Inventory and Cost of good sold

Chapter 5

T.Hend Alajaji

Objectives :

1. Inventory .

2. Explain how to report inventory and cost of

goods sold.

3. Compute costs using four inventory costing

methods

Ch5

Inventory

Goods

Raws Materils

Merchandis inventory

Manufacture inventory

Raw MaterialsWork in Process

Finished goods

Merchandising Inventory =

Balance Sheet

Cost of Goods = Income Statement

inventory is a stock of goods or other items

owned by a firm and hold for sale or for

processing before being sold, as part of a

firm’s ordinary operations.

Goods or Raw material owned by the company

.

Inventory:

Types of Inventory

Merchandisers . . . Buy finished

goods. Sell finished

goods.

Manufacturers . . . Buy raw

materials. Produce and sell

finished goods.

Raw MaterialsWork in ProcessFinished goods

Merchandise inventory

Materials waiting tobe processed

Partially complete products

Completed products awaiting sale

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Learning Objective 2

Explain how to report inventory and cost of goods sold in financial

statement.

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Balance Sheet and Income Statement Reporting

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Cost of Goods Sold Equation

Beginning Inventory 4,800$ + Purchases 10,200 = Cost of Goods Available for Sale 15,000 – Cost of Goods sold 9,000 = Ending Inventory 6,000$

Cost of Goods Sold Calculation

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.

Cost of Goods Sold Equation

BeginningInventory

$4,800

BeginningInventory

$4,800+

Goods Availablefor Sale$15,000

Purchases$10,000

Purchases$10,000

EndingInventory

$6,000

EndingInventory

$6,000

StillHere

(Balance Sheet)

Cost ofGoods Sold

$9,000

Cost ofGoods Sold

$9,000

Sold

(Income Statement)

Learning Objective 3

Compute costs using four inventory costing methods.

Inventory Costing Methods

First-in, first-out(FIFO)

First-in, first-out(FIFO)

Last-in, first-out(LIFO)

Last-in, first-out(LIFO)

Weighted average

Weighted average

Inventory Costing Methods

May 3 Purchased 1 unit for $70May 5 Purchased 1 more unit for $75May 6 Purchased 1 more unit for $95May 8 Sold 2 units for $125 each

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

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Inventory Costing Methods

FIFO LIFO Weighted 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 Sti

ll

there

Net Sales 250$ Cost of Goods Sold 145 Gross Profit 105$

Inventory 95$

Income Statement

Balance Sheet

Sold

Sti

ll

there

Net Sales 250$ Cost of Goods Sold 170 Gross Profit 80$

Inventory 70$

Income Statement

Balance Sheet

Sold

Still

there

240$3

= $80per unit

Net Sales 250$ Cost of Goods Sold 160 Gross Profit 90$

Inventory 80$

Income Statement

Balance Sheet

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Inventory Costing Methods

WeightedFIFO LIFO Average

Cost of Goods sold (Income Statement) Oldest cost Newest cost Average costInventory (Balance sheet) Newest cost Oldest cost Average cost

Summary

Inventory Cost Flow Computations

# of Cost TotalDescription Units per Unit Cost

Beginning Inventory 10 7 70$ Purchase 30 8 240 Purchase 10 10 100 Cost of Goods Available for Sale 50 410$

Weighted Average

WeightedAverage Cost =

Cost of goods Available for SaleNumber of Units Available for Sale

WeightedAverage Cost =

410$50 units

=8.20$ per unit

Inventory Cost Flow Computations

Weighted Average Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240

10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory Cost of Goods Sold

Weighted Average Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240

10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory 123 Cost of Goods Sold

Weighted Average Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240

10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory 123 Cost of Goods Sold 287$

15 units @ $8.20

35 units @ $8.20

Financial Statement Effects

WeightedEffects on the Income Statement FIFO LIFO AverageSales 525$ 525$ 525$ Cost of Goods Sold 270 300 287 Gross Profit 255 225 238 Operating Expenses 125 125 125 Income from Operations 130 100 113 Other Revenue (Expenses) 20 20 20 Income before Income Tax Expense 150 120 133 Income Tax Expense (30%) 45 36 40 Net Income 105$ 84$ 93$

Effects on the Balance SheetInventory 140$ 110$ 123$

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Financial Statement Effects

Effects of Increasing Costs on the Financial Statements

FIFO LIFOInventory (Balance sheet) Higher LowerCost of Goods Sold (Income Statement) Lower Higher

Effects of Decreasing Costs on the Financial Statements

FIFO LIFOInventory (Balance sheet) Lower HigherCost of Goods Sold (Income Statement) Higher Lower

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