Download Accounting for Inventories

Accounting for
Inventories
Inventory Costs
All expenditures incurred
Inventory Costs
All expenditures incurred to
bring the item to its
Inventory Costs
All expenditures incurred to
bring the item to its
existing condition and
location
Costs include
 Invoice
cost
 Shipping
 Cash discounts
 Purchases allowances
Inventory Systems - Periodic
 Compute
inventory balance at end
of each accounting period
 Compute cost of goods sold at
accounting period end
Inventory Systems - Perpetual
 Compute
cost of goods sold at
each sale
 Compute new inventory balance at
each sale
Cost Flow Assumptions
 Only
with specific identification do
we attempt to match the actual
movement of product through the
business with the movement of
costs through the accounting
system
Cost Flow Assumptions
 With
other inventory cost methods,
we make an assumption of the
movement of costs through the
accounting system.
 This "flow" of costs through the
system need not match the
movement of product through the
business.
Cost Flow Assumptions
 First-In,
First-Out
Cost Flow Assumptions
 First-In,
–
First-Out
Earliest goods assumed to be first
units sold
Cost Flow Assumptions
 First-In,
First-Out
Earliest goods assumed to be first
units sold
– Inventory made up of latest goods
acquired
–
Cost Flow Assumptions
 Last-In,
First-Out
Cost Flow Assumptions
 Last-In,
–
First-Out
Newest goods assumed to be first
units sold
Cost Flow Assumptions
 Last-In,
First-Out
Newest goods assumed to be first
units sold
– Inventory made up of earliest goods
acquired
–
Cost Flow Assumptions
 Average
cost
Cost Flow Assumptions
 Average
–
cost
Cost of items sold is the weighted
average of costs incurred
Cost Flow Assumptions
 Average
cost
Cost of items sold is the weighted
average of costs incurred
– Inventory is the weighted average of
costs incurred
–
Inventory Example Data
Jan. 1 Beg Inven. 200 $4.00
Apr. 10 Purchase 700 5.00
Oct. 23 Purchase 400 6.00
Available
1,300
Merchandise Sales
May 5
500
Dec. 19
300
Total
800
$
800.00
3,500.00
2,400.00
$6,700.00
First-In First-Out
Newest layer
$6.00
First-In First-Out
Newest layer
400 units @ $6.00 $2,400
First-In First-Out
Newest layer
400 units @ $6.00 $2,400
Next newest layer
$5.00
First-In First-Out
Newest layer
400 units @ $6.00 $2,400
Next newest layer 100 units @ $5.00
500
First-In First-Out
Newest layer
400 units @ $6.00 $2,400
Next newest layer 100 units @ $5.00
500
Total cost
$2,900
First-In First-Out
Cost of Goods Sold
Beginning Inventory
$
800
First-In First-Out
Cost of Goods Sold
Beginning Inventory
$ 800
Purchases
5,900
Cost of goods available
for sale
$6,700
First-In First-Out
Cost of Goods Sold
Beginning Inventory
$ 800
Purchases
5,900
Cost of goods available
for sale
$6,700
Deduct: Ending Inventory 2,900
Cost of goods sold $3,800
First-In First-Out
Proof of cost of goods sold:
Oldest cost layer
200 units @ $4.00 $ 800
First-In First-Out
Proof of cost of goods sold:
Oldest cost layer
200 units @ $4.00 $ 800
Next oldest layer
600 units @ $5.00 3,000
Total
$3,800
Last-In First-Out
Oldest layer
$4.00
Last-In First-Out
Oldest layer
200 units @ $4.00
$
800
Last-In First-Out
Oldest layer
200 units @ $4.00
Next oldest layer
$5.00
$
800
Last-In First-Out
Oldest layer
200 units @ $4.00
Next oldest layer
300 units @ $5.00
$
800
1,500
Last-In First-Out
Oldest layer
200 units @ $4.00
Next oldest layer
300 units @ $5.00
Total cost
$
800
1,500
$2,300
Last-In First-Out
LIFO
Periodic Inventory
Cost of goods sold:
Beginning inventory
$
800
Last-In First-Out
LIFO
Periodic Inventory
Cost of goods sold:
Beginning inventory
$ 800
Purchase
5,900
Cost of goods available $6,700
Last-In First-Out
LIFO
Periodic Inventory
Cost of goods sold:
Beginning inventory
$ 800
Purchase
5,900
Cost of goods available $6,700
Deduct: Ending inventory
2,300
Cost of goods sold
$4,400
Last-In First-Out
LIFO
Periodic Inventory
Proof of Cost of Goods Sold
Last-In First-Out
LIFO
Periodic Inventory
Proof of Cost of Goods Sold
Newest cost layer
400 units @ $6.00
$2,400
Last-In First-Out
LIFO
Periodic Inventory
Proof of Cost of Goods Sold
Newest cost layer
400 units @ $6.00
Next newest layer
400 units @ $5.00
Total cost
$2,400
2,000
$4,400
Weighted Average
Periodic Inventory
Weighted average cost equals
Cost of goods available for sale $6,700
divided by
Total units available
1,300
equals
Weighted average cost per unit $5.1538
Weighted Average
Periodic Inventory
December 31 Inventory
500 units x $5.1538 = $2,577
Weighted Average
Periodic Inventory
Cost of goods sold:
Weighted Average
Periodic Inventory
Cost of goods sold:
Beginning inventory
Purchases
Cost of goods available
$
800
5,900
$6,700
Weighted Average
Periodic Inventory
Cost of goods sold:
Beginning inventory
Purchases
Cost of goods available
Deduct: Ending inventory
Cost of goods sold
$
800
5,900
$6,700
2,577
$4,123
Weighted Average
Periodic Inventory
Proof of cost of goods sold
800 units x $5.1538 = $4,123
Income Statement Comparison
Periodic Inventory
FIFO
Sales
$8,000
CGS
3,800
GM
$4,200
Op. expense 1,000
Net income $3,200
LIFO
$8,000
4,400
$3,600
1,000
$2,600
WA
$8,000
4,123
$3,877
1,000
$2,877
Last-In First-Out
LIFO - Perpetual Inventory
200 x $4 $800
Last-In First-Out
LIFO - Perpetual Inventory
4/4
700 x $5
$3500
200 x $4 $800
700 x $5 3500 $4300
Last-In First-Out
LIFO - Perpetual Inventory
4/4
5/5
700 x $5
$3500
200 x $4 $800
700 x $5 3500 $4300
500 x $5 $2500 200 x $4 $800
200 x $5 1000 $1800
Last-In First-Out
LIFO - Perpetual Inventory
4/4
700 x $5
5/5
10/23 400 x $6
$3500
200 x $4 $800
700 x $5 3500 $4300
500 x $5 $2500 200 x $4 $800
200 x $5 1000 $1800
$2400
200 x $4 $800
200 x $5 1000
400 x $6 2400 $4200
Last-In First-Out
LIFO - Perpetual Inventory
4/4
700 x $5
5/5
10/23 400 x $6
12/19
$3500
200 x $4 $800
700 x $5 3500
500 x $5 $2500 200 x $4 $800
200 x $5 1000
$2400
200 x $4 $800
200 x $5 1000
400 x $6 2400
300x $6 $1800 200 x $4 $800
200 x $5 1000
100 x $6 600
$4300
$1800
$4200
$2400
Last-In First-Out
LIFO - Perpetual Inventory
4/4
700 x $5
5/5
10/23 400 x $6
12/19
Cost of goods sold
$3500
200 x $4 $800
700 x $5 3500
500 x $5 $2500 200 x $4 $800
200 x $5 1000
$2400
200 x $4 $800
200 x $5 1000
400 x $6 2400
300x $6 $1800 200 x $4 $800
200 x $5 1000
100 x $6 600
$4300
$1800
$4200
$2400
$4300
Lower of Cost or Market
Class A
Item 1
Item 2
Cost
$100
80
Mkt
$120
70
Class B
Item 6
$50
$65
Item 7
40
20
LCM
Lower of Cost or Market - By Item
Class A
Item 1
Cost
$100
Mkt
$120
LCM
$100
Lower of Cost or Market - By Item
Class A
Item 1
Item 2
Cost
$100
80
Mkt
$120
70
LCM
$100
70
Lower of Cost or Market - By Item
Class A
Item 1
Item 2
Class B
Item 6
Cost
$100
80
Mkt
$120
70
LCM
$100
70
$50
$65
50
Lower of Cost or Market - By Item
Class A
Item 1
Item 2
Class B
Item 6
Item 7
Total
Cost
$100
80
Mkt
$120
70
LCM
$100
70
$50
40
$65
20
50
20
$240
Lower of Cost or Market - By Class
Class A
Item 1
Item 2
Total
Cost
$100
80
$180
Mkt
$120
70
$190
LCM
$180
Lower of Cost or Market - By Class
Class A
Item 1
Item 2
Total
Class B
Item 6
Item 7
Total
Total
Cost
$100
80
$180
Mkt
$120
70
$190
$50
40
$90
$65
20
$85
LCM
$180
85
$265
Lower of Cost or Market- By Total
Class A
Item 1
Item 2
Class B
Item 6
Item 7
Total
Cost
$100
80
Mkt
$120
70
50
40
$270
40
20
$275
LCM
$270
Gross Margin Method
Logic of Income Statement
Net Sales
Cost of goods sold:
Begin inv
Net purchases
Cost goods avail
End inv
Gross margin
$70
$ 5
50
$55
10
45
$25
Gross Margin Method
Inventory Estimation
Cost of goods available:
Begin inv
20,000
Net purchases
135,000
Cost of goods available
$155,000
Deduct cost of goods sold:
$
Gross Margin Method
Inventory Estimation
Cost of goods available
$155,000
Net sales
$150,000
Multiply by (1 - Gross margin rate)
(1 - 0.30)
x 0.70
Est cost of goods sold
105,000
Gross Margin Method
Proof of Answer
Net sales
$150,000
Cost of goods sold
Begin inv
Net purchases
CGAS
End inv
Cost of goods sold
$ 20,000
135,000
$155,000
50,000
Inventory Errors
An error in the computation of
inventory at the end of one period
Inventory Errors
An error in the computation of
inventory at the end of one period
causes an error in assets and
owner’s equity at the end of that
period
Inventory Errors
An error in the computation of
inventory at the end of one period
causes an error in assets and
owner’s equity at the end of that
period
and an error in income for two
periods.
Effect of Inventory Errors
 Overstatement
of inventory at end
of period 1
–
Causes an overstatement of net
income for period 1
Effect of Inventory Errors
 Overstatement
of inventory at end
of period 1
Causes an overstatement of net
income for period 1
– and an overstatement of assets and
owner's equity at period 1 end
–
Effect of Inventory Errors
 Overstatement
of inventory at end
of period 1
–
Causes an understatement of net
income for period 2
Effect of Inventory Errors
 Overstatement
of inventory at end
of period 1
Causes an understatement of net
income for period 2
– BUT assets and owner's equity at
period 2 end will be correct
–
Effect of Inventory Errors
 Understatement
of inventory at end
of period 1
–
Causes an understatement of net
income for period 1
Effect of Inventory Errors
 Understatement
of inventory at end
of period 1
Causes an understatement of net
income for period 1
– and an understatement of assets and
owner's equity at period 1 end
–
Effect of Inventory Errors
 Understatement
of inventory at end
of period 1
–
Causes an overstatement of net
income for period 2
Effect of Inventory Errors
 Understatement
of inventory at end
of period 1
Causes an overstatement of net
income for period 2
– BUT assets and owner's equity at
period 2 end will be correct
–