o l d 1 , 9 8 5 I n v e n t o r y 1 , 9 8 5 G E N E R A L J O U R N A L D a t e A c c o u n t T i t l e s a n d E x p l a n a t i o n P R D e b i t C r e d i t A u g . 1 4 C a s h 2 , 6 0 0 S a l e s 2 , 6 0 0 1 4 C o s t o f G o o d s S o l d 1 , 9 8 5 I n v e n t o r y 1 , 9 8 5 G E N E R A L J O U R N A L D a t e A c c o u n t T i t l e s a n d E x p l a n a t i o n P R D e b i t C r e d i t A u g . 1 4 C a s h 2 , 6 0 0 S a l e s 2 , 6 0 0 1 4 C o s t o f G o o d s S o l d 1 , 9 8 5 I n v e n t o r y 1 , 9 8 5 Retail (20 × $130) Cost A similar entry is made after each sale. Specific Identification© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Additional purchases were made on August 17 and 28. On August 31, 23 bikes sold for $150 each. Costs associated with sales on August 31 were as follows: 1 @ $91, 3 @ $106, 15 @ $115, & 4 @ $119. Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 9 @ 91 $ = 819 $ 11 @ 106 $ = 1,166 $ 515 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,815 $ Aug. 28 10 @ 119 $ = 1,190 $ 4,005 $ Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 9 @ 91 $ = 819 $ 11 @ 106 $ = 1,166 $ 515 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,815 $ Aug. 28 10 @ 119 $ = 1,190 $ 4,005 $ Aug. 31 1 @ 91 $ = 91 $ 3 @ 106 $ = 318 $ 15 @ 115 $ = 1,725 $ 4 @ 119 $ = 476 $ 1,395 $ Specific Identification Cost of Goods Sold for August 31 = $2,610© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Balance Sheet Inventory = $1,395 Income Statement COGS = $4,595 1 @ 106 $ = 106 $ 5 @ 115 $ = 575 6 @ 119 $ = 714 End. Inv. 1,395 $ Specific Identification Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 9 @ 91 $ = 819 $ 11 @ 106 $ = 1,166 $ 515 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,815 $ Aug. 28 10 @ 119 $ = 1,190 $ 4,005 $ Aug. 31 1 @ 91 $ = 91 $ 3 @ 106 $ = 318 $ 15 @ 115 $ = 1,725 $ 4 @ 119 $ = 476 $ 1,395 $ © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Since specific identification is so easy, can’t we use it all the time? Not really. Specific identification is hard to use when we sell a lot of inventory that has lots of different costs. Specific Identification© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Cost of Goods Available for Sale Units on hand on the date of sale ÷ Average-Cost Method When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On August 14, TBC sold 20 bikes for $130 each. Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ The average cost per unit must be computed prior to each sale. Average-Cost Method $2,500 ? 25 = $100© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 20 @ 100 $ = 2,000 $ 500 $ The average cost per unit is $100. Let’s look at the entries for the Aug. 14 sale. Average-Cost Method $100 = $2,500 ? 25© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Aug. 14 Cash 2,600 Sales 2,600 14 Cost of Goods Sold 2,000 Inventory 2,000 Retail Cost A similar entry is made after each sale. Average-Cost Method© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Additional purchases were made on August 17 and August 28. On August 31, an additional 23 units were sold. Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 20 @ 100 $ = 2,000 $ 500 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,800 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,990 $ Average-Cost Method© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin $114 = $3,990 ? 35 Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 20 @ 100 $ = 2,000 $ 500 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,800 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,990 $ Total Purchases 55 Less: Sales to Date -20 Units on Hand 35 Average-Cost Method© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin $114 = $3,990 ? 35 D a t e P u r c h a s e s C o s t o f G o o d s S o l d I n v e n t o r y B a l a n c e A u g . 1 1 0 @ 9 1 $ = 9 1 0 $ 9 1 0 $ A u g . 3 1 5 @ 1 0 6 $ = 1 , 5 9 0 $ 2 , 5 0 0 $ A u g . 1 4 2 0 @ 1 0 0 $ = 2 , 0 0 0 $ 5 0 0 $ A u g . 1 7 2 0 @ 1 1 5 $ = 2 , 3 0 0 $ 2 , 8 0 0 $ A u g . 2 8 1 0 @ 1 1 9 $ = 1 , 1 9 0 $ 3 , 9 9 0 $ A u g . 3 1 2 3 @ 1 1 4 $ = 2 , 6 2 2 $ 1 , 3 6 8 $ The average cost per unit is $114. Average-Cost Method© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Income Statement COGS = $4,622 Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 20 @ 100 $ = 2,000 $ 500 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,800 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,990 $ Aug. 31 23 @ 114 $ = 2,622 $ 1,368 $ Balance Sheet Inventory = $1,368 $114 × 12 = $1,368 Average-Cost Method© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Costs of Goods Sold Ending Inventory Oldest Costs Recent Costs First-In, First-Out Method (FIFO)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On August 14, TBC sold 20 bikes for $130 each. Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory. Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 10 @ 91 $ = 910 $ 10 @ 106 $ = 1,060 $ 530 $ First-In, First-Out Method (FIFO)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Aug. 14 Cash 2,600 Sales 2,600 14 Cost of Goods Sold 1,970 Inventory 1,970 Retail Cost A similar entry is made after each sale. First-In, First-Out Method (FIFO)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Additional purchases were made on Aug. 17 and Aug. 28. On August 31, an additional 23 units were sold. Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 10 @ 91 $ = 910 $ 10 @ 106 $ = 1,060 $ 530 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,830 $ Aug. 28 10 @ 119 $ = 1,190 $ 4,020 $ First-In, First-Out Method (FIFO) Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 10 @ 91 $ = 910 $ 10 @ 106 $ = 1,060 $ 530 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,830 $ Aug. 28 10 @ 119 $ = 1,190 $ 4,020 $ Aug. 31 5 @ 106 $ = 530 $ 18 @ 115 $ = 2,070 $ 1,420 $ Cost of Goods Sold for August 31 = $2,600© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Balance Sheet Inventory = $1,420 Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 10 @ 91 $ = 910 $ 10 @ 106 $ = 1,060 $ 530 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,830 $ Aug. 28 10 @ 119 $ = 1,190 $ 4,020 $ Aug. 31 5 @ 106 $ = 530 $ 18 @ 115 $ = 2,070 $ 1,420 $ Income Statement COGS = $4,570 2 @ 115 $ = 230 $ 10 @ 119 $ = 1,190 End. Inv. 1,420 $ First-In, First-Out Method (FIFO)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Costs of Goods Sold Ending Inventory Recent Costs Oldest Costs Last-In, First-Out Method (LIFO)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin On August 14, TBC sold 20 bikes for $130 each. Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Last-In, First-Out Method (LIFO) Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 15 @ 106 $ = 1,590 $ 5 @ 91 $ = 455 $ 455 $ The Cost of Goods Sold for the August 14 sale is $2,045, leaving $455 and 5 units in inventory. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Aug. 14 Cash 2,600 Sales 2,600 14 Cost of Goods Sold 2,045 Inventory 2,045 Retail Cost A similar entry is made after each sale. Last-In, First-Out Method (LIFO)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 15 @ 106 $ = 1,590 $ 5 @ 91 $ = 455 $ 455 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,755 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,945 $ Last-In, First-Out Method (LIFO) Additional purchases were made on Aug. 17 and Aug. 28. On Aug. 31, an additional 23 units were sold.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 15 @ 106 $ = 1,590 $ 5 @ 91 $ = 455 $ 455 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,755 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,945 $ Last-In, First-Out Method (LIFO) Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 15 @ 106 $ = 1,590 $ 5 @ 91 $ = 455 $ 455 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,755 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,945 $ Aug. 31 10 @ 119 $ = 1,190 $ 13 @ 115 $ = 1,495 $ 1,260 $ Cost of Goods Sold for August 31 = $2,685© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Date Purchases Cost of Goods Sold Inventory Balance Aug. 1 10 @ 91 $ = 910 $ 910 $ Aug. 3 15 @ 106 $ = 1,590 $ 2,500 $ Aug. 14 15 @ 106 $ = 1,590 $ 5 @ 91 $ = 455 $ 455 $ Aug. 17 20 @ 115 $ = 2,300 $ 2,755 $ Aug. 28 10 @ 119 $ = 1,190 $ 3,945 $ Aug. 31 10 @ 119 $ = 1,190 $ 13 @ 115 $ = 1,495 $ 1,260 $ Balance Sheet Inventory = $1,260 Income Statement COGS = $4,730 Last-In, First-Out Method (LIFO) 5 @ 91 $ = 455 $ 7 @ 115 $ = 805 End. Inv. 1,260 $© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin I n v e n t o r y V a l u a t i o n M e t h o d s : A S u m m a r y C o s t s A l l o c a t e d t o : V a l u a t i o n M e t h o d C o s t o f G o o d s S o l d I n v e n t o r y C o m m e n t s S p e c i f i c A c t u a l c o s t o f A c t u a l c o s t o f u n i t s P a r a l l e l s p h y s i c a l f l o w i d e n t i f i c a t i o n t h e u n i t s s o l d r e m a i n i n g L o g i c a l m e t h o d w h e n u n i t s a r e u n i q u e M a y b e m i s l e a d i n g f o r i d e n t i c a l u n i t s A v e r a g e c o s t N u m b e r o f u n i t s s o l d t i m e s t h e N u m b e r o f u n i t s o n h a n d t i m e s t h e A s s i g n s a l l u n i t s t h e s a m e a v e r a g e u n i t c o s t a v e r a g e u n i t c o s t a v e r a g e u n i t c o s t C u r r e n t c o s t s a r e a v e r a g e d i n w i t h o l d e r c o s t s F i r s t - i n , F i r s t - o u t ( F I F O ) C o s t o f e a r l i e s t p u r c h a s e s o n C o s t o f m o s t r e c e n t l y C o s t o f g o o d s s o l d i s b a s e d o n o l d e r c o s t s h a n d p r i o r t o t h e s a l e p u r c h a s e d u n i t s I n v e n t o r y v a l u e d a t c u r r e n t c o s t s M a y o v e r s t a t e i n c o m e d u r i n g p e r i o d s o f r i s i n g p r i c e s ; m a y i n c r e a s e i n c o m e t a x e s d u e L a s t - i n , F i r s t - o u t ( L I F O ) C o s t o f m o s t r e c e n t l y C o s t o f e a r l i e s t p u r c h a s e s C o s t o f g o o d s s o l d s h o w n a t r e c e n t p r i c e s p u r c h a s e d u n i t s ( a s s u m e d s t i l l i n i n v e n t o r y ) I n v e n t o r y s h o w n a t o l d ( a n d p e r h a p s o u t o f d a t e ) c o s t s M o s t c o n s e r v a t i v e m e t h o d d u r i n g p e r i o d s o f r i s i n g p r i c e s ; o f t e n r e s u l t s i n l o w e r i n c o m e t a x e s© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Once a company has adopted a particular accounting method, it should follow that method consistently rather than switch methods from one year to the next. The Principle of Consistency© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO2 To explain the need for taking a physical inventory.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin This inventory arrived just in time for us to use it in the manufacturing process. Just-In-Time (JIT) Inventory Systems© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Dec. 31 Cost of Goods Sold $$$$ Inventory $$$$ The primary reason for taking a physical inventory is to adjust the perpetual inventory records for unrecorded shrinkage losses , such as theft, spoilage, or breakage. Taking a Physical Inventory© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO3 To record shrinkage losses and other year- end adjustments to inventory.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Reduces the value of the inventory. Obsolescence Adjust inventory value to the lower of historical cost or current replacement cost (market). Lower of Cost or Market (LCM) LCM and Other Write-Downs of Inventory© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin LCM and Other Write-Downs of Inventory C o s t M a r k e t I n d i v i d u a l I t e m s I n v e n t o r y C a t e g o r y T o t a l I n v e n t o r y B i c y c l e s : B o y ' s b i c y c l e s 4 , 2 0 0 $ 4 , 6 0 0 $ 4 , 2 0 0 G i r l s b i c y c l e s 3 , 8 0 0 3 , 1 0 0 3 , 1 0 0 J u n i o r b i c y c l e 5 , 7 0 0 5 , 0 0 0 5 , 0 0 0 T o t a l 1 3 , 7 0 0 $ 1 2 , 7 0 0 $ 1 2 , 7 0 0 B i c y c l e a c c e s s o r i e s : T r a i n i n g w h e e l s 4 8 5 $ 5 2 5 $ 4 8 5 H e a d l a m p s 3 1 2 4 0 0 3 1 2 P r o t e c t i v e h e l m e t s 7 0 0 6 0 0 6 0 0 G l o v e s 2 4 5 2 1 2 2 1 2 K n e e p a d s 1 9 5 1 4 5 1 4 5 T o t a l 1 , 9 3 7 $ 1 , 8 8 2 $ 1 , 8 8 2 T o t a l i n v e n t o r y 1 5 , 6 3 7 $ 1 4 , 5 8 2 $ 1 4 , 0 5 4 $ 1 4 , 5 8 2 $ 1 4 , 5 8 2 $ L C M A p p l i e d o n t h e B a s i s o f . . .© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Year End A sale should be recorded when title to the merchandise passes to the buyer. F.O.B. shipping point ? title passes to buyer at the point of shipment. F.O.B. destination point ? title passes to buyer at the point of destination. Goods In Transit© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO4 In a periodic inventory system, you are to determine the cost of goods sold using (a) specific identification, (b) average cost, (c) FIFO, and (d) LIFO. © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Entry on Purchase Date Purchases $$$$ Accounts Payable $$$$ In a periodic inventory system, inventory entries are as follows. Note that an entry is not made to inventory. Periodic Inventory Systems© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin GENERAL JOURNAL Date Account Titles and Explanation P R Debit Credit Entry on Sale Date No entry to inventory. Accounts Receivable $$$$ Sales $$$$ In a periodic inventory system, inventory entries are as follows. Periodic Inventory Systems© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The inventory on hand and the cost of goods sold for the year are not determined until year-end. Periodic Inventory Systems© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Specific identification LIFO Average cost FIFO We use one of these inventory valuation methods in a periodic inventory system. Periodic Inventory Systems© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin C o m p u t e r s , I n c . M o u s e P a d I n v e n t o r y D a t e U n i t s $ / U n i t T o t a l B e g i n n i n g I n v e n t o r y 1 , 0 0 0 5 . 2 5 $ 5 , 2 5 0 . 0 0 $ P u r c h a s e s : J a n . 3 3 0 0 5 . 3 0 1 , 5 9 0 . 0 0 J u n e 2 0 1 5 0 5 . 6 0 8 4 0 . 0 0 S e p t . 1 5 2 0 0 5 . 8 0 1 , 1 6 0 . 0 0 N o v . 2 9 1 5 0 5 . 9 0 8 8 5 . 0 0 G o o d s A v a i l a b l e f o r S a l e 1 , 8 0 0 9 , 7 2 5 . 0 0 $ E n d i n g I n v e n t o r y 1 , 2 0 0 ? C o s t o f G o o d s S o l d 6 0 0 ? Information for the Following Inventory Examples© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin By reviewing actual purchase invoices, Computers, Inc. determines that the 1,200 mouse pads on hand at year-end have an actual total cost of $6,400. Determine the cost of goods sold for the year. Specific Identification© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin C o m p u t e r s , I n c . M o u s e P a d I n v e n t o r y D a t e U n i t s $ / U n i t T o t a l B e g i n n i n g I n v e n t o r y 1 , 0 0 0 5 . 2 5 $ 5 , 2 5 0 . 0 0 $ P u r c h a s e s : J a n . 3 3 0 0 5 . 3 0 1 , 5 9 0 . 0 0 J u n e 2 0 1 5 0 5 . 6 0 8 4 0 . 0 0 S e p t . 1 5 2 0 0 5 . 8 0 1 , 1 6 0 . 0 0 N o v . 2 9 1 5 0 5 . 9 0 8 8 5 . 0 0 G o o d s A v a i l a b l e f o r S a l e 1 , 8 0 0 9 , 7 2 5 . 0 0 $ E n d i n g I n v e n t o r y 1 , 2 0 0 6 , 4 0 0 . 0 0 $ C o s t o f G o o d s S o l d 6 0 0 3 , 3 2 5 . 0 0 $ Cost of Goods Sold $9,725 - $6,400 = $3,325 Specific Identification© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Total Cost of Goods Available for Sale Total Number of Units Available for Sale ÷ The average cost is calculated at year- end as follows: Average-Cost Method© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin C o m p u t e r s , I n c . M o u s e P a d I n v e n t o r y D a t e U n i t s $ / U n i t T o t a l B e g i n n i n g I n v e n t o r y 1 , 0 0 0 5 . 2 5 $ 5 , 2 5 0 . 0 0 $ P u r c h a s e s : J a n . 3 3 0 0 5 . 3 0 1 , 5 9 0 . 0 0 J u n e 2 0 1 5 0 5 . 6 0 8 4 0 . 0 0 S e p t . 1 5 2 0 0 5 . 8 0 1 , 1 6 0 . 0 0 N o v . 2 9 1 5 0 5 . 9 0 8 8 5 . 0 0 G o o d s A v a i l a b l e f o r S a l e 1 , 8 0 0 9 , 7 2 5 . 0 0 $ E n d i n g I n v e n t o r y 1 , 2 0 0 ? C o s t o f G o o d s S o l d 6 0 0 ? Avg. Cost $9,725 ? 1,800 = $5.40278 Average-Cost Method C o m p u t e r s , I n c . M o u s e P a d I n v e n t o r y D a t e U n i t s $ / U n i t T o t a l B e g i n n i n g I n v e n t o r y 1 , 0 0 0 5 . 2 5 $ 5 , 2 5 0 . 0 0 $ P u r c h a s e s : J a n . 3 3 0 0 5 . 3 0 1 , 5 9 0 . 0 0 J u n e 2 0 1 5 0 5 . 6 0 8 4 0 . 0 0 S e p t . 1 5 2 0 0 5 . 8 0 1 , 1 6 0 . 0 0 N o v . 2 9 1 5 0 5 . 9 0 8 8 5 . 0 0 G o o d s A v a i l a b l e f o r S a l e 1 , 8 0 0 9 , 7 2 5 . 0 0 $ E n d i n g I n v e n t o r y 1 , 2 0 0 6 , 4 8 3 . 0 0 $ C o s t o f G o o d s S o l d 6 0 0 3 , 2 4 2 . 0 0 $ Ending Inventory Avg. Cost $5.40278 ?? 1,200 = $6,483 Cost of Goods Sold Avg. Cost $5.40278 ?? 600 = $3,242© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Costs of Goods Sold Ending Inventory Oldest Costs Recent Costs First-In, First-Out Method (FIFO)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Remember: Start with the 11/29 purchase and then add other purchases until you reach the number of units in ending inventory. First-In, First-Out Method (FIFO) C o m p u t e r s , I n c . M o u s e P a d I n v e n t o r y D a t e U n i t s $ / U n i t T o t a l B e g i n n i n g I n v e n t o r y 1 , 0 0 0 5 . 2 5 $ 5 , 2 5 0 . 0 0 $ P u r c h a s e s : J a n . 3 3 0 0 5 . 3 0 1 , 5 9 0 . 0 0 J u n e 2 0 1 5 0 5 . 6 0 8 4 0 . 0 0 S e p t . 1 5 2 0 0 5 . 8 0 1 , 1 6 0 . 0 0 N o v . 2 9 1 5 0 5 . 9 0 8 8 5 . 0 0 G o o d s A v a i l a b l e f o r S a l e 1 , 8 0 0 9 , 7 2 5 . 0 0 $ E n d i n g I n v e n t o r y 1 , 2 0 0 ? C o s t o f G o o d s S o l d 6 0 0 ?© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Date Beg. Inv. Purchases End. Inv. Cost of Goods Sold Nov. 29 150@$5.90 150@$5.90 Units 150 Now, let’s complete the table. First-In, First-Out Method (FIFO) Date Beg. Inv. Purchases End. Inv. Cost of Goods Sold 1,000@$5.25 600@$5.25 400@$5.25 Jan. 3 300@$5.30 300@$5.30 June 20 150@$5.60 150@$5.60 Sept. 15 200@$5.80 200@$5.80 Nov. 29 150@$5.90 150@$5.90 Units 1,200 600 Now, we have allocated the cost to all 1,200 units in ending inventory. Date Beg. Inv. Purchases End. Inv. Cost of Goods Sold 1,000@$5.25 600@$5.25 400@$5.25 Jan. 3 300@$5.30 300@$5.30 June 20 150@$5.60 150@$5.60 Sept. 15 200@$5.80 200@$5.80 Nov. 29 150@$5.90 150@$5.90 Units 1,200 600 Costs $6,575 $3,150 Cost of Goods Available for Sale $9,725© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Completing the table summarizes the computations just made. First-In, First-Out Method (FIFO) C o m p u t e r s , I n c . M o u s e P a d I n v e n t o r y D a t e U n i t s $ / U n i t T o t a l B e g i n n i n g I n v e n t o r y 1 , 0 0 0 5 . 2 5 $ 5 , 2 5 0 . 0 0 $ P u r c h a s e s : J a n . 3 3 0 0 5 . 3 0 1 , 5 9 0 . 0 0 J u n e 2 0 1 5 0 5 . 6 0 8 4 0 . 0 0 S e p t . 1 5 2 0 0 5 . 8 0 1 , 1 6 0 . 0 0 N o v . 2 9 1 5 0 5 . 9 0 8 8 5 . 0 0 G o o d s A v a i l a b l e f o r S a l e 1 , 8 0 0 9 , 7 2 5 . 0 0 $ E n d i n g I n v e n t o r y 1 , 2 0 0 6 , 5 7 5 . 0 0 $ C o s t o f G o o d s S o l d 6 0 0 3 , 1 5 0 . 0 0 $ © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Costs of Goods Sold Ending Inventory Recent Costs Oldest Costs Last-In, First-Out Method (LIFO)© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Remember: Start with beginning inventory and then add other purchases until you reach the number of units in ending inventory. Last-In, First-Out Method (LIFO) C o m p u t e r s , I n c . M o u s e P a d I n v e n t o r y D a t e U n i t s $ / U n i t T o t a l B e g i n n i n g I n v e n t o r y 1 , 0 0 0 5 . 2 5 $ 5 , 2 5 0 . 0 0 $ P u r c h a s e s : J a n . 3 3 0 0 5 . 3 0 1 , 5 9 0 . 0 0 J u n e 2 0 1 5 0 5 . 6 0 8 4 0 . 0 0 S e p t . 1 5 2 0 0 5 . 8 0 1 , 1 6 0 . 0 0 N o v . 2 9 1 5 0 5 . 9 0 8 8 5 . 0 0 G o o d s A v a i l a b l e f o r S a l e 1 , 8 0 0 9 , 7 2 5 . 0 0 $ E n d i n g I n v e n t o r y 1 , 2 0 0 ? C o s t o f G o o d s S o l d 6 0 0 ?© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Date Beg. Inv. Purchases End. Inv. Cost of Goods Sold 1,000@$5.25 1,000@$5.25 Units 1,000 Last-In, First-Out Method (LIFO) Date Beg. Inv. Purchases End. Inv. Cost of Goods Sold 1,000@$5.25 1,000@$5.25 Jan. 3 300@$5.30 200@$5.30 100@$5.30 Units 1,200 100 Now, we have allocated the cost to all 1,200 units in ending inventory. Next, let’s complete the table. Date Beg. Inv. Purchases End. Inv. Cost of Goods Sold 1,000@$5.25 1,000@$5.25 Jan. 3 300@$5.30 200@$5.30 100@$5.30 June 20 150@$5.60 150@$5.60 Sept. 15 200@$5.80 200@$5.80 Nov. 29 150@$5.90 150@$5.90 Units 1,200 600 Costs $6,310 $3,415 Cost of Goods Available for Sale $9,725© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Completing the table summarizes the computations just made. Last-In, First-Out Method (LIFO) C o m p u t e r s , I n c . M o u s e P a d I n v e n t o r y D a t e U n i t s $ / U n i t T o t a l B e g i n n i n g I n v e n t o r y 1 , 0 0 0 5 . 2 5 $ 5 , 2 5 0 . 0 0 $ P u r c h a s e s : J a n . 3 3 0 0 5 . 3 0 1 , 5 9 0 . 0 0 J u n e 2 0 1 5 0 5 . 6 0 8 4 0 . 0 0 S e p t . 1 5 2 0 0 5 . 8 0 1 , 1 6 0 . 0 0 N o v . 2 9 1 5 0 5 . 9 0 8 8 5 . 0 0 G o o d s A v a i l a b l e f o r S a l e 1 , 8 0 0 9 , 7 2 5 . 0 0 $ E n d i n g I n v e n t o r y 1 , 2 0 0 6 , 3 1 0 . 0 0 $ C o s t o f G o o d s S o l d 6 0 0 3 , 4 1 5 . 0 0 $ © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO5 To explain the effects on the income statement of errors in inventory valuation.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin E r r o r s i n M e a s u r i n g I n v e n t o r y B e g i n n i n g I n v e n t o r y E n d i n g I n v e n t o r y E f f e c t o n I n c o m e S t a t e m e n t O v e r s t a t e d U n d e r s t a t e d O v e r s t a t e d U n d e r s t a t e d G o o d s A v a i l a b l e f o r S a l e + - N E N E C o s t o f G o o d s S o l d + - - + G r o s s P r o f i t - + + - N e t I n c o m e - + + - E f f e c t o n B a l a n c e S h e e t E n d i n g I n v e n t o r y N E N E + - R e t a i n e d E a r n i n g s - + + - An error in ending inventory in a year will result in the same error in the beginning inventory of the next year. Importance of an Accurate Valuation of Inventory© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO6 To estimate the cost of goods sold and ending inventory by the gross profit method and by the retail method.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin For interim financial statements, we may need to estimate ending inventory and cost of goods sold.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Determine cost of goods ? available for sale. Estimate cost of goods sold by ? multiplying the net sales by the cost ratio. Deduct cost of goods sold from ? cost of goods available for sale to determine ending inventory. The Gross Profit Method© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin In March of 2007, Matrix Company’s inventory was destroyed by fire. Matrix normal gross profit ratio is 30% of net sales. At the time of the fire, Matrix showed the following balances: S a l e s 3 1 , 5 0 0 $ S a l e s r e t u r n s 1 , 5 0 0 B e g i n n i n g I n v e n t o r y 1 2 , 0 0 0 N e t c o s t o f g o o d s p u r c h a s e d 2 0 , 5 0 0 The Gross Profit Method© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin G o o d s A v a i l a b l e f o r S a l e : B e g i n n i n g I n v e n t o r y 1 2 , 0 0 0 $ N e t c o s t o f g o o d s p u r c h a s e d 2 0 , 5 0 0 G o o d s a v a i l a b l e f o r s a l e 3 2 , 5 0 0 $ L e s s e s t i m a t e d c o s t o f g o o d s s o l d : S a l e s 3 1 , 5 0 0 $ L e s s s a l e s r e t u r n s ( 1 , 5 0 0 ) N e t s a l e s 3 0 , 0 0 0 $ E s t i m a t e d c o s t o f g o o d s s o l d ( 2 1 , 0 0 0 ) E s t i m a t e d M a r c h i n v e n t o r y l o s s 1 1 , 5 0 0 $ E s t i m a t i n g I n v e n t o r y T h e G r o s s P r o f i t M e t h o d G o o d s A v a i l a b l e f o r S a l e : B e g i n n i n g I n v e n t o r y 1 2 , 0 0 0 $ N e t c o s t o f g o o d s p u r c h a s e d 2 0 , 5 0 0 G o o d s a v a i l a b l e f o r s a l e 3 2 , 5 0 0 $ L e s s e s t i m a t e d c o s t o f g o o d s s o l d : S a l e s 3 1 , 5 0 0 $ L e s s s a l e s r e t u r n s ( 1 , 5 0 0 ) N e t s a l e s 3 0 , 0 0 0 $ E s t i m a t e d c o s t o f g o o d s s o l d ( 2 1 , 0 0 0 ) E s t i m a t e d M a r c h i n v e n t o r y l o s s 1 1 , 5 0 0 $ E s t i m a t i n g I n v e n t o r y T h e G r o s s P r o f i t M e t h o d The Gross Profit Method G o o d s A v a i l a b l e f o r S a l e : B e g i n n i n g I n v e n t o r y 1 2 , 0 0 0 $ N e t c o s t o f g o o d s p u r c h a s e d 2 0 , 5 0 0 G o o d s a v a i l a b l e f o r s a l e 3 2 , 5 0 0 $ L e s s e s t i m a t e d c o s t o f g o o d s s o l d : S a l e s 3 1 , 5 0 0 $ L e s s s a l e s r e t u r n s ( 1 , 5 0 0 ) N e t s a l e s 3 0 , 0 0 0 $ E s t i m a t e d c o s t o f g o o d s s o l d ( 2 1 , 0 0 0 ) E s t i m a t e d M a r c h i n v e n t o r y l o s s 1 1 , 5 0 0 $ E s t i m a t i n g I n v e n t o r y T h e G r o s s P r o f i t M e t h o d × 70% Step 1 Step 2 Step 3© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Retail Method The retail method of estimating inventory requires that management determine the value of ending inventory at retail prices. G o o d s a v a i l a b l e f o r s a l e a t c o s t 3 2 , 5 0 0 $ G o o d s a v a i l a b l e f o r s a l e a t r e t a i l 5 0 , 0 0 0 P h y s i c a l c o u n t o f e n d i n g i n v e n t o r y p r i c e d a t r e t a i l 2 2 , 0 0 0 I n f o r m a t i o n f o r M a t r i x C o m p a n y T h e R e t a i l M e t h o d In March of 2007, Matrix Company’s inventory was destroyed by fire. At the time of the fire, Matrix’s management collected the following information:© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin The Retail Method a G o o d s a v a i l a b l e f o r s a l e a t c o s t 3 2 , 5 0 0 $ b G o o d s a v a i l a b l e f o r s a l e a t r e t a i l 5 0 , 0 0 0 c C o s t r a t i o [ a ? ? b ] 6 5 % d P h y s i c a l c o u n t o f e n d i n g i n v e n t o r y p r i c e d a t r e t a i l 2 2 , 0 0 0 e E s t i m a t e d e n d i n g i n v e n t o r y a t c o s t [ c ? ? d ] 1 4 , 3 0 0 $ E s t i m a t i n g I n v e n t o r y T h e R e t a i l M e t h o d Matrix would follow the steps below to estimate their ending inventory using the retail method.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Learning Objective LO7 To compute the inventory turnover rate and explain its uses.© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Measures how quickly a company sells its merchandise inventory. A ratio that is low compared to competitors suggests inefficient use of assets. I n v e n t o r y T u r n o v e r R a t e = C o s t o f G o o d s S o l d A v e r a g e I n v e n t o r y Average Inventory = (Beginning Inventory + Ending Inventory) ÷ 2 Financial Analysis© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Measures how many days on average it takes to sell its inventory. A v g . N u m b e r o f D a y s t o S e l l I n v e n t o r y = D a y s i n t h e Y e a r I n v e n t o r y T u r n o v e r Financial Analysis© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Remember that identical companies that use different inventory methods (e.g., FIFO and LIFO) will have different inventory turnover ratios . Accounting Methods Can Affect Financial Ratios© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin End of Chapter 8