Download Cost of Goods Sold for August 31 = $2622

Financial and Managerial
Accounting
John J. Wild
Third Edition
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 5
Inventories and Cost of Sales
Conceptual Chapter Objectives
C1: Identify the items making up
merchandise inventory.
C2: Identify the costs of merchandise
inventory.
5-3
Analytical Chapter Objectives
A1: Analyze the effects of inventory methods
for both financial and tax reporting.
A2: Analyze the effects of inventory errors on
current and future financial statements.
A3: Assess inventory management using both
inventory turnover and days’ sales in
inventory.
5-4
Procedural Chapter Objectives
P1: Compute inventory in a perpetual system
using the methods of specific identification,
FIFO, LIFO, and weighted average.
P2: Compute the lower of cost or market
amount of inventory.
P3: Appendix 5A: Compute inventory in a
periodic system using the methods of
specific identification, FIFO, LIFO, and
weighted average.
P4: Appendix 5B: Apply both the retail
inventory and gross profit methods to
estimate inventory.
5-5
C1
Determining Inventory Items
Merchandise inventory includes all goods that
a company owns and holds for sale, regardless
of where the goods are located when inventory
is counted.
Items requiring special attention include:
Goods in
Transit
Goods on
Consignment
Goods
Damaged or
Obsolete
5-6
C1
Goods in Transit
FOB Shipping Point
Public
Carrier
Seller
Buyer
Ownership passes
to the buyer here.
Public
Carrier
Seller
FOB Destination Point
Buyer
5-7
C2
Determining Inventory Costs
Include all expenditures necessary to bring an
item to a salable condition and location.
Minus
Discounts
and
Allowances
Plus Import
Duties
Invoice
Cost
Plus
Freight
Plus
Insurance
Plus
Storage
5-8
C2
Internal Controls and Taking a Physical
Count

Most companies take
a physical count of
inventory at least once
each year.

When the physical
count does not match
the Merchandise
Inventory account, an
adjustment must be
made.
5-9
P1
Inventory Costing Under a Perpetual
System
Accounting for
inventory
requires several
decisions . . .

Costing Method
 Specific Identification, FIFO, LIFO,
or Weighted Average

Inventory System
 Perpetual or Periodic
5-10
P1
Frequency in Use of Inventory
Methods
FIFO
46%
LIFO
30%
Weighted
Average
20%
Other*
4%
5-11
P1
Inventory Cost Flow Assumptions
First-In, First-Out
(FIFO)
Assumes costs flow in the order
incurred.
Last-In, First-Out
(LIFO)
Assumes costs flow in the
reverse order incurred.
Weighted
Average
Assumes costs flow at an
average of the costs available.
5-12
P1
Inventory Costing Illustration
Cost of Goods Available
Aug. 1 Beg. Inventory
Aug. 3 Purchased
Aug. 17 Purchased
Aug. 28 Purchased
for Sale
10 units
15 units
20 units
10 units
=
=
=
=
$
910
$ 1,590
$ 2,300
$ 1,190
Retail Sales of Goods
Aug. 14 Sales
Aug. 31 Sales
20 units @ $ 130 =
23 units @ $ 150 =
$ 2,600
$ 3,450
@
@
@
@
$
$
$
$
91
106
115
119
5-13
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Specific Identification
Purchases
10 @
$
91 =
15 @
$ 106 =
Cost of Goods Sold
$
910
$ 1,590
8 @
20 @
$ 115 =
10 @
$ 119 =
Inventory
Balance
$
910
$ 2,500
$
91 =
$
728
12 @purchases
$ 106 =
$ were
1,272 $
500
The above
$ 2,300
$ 2,800
made
in
August.
On
August
14,
$ 1,190
$ 3,990
a company
eight
2 @ sold
$
91
=
$bikes
182
@ $ 106 $91
=
$and
31812
originally3 costing
14 @ $ 115 =
$ 1,610
bikes originally
costing
$106.
4 @
$ 119 =
$
476
$ 1,404
5-14
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Specific Identification
Purchases
Cost of Goods Sold
10
@
$ 91
=
$
910
15
@
$ 106
=
$ 1,590
8
@
$ 91
=
$
Inventory
Balance
$
910
$
2,500
728
The Cost of Goods Sold12for@the$20
bikes
on $
106
= old
$ 1,272
the August 14 sale is $2,000.
20 @ $ 115 = $ 2,300
$
10 @ $ 119
= $@1,190
$
8 bikes
91 =
$ 728
12 bikes @ 106 =2 @ $1,272
$ 91 =
$ 182
3
@
$ 106
=
$
500
2,800
3,990
318
After this sale, there are five units in inventory
14 @ $ 115 =
$ 1,610
at $500:
2 bikes @ $91 =
$ 182
3 bikes @ $106 =
$ 318
5-15
P1
Specific Identification
Date
Aug. 1
Aug. 3
Aug. 14
Purchases
Inventory
Balance
$
910
$ 2,500
Cost of Goods Sold
10
@
$ 91
=
$
910
15
@
$ 106
=
$ 1,590
8
@
$ 91
=
$
728
12
@
$ 106
=
$ 1,272
Aug. 17 20 @ $ 115 = $ 2,300
Aug. 28 10 @ $ 119 = $ 1,190
Aug.Additional
31
$ 91 =
$ 182
purchases were made2 on@August
17 and
28.
3
@
$ 106
=
$
$
500
$ 2,800
$ 3,990
318
The cost of the 23 items sold on August
14 @ 31
$ were
115 =as follows:
$ 1,610
2 @ $91 4 @ $ 119 = $ 476 $ 1,404
3 @ $106
15 @ $115
3 @ $119
5-16
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Specific Identification
Purchases
Inventory
Balance
$
910
$ 2,500
Cost of Goods Sold
10
@
$
91
=
$
910
15
@
$ 106
=
$ 1,590
20
@
$ 115
=
$ 2,300
10
@
$ 119
=
$ 1,190
8
@
$
91
=
$
728
12
@
$ 106
=
$ 1,272
2
@
$
91
=
$
182
3
@
$ 106
=
$
318
15
@
$ 115
=
$ 1,725
3
@
$ 119
=
$
357
$
500
$ 2,800
$ 3,990
$ 1,408
Cost of Goods Sold for
August 31 = $2,582
5-17
P1
Specific Identification
Here are the entries to record the purchases and sales. The
numbers in red are determined by the cost flow assumption
used.
All purchases
and sales are
made on
credit.
The selling
price of
inventory was
as follows:
8/14 $130
8/31 150
Aug. 3
Aug. 14
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Aug. 31
Merchandise inventory
Accounts payable
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
Merchandise inventory
Accounts payable
Merchandise inventory
Accounts payable
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
1,590
1,590
2,600
2,600
2,000
2,000
2,300
2,300
1,190
1,190
3,450
3,450
2,582
2,582
5-18
P1
Date
Aug. 1
Aug. 3
First-In, First-Out (FIFO)
Purchases
Inventory
Balance
$
910
$ 2,500
Cost of Goods Sold
10
@
$ 91
=
$
910
15
@
$ 106
=
$ 1,590
Aug. 17 20 @ $ 115 = $ 2,300
The above purchases were
Aug. 28 10 @ $ 119 = $ 1,190
made
Aug.
31 in August.
5 @
18
@
On August 14, the company
sold 20 bikes.
$ 2,300
$ 3,490
$ 106
=
$
530
$ 115
=
$ 2,070
$
890
5-19
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
First-In, First-Out (FIFO)
Purchases
Cost of Goods Sold
10
@
$ 91
=
$
15
@
$ 106
=
$ 1,590
20
@
$ 115
=
Inventory
Balance
$
910
$ 2,500
910
10
@
$ 91
=
$
910
10
@
$ 106
=
$ 1,060
$ 2,300
The
Sold for the
10 @Cost
$ 119 of
= Goods
$ 1,190
5 @ $ 106 =
August 14 sale is $1,970.
18
@
$ 115
=
$
$
530
$ 2,830
$ 4,020
530
$ 2,070
$ 1,420
After this sale, there are five units in
inventory at $530:
5 @ $106
5-20
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
First-In, First-Out (FIFO)
Purchases
Inventory
Balance
$
910
$ 2,500
Cost of Goods Sold
10
@
$ 91
=
$
910
15
@
$ 106
=
$ 1,590
20
@
$ 115
=
$ 2,300
10
@
$ 119
=
$ 1,190
10
@
$ 91
=
$
910
10
@
$ 106
=
$ 1,060
5
@
$ 106
=
$
18
@
$ 115
=
$ 2,070
$
530
$ 2,830
$ 4,020
530
$ 1,420
Cost of Goods Sold for
August 31 = $2,600
5-21
P1
Date
Aug. 1
Aug. 3
Aug. 14
First-In, First-Out (FIFO)
Purchases
Aug. 31
Cost of Goods Sold
10
@
$
91
=
$
15
@
$ 106
=
$ 1,590
Income
Statement
Aug. 17 20
@ $ 115 =
Aug.
28 10
@ $ 119 =
COGS
= $4,570
Inventory
Balance
$
910
$ 2,500
910
10
@
$
91
=
$
910
10
@
$ 106
=
$ 1,060
5
@
$ 106
=
$
18
@
$ 115
=
$ 2,070
$ 2,300
$ 1,190
$
530
$ 2,830
$ 4,020
530
$ 1,420
Balance Sheet
Inventory = $1,420
5-22
P1
First-In, First-Out (FIFO)
Here are the entries to record the purchases and sales
entries. The numbers in red are determined by the cost flow
assumption used.
All purchases
and sales are
made on
credit.
The selling
price of
inventory was
as follows:
8/14 $130
8/31 150
Aug. 3
Aug. 14
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Aug. 31
Merchandise inventory
Accounts payable
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
Merchandise inventory
Accounts payable
Merchandise inventory
Accounts payable
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
1,590
1,590
2,600
2,600
1,970
1,970
2,300
2,300
1,190
1,190
3,450
3,450
2,600
2,600
5-23
P1
Date
Aug. 1
Aug. 3
Aug. 14
Last-In, First-Out (LIFO)
Purchases
Inventory
Balance
$
910
$ 2,500
Cost of Goods Sold
10
@
$ 91
=
$
910
15
@
$ 106
=
$ 1,590
15
@
$ 106
=
$ 1,590
5
@
$ 91
=
$
Aug.
20 @ $ 115 = $ 2,300
The17above
purchases were
Aug. 28 10 @ $ 119 = $ 1,190
made
Aug.
31 in August.
10 @
$ 119
=
$ 1,190
$ 115
=
$ 1,495
13
@
On August 14, the company
sold 20 bikes.
455
$
455
$ 2,755
$ 3,945
$ 1,260
5-24
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Last-In, First-Out (LIFO)
Purchases
Cost of Goods Sold
10
@
$ 91
=
$
15
@
$ 106
=
$ 1,590
20
@
10
@
$ 115
=
Inventory
Balance
$
910
$ 2,500
910
15
@
$ 106
=
$ 1,590
5
@
$ 91
=
$
455
$ 2,300
The
Cost
Goods Sold for the
$ 119
= $of
1,190
10 @
119 =
$ 1,190
August 14 sale
is $$2,045.
13
@
$ 115
=
$ 1,495
$
455
$ 2,755
$ 3,945
$ 1,260
After this sale, there are five units in
inventory at $455:
5 @ $91
5-25
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Last-In, First-Out (LIFO)
Purchases
Inventory
Balance
$
910
$ 2,500
Cost of Goods Sold
10
@
$ 91
=
$
910
15
@
$ 106
=
$ 1,590
20
@
$ 115
=
$ 2,300
10
@
$ 119
=
$ 1,190
15
@
$ 106
=
$ 1,590
5
@
$ 91
=
$
10
@
$ 119
=
$ 1,190
13
@
$ 115
=
$ 1,495
455
$
455
$ 2,755
$ 3,945
$ 1,260
Cost of Goods Sold for
August 31 = $2,685
5-26
P1
Date
Aug. 1
Aug. 3
Aug. 14
Last-In, First-Out (LIFO)
Purchases
Cost of Goods Sold
10
@
$
91
=
$
15
@
$ 106
=
$ 1,590
Aug. 17Income
20 @ $ 115 =
Statement
Aug.
28 10 @COGS
$ 119 =
= $4,730
Aug. 31
Inventory
Balance
$
910
$ 2,500
910
15
@
$ 106
=
$ 1,590
5
@
$
91
=
$
10
@
$ 119
=
$ 1,190
13
@
$ 115
=
$ 1,495
455
$ 2,300
$ 1,190
$
455
$ 2,755
$ 3,945
$ 1,260
Balance Sheet
Inventory = $1,260
5-27
P1
Last-In, First-Out (LIFO)
Here are the entries to record the purchases and sales
entries. The numbers in red are determined by the cost flow
assumption used.
All purchases
and sales are
made on
credit.
The selling
price of
inventory was
as follows:
8/14 $130
8/31 150
Aug. 3
Aug. 14
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Aug. 31
Merchandise inventory
Accounts payable
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
Merchandise inventory
Accounts payable
Merchandise inventory
Accounts payable
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
1,590
1,590
2,600
2,600
2,045
2,045
2,300
2,300
1,190
1,190
3,450
3,450
2,685
2,685
5-28
P1
Weighted Average
When a unit is sold, the
average cost of each unit
in inventory is assigned to
cost of goods sold.
Cost of Goods Units on hand
Available for ÷ on the date of
Sale
sale
5-29
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Weighted Average
10
15
20
10
Inventory
Balance
Purchases
Cost of Goods Sold
@ $ 91 = $ 910
$
910
@ $ 106 = $ 1,590
$ 2,500
20 @ $ the
100 weighted
= $ 2,000 $
500
First, we need to compute
@average
$ 115 =cost
$ 2,300
per unit of items in inventory. $ 2,800
@ $ 119 = $ 1,190
$ 3,990
Cost of goods available for sale
$ 2,500
23 @ $ 114 = $ 2,622 $ 1,368
Total units in inventory
25
Weighted average cost per unit
$
÷
100
The Cost of Goods Sold for the August 14
sale is $2,000. After this sale, there are five
units in inventory at $500:
5-30
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Weighted Average
Purchases
Cost of Goods Sold
10 @
$
91 =
$
910
15 @
$ 106 =
$
1,590
20 @
20 @
$ 115 =
$
2,300
10 @
$ 119 =
$
1,190
$ 100 =
$
2,000
Inventory
Balance
$ 910
$ 2,500
$ 500
$ 2,800
$ 3,990
$ 1,368
23 @ $ 114 = $ 2,622
Additional purchases were made
on August 17 and 28.
Twenty-three bikes were sold on August 31.
What is the weighted average cost per unit
of items in inventory?
5-31
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Weighted Average
Purchases
Cost of Goods Sold
10 @
$
91 =
$
910
15 @
$ 106 =
$
1,590
20 @
$ 115 =
$
2,300
10 @
$ 119 =
$
1,190
Units
Inventory 8/14
5
Purchase 8/17
20
Purchase 8/28
10
Units available for sale
35
20 @
$ 100 =
$
2,000
23 @
$ 114 =
$
2,622
Cost of goods available for sale
Total units in inventory
Weighted average cost per unit
Inventory
Balance
$ 910
$ 2,500
$ 500
$ 2,800
$ 3,990
$ 1,368
$
3,990
÷ 35
$
114
5-32
P1
Date
Aug. 1
Aug. 3
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Weighted Average
Purchases
10
@ $ 91
= $
910
15
@ $ 106
= $ 1,590
20
@ $ 115
= $ 2,300
10
@ $ 119
= $ 1,190
Cost of Goods Sold for
August 31 = $2,622
Inventory
Balance
Cost of Goods Sold
$
910
$ 2,500
20 @ $ 100 = $ 2,000 $
500
$ 2,800
$ 3,990
23 @ $ 114 = $ 2,622 $ 1,368
Ending inventory is
comprised of 12 units @ an
average cost of $114 each or
$1,368.
5-33
P1
Weighted Average
Date
Purchases
Aug. 1
10 @ $ 91 =
Aug. 3
15 @ $ 106 =
Aug. 14
Aug. 17 Income
20 @ $ 115 =
Aug.Statement
28 10 @ $COGS
119 =
Aug. 31 = $4,622
$
910
$ 1,590
$ 2,300
$ 1,190
Inventory
Balance
Cost of Goods Sold
$
910
$ 2,500
20 @ $ 100 = $ 2,000 $
500
$ 2,800
$ 3,990
23 @ $ 114 = $ 2,622 $ 1,368
Balance Sheet
Inventory = $1,368
5-34
P1
Weighted Average
Here are the entries to record the purchases and sales
entries for Trekking. The numbers in red are determined by
the cost flow assumption used.
All purchases
and sales are
made on
credit.
The selling
price of
inventory was
as follows:
8/14 $130
8/31 150
Aug. 3
Aug. 14
Aug. 14
Aug. 17
Aug. 28
Aug. 31
Aug. 31
Merchandise inventory
Accounts payable
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
Merchandise inventory
Accounts payable
Merchandise inventory
Accounts payable
Accounts receivable
Sales
Cost of goods sold
Merchandise inventory
1,590
1,590
2,600
2,600
2,000
2,000
2,300
2,300
1,190
1,190
3,450
3,450
2,622
2,622
5-35
A1
Financial Statement Effects of Costing
Methods
Because prices change, inventory methods nearly
always assign different cost amounts.
Trekking Company
For Month Ended August 31
Specific
Identification
Sales
$
6,050
Cost of goods sold
4,582
Gross profit
$
1,468
Operating expenses
450
Income before taxes
$
1,018
Income tax expense (30%)
305
Net income
$
713
Balance sheet inventory
$
1,408
$
FIFO
6,050
4,570
1,480
450
1,030
309
721
$
1,420
$
$
$
$
LIFO
6,050
4,730
1,320
450
870
261
609
$
1,260
$
$
$
Weighted
Average
$
6,050
4,622
$
1,428
450
$
978
293
$
685
$
1,368
5-36
A1
Financial Statement Effects of Costing
Methods
Advantages of Methods
Weighted
Average
First-In,
First-Out
Last-In,
First-Out
Smoothes out
price changes.
Ending inventory
approximates
current
replacement cost.
Better matches
current costs in cost
of goods sold with
revenues.
5-37
A1
Tax Effects of Costing Methods
The Internal Revenue Service (IRS)
identifies several acceptable
methods for inventory costing for
reporting taxable income.
If LIFO is used for tax
purposes, the IRS requires
it be used in financial
statements.
5-38
A1
Consistency in Using Costing
Methods
The consistency concept requires a
company to use the same accounting
methods period after period so that
financial statements are comparable
across periods.
5-39
P2
Lower of Cost or Market
Inventory must be reported at market
value when market is lower than
cost.
Defined as current
replacement cost
(not sales price).
Consistent with
the conservatism
principle.
Can be applied three ways:
(1)
(2)
(3)
separately to each
individual item.
to major categories of
assets.
to the whole inventory.
5-40
P2
Lower of Cost or Market
A motorsports retailer has the following items in
inventory:
Per Unit
Inventory Items
Cycles:
Roadster
Sprint
Category subtotal
Off-Road
Trax-4
Blazer
Category subtotal
Total
Units on
Hand
Cost
20 $ 8,000
10
5,000
8
5
5,000
9,000
Market
Total
Cost
Total
Market
$ 7,000
6,000
$160,000
50,000
210,000
$ 140,000
60,000
200,000
6,500
7,000
40,000
45,000
85,000
$295,000
52,000
35,000
87,000
$ 287,000
5-41
P2
Lower of Cost or Market
Here is how to compute lower of cost or
market for individual inventory items.
LCM Applied to
Units on
Inventory Items Hand
Total Cost
Cycles:
Roadster
20 $ 160,000
Sprint
10
50,000
Category subtotal
$ 210,000
$ 140,000 $ 140,000
60,000
50,000
$ 200,000
Off-Road
Trax-4
Blazer
Category subtotal
Total
$ 52,000
40,000
35,000
35,000
$ 87,000
$ 287,000 $ 265,000
8
5
$ 40,000
45,000
$ 85,000
$ 295,000
Total
Market
Items
Categories
Whole
5-42
P2
Lower of Cost or Market
Here is how to compute lower of cost or market
for the two groups of inventory items.
LCM Applied to
Units on
Inventory Items Hand
Total Cost
Cycles:
Roadster
20 $ 160,000
Sprint
10
50,000
Category subtotal
$ 210,000
$ 140,000 $ 140,000
60,000
50,000
$ 200,000
$ 200,000
Off-Road
Trax-4
Blazer
Category subtotal
Total
$ 52,000
40,000
35,000
35,000
$ 87,000
$ 287,000 $ 265,000
85,000
$ 285,000
8
5
$ 40,000
45,000
$ 85,000
$ 295,000
Total
Market
Items
Categories
Whole
5-43
P2
Lower of Cost or Market
Here is how to compute lower of cost or market
for the entire inventory.
LCM Applied to
Units on
Inventory Items Hand
Total Cost
Cycles:
Roadster
20 $ 160,000
Sprint
10
50,000
Category subtotal
$ 210,000
$ 140,000 $ 140,000
60,000
50,000
$ 200,000
$ 200,000
Off-Road
Trax-4
Blazer
Category subtotal
Total
$ 52,000
40,000
35,000
35,000
$ 87,000
$ 287,000 $ 265,000
85,000
$ 285,000
8
5
$ 40,000
45,000
$ 85,000
$ 295,000
Total
Market
Items
Categories
Whole
$ 287,000
5-44
A2
Financial Statement Effects of Inventory
Errors
Income Statement Effects
Inventory Error
Understate ending inventory
Understate beginning inventory
Overstate ending inventory
Overstate beginning inventory
Cost of Goods Sold Net Income
Overstated
Understated
Understated
Overstated
Understated
Overstated
Overstated
Understated
5-45
A2
Financial Statement Effects of Inventory
Errors
Balance Sheet Effects
Inventory Error
Understate ending inventory
Overstate ending inventory
Assets
Equity
Understated Understated
Overstated
Overstated
5-46
A3
Inventory Turnover
Shows how many times a company turns over its
inventory during a period. Indicator of how well
management is controlling the amount of
inventory available.
Inventory
Turnover
Average
Inventory
=
=
Cost of goods sold
Avg. inventory
(Beg. Inv. + End Inv.) ÷ 2
5-47
A3
Days’ Sales in Inventory
Reveals how much inventory is available in
terms of the number of days’ sales.
Days' Sales in
Inventory
=
Ending Inventory
Cost of goods sold
×
365
5-48
End of Chapter 5
5-49