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Transcript of Copyright © 2016 by McGraw-Hill Education Chapter 7 Inventory and Cost of Goods Sold PowerPoint...
Copyright © 2016 by McGraw-Hill Education
Chapter 7
Inventory and Cost of Goods Sold
PowerPoint Author:Brandy Mackintosh, CA
7-2
Learning Objective 7-1
Describe the issues in managing different types of
inventory.
7-3
The primary goals of inventory managers are to:
1. Maintain a sufficient quantity of inventory to meet customers’ needs
2. Ensure quality meets customers’ expectations and company standards
3. Minimize the costs of acquiring and carrying the inventory
Inventory Management Decisions
7-4
Types of InventoryMerchandisers . . .
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
7-5
Learning Objective 7-2
Explain how to report Inventory and Cost of Goods
Sold.
7-6
Balance Sheet and Income Statement Reporting
7-7
Cost of Goods Sold Equation
Periodic Updating:
Perpetual Updating:
Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold
Beginning Inventory + Purchases – Cost of Goods Sold = Ending Inventory
7-8
Cost of Goods Sold EquationA company has beginning inventory of 5 units that each cost
$10, then purchases 20 units with a cost of $10 each, sells 15 units, and is left with 10 units in ending inventory.
7-9
Learning Objective 7-3
Compute costs using four inventory costing methods.
7-10
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
Specificidentification
Specificidentification
7-11
Inventory Costing MethodsConsider 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 costMay 3
May 5May 6May 8
Purchased 1 unit for $70Purchased 1 more unit for $75Purchased 1 more unit for $95Sold 2 units for $125 each
7-12
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
So
ld
Sti
ll t
her
e
Income StatementNet SalesCost of Goods SoldGross Profit
$250 145$105
Balance SheetInventory $95
May 6$95 cost
May 5$75 cost
May 3$70 cost
So
ld
Sti
ll t
her
e
Income StatementNet SalesCost of Goods SoldGross Profit
$250 170$ 80
Balance SheetInventory $70
$80per unit
Sold
Still there
$2403 =
Income StatementNet SalesCost of Goods SoldGross Profit
$250 160$ 90
Balance SheetInventory $80
7-13
Inventory Costing Methods
Summary
Cost of Goods Sold (Income Statement)Inventory (Balance Sheet)
FIFO
Oldest costNewest cost
LIFO
Newest costOldest cost
WeightedAverage
Average costAverage cost
Let’s consider a more complex example.
DateOct 1Oct 3Oct 5Oct 6
DescriptionBeginning InventoryPurchasePurchaseSalesEnding Inventory
# of Units103010
(35)15
Cost per Unit$ 7$ 8$10
To calculateTo calculate
Total Cost$ 70
240100
To calculateTo calculate
7-14
Inventory Cost Flow Computations
FIFO
+
-=
beginning Inventorypurchases
cost of goods available for saleending InventoryCost of Goods Sold
10 units x $ 7 = $ 7030 units x $ 8 = 240
10 units x $ 10 = 100
$ 410140
$ 270
(10 units @ $10) + (5 units @ $8)
(10 units @ $7) + (25 units @ $8)
7-15
Inventory Cost Flow Computations
LIFO
+
-=
beginning Inventorypurchases
cost of goods available for saleending InventoryCost of Goods Sold
10 units x $ 7 = $ 7030 units x $ 8 = 240
10 units x $ 10 = 100
$ 410110
$ 300
(10 units @ $7) + (5 units @ $8)
(10 units @ $10) + (25 units @ $8)
7-16
Inventory Cost Flow Computations
Weighted Average
WeightedAverage Cost
=Cost of goods Available for Sale
Number of Units Available for Sale
WeightedAverage Cost
=$410
50 units= $8.20 per unit
Description
beginning Inventorypurchasepurchasecost of goods available for sale
# of Units
1030
1050
Cost per Unit
$ 7$ 8$10
Total Cost
$ 70240
100$ 410
7-17
Inventory Cost Flow Computations
Weighted Average
+
-=
Beginning InventoryPurchases
Cost of Goods Available for SaleEnding InventoryCost of Goods Sold
10 units x $ 7 = $ 7030 units x $ 8 = 240
10 units x $ 10 = 100
$ 410123
$ 287
15 units @ $8.20
35 units @ $8.20
7-18
Financial Statement Effects
Effects on the Income Statement
SalesCost of Goods Sold
Gross Profit
Operating ExpensesIncome from OperationsOther Revenue (Expenses)
Income before Income Tax ExpenseIncome Tax Expense (30%)
Net Income
Effects on the Balance Sheet
Inventory
WeightedAverage
$ 525287
238
12511320
13340
$ 93
$ 123
LIFO
$ 525300
225
12510020
12036
$ 84
$ 110
FIFO
$ 525270
255
12513020
15045
$ 105
$ 140
7-19
Financial Statement Effects
7-20
Tax Implications and Cash Flow Effects
Effects on the Income Statement
SalesCost of Goods Sold
Gross Profit
Operating ExpensesIncome from OperationsOther Revenue (Expenses)
Income before Income Tax ExpenseIncome Tax Expense (30%)
Net Income
Effects on the Balance Sheet
Inventory
WeightedAverage
$ 525287
238
12511320
13340
$ 93
$ 123
LIFO
$ 525300
225
12510020
12036
$ 84
$ 110
FIFO
$ 525270
255
12513020
15045
$ 105
$ 140
7-21
Learning Objective 7-4
Report inventory at thelower of cost or market.
7-22
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.
Lower of Cost or Market
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.
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.
7-23
Lower of Cost or Market
Item
Leather coatsVintage jeans
CostperItem
$16520
MarketValue
per Item
$15025
LCMperItem
$15020
Quantity
1,000400
Total Lowerof cost
or Market
$150,0008,000
Totalcost
$165,0008,000
Write-down
$15,0000
1,000 items @ $165
2 Record
Cost of Goods Sold Inventory 15,000
15,000
1,000 items @ $150 400 items @ $201 Analyze
LiabilitiesAssets = Stockholders’ Equity+
Inventory -$15,000 Cost of GoodsSold (+E) -$15,000
7-24
Lower of Cost or Market
7-25
Learning Objective 7-5
Evaluate inventory management by computing
and interpreting the inventory turnover ratio.
7-26
Inventory Turnover Analysis
7-27
Comparison to Benchmarks
Copyright © 2016 by McGraw-Hill Education
Supplement 7A
FIFO, LIFO, and Weighted Average in a Perpetual Inventory System
7-29
Learning Objective 7-S1
Compute inventory costs in perpetual systems.
7-30
Perpetual Inventory System
Date Description # of Units Cost per Unit Total CostOct 1 Beginning Inventory 10 7$ 70$ Oct 3 Purchase 30 8$ 240$ Oct 4 Sales (35) To calculate To calculateOct 5 Purchase 10 10$ 100$
Ending Inventory 15 To calculate To calculate
This is the same information that we used earlier in the chapter to illustrate a periodic inventory system. The only difference is that we have assumed the sales occurred on
October 4, prior to the final inventory purchase.
7-31
FIFO (First-in, First-Out)
7-32
LIFO (Last-in, First-Out)
7-33
Weighted Average Cost
$310 ÷ 40 units= $7.75 per unit
7-34
Financial Statement Effects
Summary of Perpetual Inventory System Cost Flow Assumptions on Financial Statements
Copyright © 2016 by McGraw-Hill Education
Supplement 7B
The Effects of Errors in Ending Inventory
7-36
Learning Objective 7-S2
Determine the effects of inventory errors.
7-37
The Effects of Errors in Ending InventoryCost of Goods Sold Equation
BI + P – EI = CGS
Errors in EndingInventory will affect
the Balance Sheet andthe Income Statement.
Assume that Ending Inventory was overstated in Year 1 by$10,000 due to an error that was not discovered until Year 2.
Year 1
+-
=
Beginning InventoryPurchasesEnding Inventory
Cost of Goods Sold
AccurateAccurateOverstated $10,000
Understated $10,000
7-38
The Effects of Errors in Ending Inventory
Now let’s examine the effects of theYear 1 Ending Inventory Error on Year 2.
Assume that Ending Inventory was overstated in Year 1 by$10,000 due to an error that was not discovered until Year 2.
Year 2
+-
=
Beginning InventoryPurchasesEnding Inventory
Cost of Goods Sold
Overstated $10,000AccurateAccurate
Overstated $10,000
Copyright © 2016 by McGraw-Hill Education
Chapter 7Solved Exercises
M7-6, M7-7, E7-5, E7-10, E7-13
7-40
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average CostGiven the following information, calculate cost of goods available for sale and ending inventory, then sales, cost of goods sold, and gross profit, under (a) FIFO, (b) LIFO, and (c) weighted average. Assume a periodic inventory system is used.
7-41
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
a. FIFO Beginning Inventory 50 units x $10 = $ 500+ Purchase 250 units x $13 = $3,250 Cost of Goods Available for Sale $3,750 - Ending Inventory (200 x $13) = $2,600 = Cost of Goods Sold (50 x $10) + (50 x $13) $1,150
7-42
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
b. LIFO Beginning Inventory 50 units x $10 = $ 500+ Purchase 250 units x $13 = $3,250 Cost of Goods Available for Sale $3,750 - Ending Inventory (50 x $10) + (150 x $13) = $2,450 = Cost of Goods Sold (100 x $13) $1,300
7-43
WeightedAverage Cost =
$3,750300 units = $12.50 per unit
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
c. Weighted Average Beginning Inventory 50 units x $10 = $ 500+ Purchase 250 units x $13 = $3,250 Cost of Goods Available for Sale $3,750 - Ending Inventory (200 x $12.50) = $2,500 = Cost of Goods Sold (100 x $12.50) $1,250
7-44
M7-6 Calculating Cost of Goods Available for Sale, Ending Inventory, Sales, Cost of Goods Sold, and Gross Profit under Periodic FIFO, LIFO, and Weighted Average Cost
FIFO LIFO Weighted AvgSales (100 units at $15) $1,500 $1,500 $1,500Cost of Goods Sold 1,150 1,300 1,250 Gross Profit $ 350 $ 200 $ 250
7-45
M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory)Aircard Corporation tracks the number of units purchased and sold throughout each accounting period, but applies its inventory costing method at the end of each period as if it uses a periodic inventory system. Given the following information, calculate the cost of goods available for sale, endinginventory, and cost of goods sold, if Aircard uses (a) FIFO, (b) LIFO, or (c) weighted average cost.
7-46
M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory)
Goods Available for Sale – same for all methodsUnits Unit Total
Cost CostBeginning Inventory 2,000 $40 $ 80,000+ Purchase (July 13) 6,000 $44 264,000+ Purchase (July 25) 8,000 $50 400,000 Goods Available for Sale 16,000 $744,000
7-47
M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory)
a. FIFO Ending Inventory (7,000 units x $50) = $350,000
Cost of Goods Sold (2,000 units x $40)(6,000 units x $44)(1,000 units x $50) = $394,000
b. LIFO Ending Inventory (2,000 units x $40)
(5,000 units x $44) = $300,000
Cost of Goods Sold (8,000 units x $50)(1,000 units x $44) = $444,000
7-48
M7-7 Calculating Cost of Goods Available for Sale, Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and Weighted Average Cost (Periodic Inventory)
c. Weighted Average Average Unit Cost $744,000 / 16,000 = $46.50
Ending Inventory (7,000 units x $46.50) = $325,500
Cost of Goods Sold (9,000 units x $46.50) = $418,500
7-49
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted AverageOahu Kiki tracks the number of units purchased and sold throughout each accounting period but applies its inventory costing method at the end of each month, as if it uses a periodic inventory system. Assume Oahu Kiki’s records show the following for the month of January. Sales totaled 240 units.
Required:1. Calculate the number and cost of goods available for sale.
Goods Available for Sale – same for all methodsUnits Unit Total
Cost CostBeginning Inventory 120 $80 $ 9,600+ Purchase (Jan 15) 380 $90 34,200+ Purchase (Jan 24) 200 $110 22,000 Goods Available for Sale 700 $65,800
7-50
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted AverageAssume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units.
Required:2. Calculate the number of units in ending inventory.
Units in Ending Inventory = Units Available – Units Sold
Units in Ending Inventory = 700 – 240 = 460 units
7-51
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted AverageAssume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units.
Required:3. Calculate the cost of ending Inventory and Cost of Goods Sold using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods.
a. FIFO ending Inventory (200 units x $110)
(260 units x $ 90) = $45,400
Cost of Goods Sold (120 units x $80)(120 units x $90) = $20,400
7-52
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted AverageAssume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units.
Required:3. Calculate the cost of ending inventory and cost of goods sold using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods.
b. LIFO Ending Inventory (120 units x $80)
(340 units x $90) = $40,200
Cost of Goods Sold (200 units x $110)( 40 units x $ 90) = $25,600
7-53
E7-5 Calculating Cost of Ending Inventory and Cost of Goods Sold under Periodic FIFO, LIFO, and Weighted AverageAssume Oahu Kiki’s uses a periodic inventory system, which shows the following for the month of January. Sales totaled 240 units.
Required:3. Calculate the cost of ending inventory and cost of goods sold using the (a) FIFO, (b) LIFO, and (c) weighted average cost methods.
c. Weighted Average Average Unit Cost $65,800 / 700 units = $94
Ending Inventory (460 units x $94) = $43,240
Cost of Goods Sold (240 units x $94) = $22,560
7-54
E7-10 Reporting Inventory at Lower of Cost or MarketPeterson Furniture Designs is preparing the annual financial statements dated December 31. Ending inventory information about the five major items stocked for regular sale follows:
Required:1. Complete the two columns of the table and then compute the amount that should be reported for the ending inventory using the LCM rule applied to each item.
$1,500Total $11,900 $10,400
Item
Alligator Armoires
Bear Bureaus
Cougar Beds
Dingo Cribs
Elephant Dressers
Qty
50
75
10
30
400
Total Cost
x $30 = $1,500
x $40 = $3,000
x $50 = $ 500
x $30 = $ 900
x $15 = $6,000
Total Market
x $24 = $1,200
x $40 = $3,000
x $52 = $ 520
x $30 = $ 900
x $12 = $4,800
LCM Per Item LCM Valuation
$24
40
50
30
12
$1,200
3,000
500
900
4,800
7-55
E7-10 Reporting Inventory at Lower of Cost or MarketPeterson Furniture Designs is preparing the annual financial statements dated December 31. Ending inventory information about the five major items stocked for regular sale follows:
Required:2. Prepare the journal entry that Peterson Furniture Designs would record on December 31 to write-down its inventory to LCM.
Cost of Goods Sold 1,500 Inventory 1,500
7-56
E7-13 Analyzing and Interpreting the Inventory Turnover RatioPolaris Industries Inc. is the biggest snowmobile manufacturer in the world. It reported the following amounts in its financial statements (in millions):
Required:1. Calculate to one decimal place the inventory turnover ratio and average days to sell inventory for 2012, 2011, and 2010.
*7.1 = $2,280 ÷ $320 **7.0 = $1,900 ÷ $270 ***7.0 = $1,460 ÷ $210
2012 2011 2010 InventoryTurnoverRatio
Days toSell
=
=
Cost of Goods SoldAverage Inventory
365 DaysInventory Turnover
=
=
7.1* 7.0** 7.0***
51.4 52.1 52.1
Times per year
days
7-57
E7-13 Analyzing and Interpreting the Inventory Turnover RatioPolaris Industries Inc. is the biggest snowmobile manufacturer in the world. It reported the following amounts in its financial statements (in millions):
Required:2. Comment on any trends, and compare the effectiveness of inventory managers at Polaris to inventory managers at its main competitor, Arctic Cat, where inventory turns over 5.4 times per year in 2012 (67.6 days to sell).
Both companies use the same inventory costing method (FIFO).
The inventory turnover ratio reflects how many times average inventory was acquired and sold during the year. The inventory turnover ratio for Polaris Industries has been consistent throughout 2010 to 2012. Polaris is performing better than Arctic Cat, where the inventory turnover is 5.4 times per year or every 67.6 days.
7-58
End of Chapter 7