4/10/2012. Inventories and Cost of Goods Sold. Learning Objectives (LO) Learning Objectives (LO) LO 1 Gross Profit and Cost of Goods Sold

Save this PDF as:
 WORD  PNG  TXT  JPG

Size: px
Start display at page:

Download "4/10/2012. Inventories and Cost of Goods Sold. Learning Objectives (LO) Learning Objectives (LO) LO 1 Gross Profit and Cost of Goods Sold"

Transcription

1 Learning Objectives (LO) Inventories and Cost of Goods Sold CHAPTER 7 After studying this chapter, you should be able to 1. Link inventory valuation to gross profit 2. Use both perpetual and periodic inventory systems 3. Calculate the cost of merchandise acquired 4. Compute income and inventory values using the three principal inventory valuation methods allowed under both U.S. GAAP and IFRS and the one method allowed only by U.S. GAAP 5. Use the lower-of-cost-or-market method to value inventories under U.S. GAAP and IRFS 2of 42 Learning Objectives (LO) LO 1 Gross Profit and Cost of Goods Sold After studying this chapter, you should be able to Balance Sheet Income Statement 6. Show the effects of inventory errors on financial statements 7. Evaluate the gross profit percentage and inventory turnover 8. Describe characteristics of LIFO and how they affect the measurement of income (App. 7A) Merchandise Purchases Merchandise Inventory Current Asset Merchandise Sales Sales Minus Cost of Goods Sold (an expense) Equals Gross Profit Minus Selling Expenses and Administrative Expenses 3of 42 Equals operating Income 4of 42 Purchase inventory (both systems) (LO 3) Merchandise Inventory 960 Accounts Payable 960 Record revenue en e (both systems) stems) when inventory is sold Accounts Receivable 1,740 Sales Revenue 1,740 Perpetual System at each sale Cost of Goods Sold (COGS) 870 Merchandise Inventory 870 Beginning balance 100 Purchases Available for sale 1,010 Cost of goods sold 870 Ending balance 140 (Derived) Ending inventory count identifies spoilage, theft, etc. 5of 42 6of 42 1

2 Periodic System at each sale No entry is made so at year-end, do not have an up to date inventory count or COGS. Must conduct an ending inventory count. Beginning balance 100 Purchases +910 Available for sale 1,010 Ending Balance 140 Cost of Goods Sold 870 (Derived) Spoilage/theft, etc. buried in COGS Ending inventory count Required under a periodic system A good control practice in a perpetual systems Firms often choose fiscal accounting periods so that the year ends when inventories are low External auditors usually observe a sample of the client s physical count to confirm its accuracy 7of 42 8of 42 Product Costs Easily associated with a specific product or inventory Product costs attach to COGS/Inventory, thus making those accounts larger and expenses smaller. Period Costs Easier to associate with the reporting period than with a specific product or inventory item Period costs do not get attached to COGS/Inventory. They become expenses on the income statement making them larger and COGS/Inventory smaller. Company policy determines which are which Possible costs added to the inventory costs besides the purchase price itself Transportation (freight) in Handling Insurance Discounts that reduce these costs Quantity Early/quick payment Vendor rebates Purchase returns and allowances 9of of 42 Transportation FOB (Free on Board) Destination - Seller pays for delivery to us, the buyer; title transfers on receipt No entry FOB (Free on Board) Shipping We pay for delivery from the seller; title transfers when goods leave buyer Freight in * 30 Freight Payable 30 *Adjunct account to COGS Returns, Allowances Merchandise Inventory (Purchases) 960 Accounts Payable 960 Accounts Payable 75 Purchase Returns/Allowances * 75 * Contra account to inventory or purchases Discounts Accounts Payable 885 Discounts on Purchases 5 Cash of of 42 2

3 If inventory prices were not changing, all methods would produce the same COGS and ending inventory amounts. Since prices do change, which are assigned to COGS and ending inventory? Four methods are generally accepted: Specific identification - U.S. and IFRS acceptable First-in, first-out (FIF0) - U.S. and IFRS acceptable Weighted-average - U.S. and IFRS acceptable Last-in, first out (LIFO) - U.S. only acceptable 13 of of 42 Specific Identification The cost of each inventory item is known When an inventory item is sold, its cost becomes part of COGS. Bar codes facilitate identifying units and costs. Physical flow matches the accounting flow Relatively easy to use, especially for expensive low-volume merchandise COGS/ending inventory easily manipulated if inventory prices are changing FIFO First In, First Out Oldest costs are assigned to the income statement (COGS) Latest costs are assigned to the balance sheet (Inventory), making ratios computed there from more reflective of current market value Perpetual and periodic systems produce the same COGS and ending inventory amounts COGS can not be manipulated In periods of rising prices, FIFO leads to higher taxes paid and net income (by placing the lower costs in COGS) 15 of of 42 LIFO Last In, First Out Weighted Average Oldest costs are assigned to the balance sheet (Inventory). Latest costs are matched to revenue on the income statement (COGS), making ratios computed there from more reflective of current market value Perpetual and periodic systems produce different COGS and ending inventory amounts COGS can be manipulated by buying inventory at year-end In periods of rising prices, LIFO leads to lower net income and lower taxes paid The Internal Revenue Code requires LIFO users for tax purposes to also use LIFO for financial reporting purposes Not permitted for IFRS users Computes a unit cost by dividing the total acquisition cost of all items available for sale by the number of units available for sale The weighted-average method produces gross profit somewhere between that obtained under FIFO and LIFO Perpetual and periodic systems produce different COGS and ending inventory amounts 17 of of 42 3

4 Example Example Assume a vendor of soft drinks starts out the week with no inventory He buys and sells cola as follows: Buys one can on Monday for 30 cents Buys one can on Tuesday for 40 cents Buys one can on Wednesday for 56 cents Sells one can on Thursday for 90 cents The next slide shows the vendor s cost of goods sold and ending inventory under the four methods 19 of of 42 Miscellaneous LO 5 Lower of Cost or Market Accountants often refer to inventory methods as cost flow assumptions May choose any of the four flows. Over long run, all produce essentially the same end results Three out of the four flows are not linked to the physical flow of merchandise Consistency suggests the cost flow assumption cannot be changed unless a substantive reason surfaces (must be disclosed) Ending inventory should be valued at the lower of its cost ($45) or market value ($43) (Rarely record holding gains conservatism) Market value Input market replacement cost (i.e. LIFO cost) Output market net realizable value (NRV) or NRV less a normal profit margin Market value middle of those three numbers Loss on write-down of inventory 2 Merchandise Inventory 2 21 of of 42 Revenue recognized in the period when earned, realized, realizable Expenses recognized in the period when they helped to produce revenues Types of Errors Accidental (wrong amounts, accounts, GAAP, etc.) Intentional Profit pressures may cause managers to Delay the recording of purchases/expenses Accelerate incomplete sales orders 23 of of 42 4

5 An undiscovered inventory error usually affects All future periods if left undetected Two reporting periods if detected and correctly counted by the end of the second year The error will cause misstated amounts in the period in which the error occurred, but the effects will then be counterbalanced by identical offsetting amounts in the following period If ending inventory is understated, retained earnings is understated If ending inventory is overstated, retained earnings is overstated 25 of of 42 Gross profit Sales Revenue less COGS Expressed in dollar or percentage terms Sales Revenue $100,000, % COGS $60,000,000, 60% Gross Profit Margin $40,000,000 40% Varies significantly by industry, wholesaler (lower due to volume) versus retailer (higher), presence of R&D, etc. Can also be used to save time counting ending inventory, assuming GPM is a constant 40% Sales Revenue $100 $100 Cost of Goods Sold? $60 Gross Profit Margin (40% x $100) $ Beginning Inventory $50 Purchases +$70 Ending Inventory?? = $60 Cost of Goods Sold $60 27 of of 42 Gross profit percentage can be used to check the accuracy of the accounting records Unusually lower percentage may mean the company has tried to avoid taxes by failing to record all sales Some other factors that may cause a decline in the percentage are Price wars that reduce selling prices Shifting of the product mix sold Increase in shoplifting or embezzlement Inventory turnover Cost of goods sold 100,000 Average Inventory 20, ,000 = 4 On average inventory is being stocked/sold four times per year Higher turnover is associated with greater efficiency (lower costs associated with stocking/handling inventory) Effective in assessing companies in the same industry Days in inventory 365 days / 4 = On average inventory is held days before it is sold 29 of of 42 5

6 LO 7 Inventory Valuation Methods Miscellaneous LO 7 Inventory Valuation Methods Miscellaneous Inventory shrinkage can result from many factors, including shoplifting or employee embezzlement The best deterrent for shoplifting is an alert employee at the point of sale Retail stores also use Sensitized tags on merchandise Surveillance cameras Shrinkage Example Cost of inventory from a physical count ($8,000) Inventory balance in the general ledger ($8,200) Periodic system Perpetual system Already included in COGS Inventory Shrinkage 200 Merchandise Inventory 200 Cost of Goods Sold 200 Inventory Shrinkage of of36 Inflation When low, no significant impact on financial accounting When high, companies using LIFO pass higher costs onto taxable income which reduces taxes paid (also reduces net income) Also presents net income at current prices Major shift in the late 1970s to LIFO Some with decreasing costs stayed with FIFO for the same reason, to have higher inventory costs reduce taxable income and thus taxes paid Holding Gains during periods of raising prices Under LIFO, the latest costs (e.g. $1) appear on the income statement so there are no holding gains Under FIFO, the lower/older inventory prices ($.60) are moving to the income statement If the product sold for $2, under: LIFO, profit margin is $2 $1 = $1 FIFO, profit margin is $2 $.60 = $1.40, i.e.: $1 gross profit margin on the sale itself $.40 holding gain ($1 $.60) Inventory Profits 33 of of 36 LIFO Layers As more inventory is bought than sold in a fiscal year Older inventory costs remain in ending inventory If inventory costs have generally been raising, lower costs remain in inventory LIFO Liquidations Later, when more inventory is sold than bought, those older layers (at lower than current costs) find their way into COGS. COGS, with lower than current costs, produces an artificial (misleading) higher net income LIFO Reserve - The difference between a company s LIFO and FIFO inventory level Begin End COGS LIFO $10,121 $8,618 $127,103 LIFO Reserve $1, FIFO $11,221 $9,509 $127,312 Reported in the notes to the financial statements At the end of the year, under FIFO ending inventory was $891 lower and COGS was $209 higher than it would have been under LIFO Facilitates comparing LIFO and FIFO companies 35 of of 36 6

CHAPTER 9 WHAT IS REPORTED AS INVENTORY? WHAT IS INVENTORY? COST OF GOODS SOLD AND INVENTORY

CHAPTER 9 WHAT IS REPORTED AS INVENTORY? WHAT IS INVENTORY? COST OF GOODS SOLD AND INVENTORY CHAPTER 9 COST OF GOODS AND INVENTORY 1 WHAT IS REPORTED AS INVENTORY? Inventory represents goods that are either manufactured or purchased for resale in the normal course of business Inventory is classified

More information

Chapter 6. An advantage of the periodic method is that it is a easy system to maintain.

Chapter 6. An advantage of the periodic method is that it is a easy system to maintain. Chapter 6 Periodic and Perpetual Inventory Systems There are two methods of handling inventories: the periodic inventory system, and the perpetual inventory system With the periodic inventory system, the

More information

C H A P T E R. Inventories. Financial Accounting 14e. human/istock/360/getty Images. Warren Reeve Duchac

C H A P T E R. Inventories. Financial Accounting 14e. human/istock/360/getty Images. Warren Reeve Duchac C H A P T E R 7 Inventories Financial Accounting 14e Warren Reeve Duchac human/istock/360/getty Images Safeguarding Inventory The purchase order authorizes the purchase of the inventory from an approved

More information

INVENTORY VALUATION THE SIGNIFICANCE OF INVENTORY

INVENTORY VALUATION THE SIGNIFICANCE OF INVENTORY THE SIGNIFICANCE OF INVENTORY INVENTORY VALUATION In the balance sheet inventory is frequently the most significant current asset. In the income statement, inventory is vital in determining the results

More information

Financial Accounting. John J. Wild. Sixth Edition. McGraw-Hill/Irwin. Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Financial Accounting. John J. Wild. Sixth Edition. McGraw-Hill/Irwin. Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Accounting John J. Wild Sixth Edition McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 05 Reporting and Analyzing Inventories Conceptual Chapter

More information

Chapter 8. Inventory Chapters. Learning Objectives. Learning Objectives. Inventory. Inventory. Valuation of Inventories: A Cost-Basis Approach

Chapter 8. Inventory Chapters. Learning Objectives. Learning Objectives. Inventory. Inventory. Valuation of Inventories: A Cost-Basis Approach Chapter 8 Valuation of Inventories: A Cost-Basis Approach Chapters Topic of chapters 8 and 9 : Asset on balance sheet Cost of goods sold: Expense on I/S See Safeway, Dr. Pepper, Campbell, Grainger, Amazon,

More information

Prepared by Coby Harmon University of California, Santa Barbara Westmont College

Prepared by Coby Harmon University of California, Santa Barbara Westmont College 6-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College 6 Inventories Learning Objectives After studying this chapter, you should be able to: [1] Determine how to classify

More information

CHAPTER 6 T E A C H E R V E R S I O N

CHAPTER 6 T E A C H E R V E R S I O N Inventories CHAPTER 6 T E A C H E R V E R S I O N Describe the importance of control over inventory. Control of Inventory LO 1 Two primary objectives of control over inventory are: 1. Safeguarding the

More information

Chapter 6. Inventories

Chapter 6. Inventories 1 Chapter 6 Inventories 2 Learning objectives 1. Define and identify the items included in inventory at the reporting date 2. Determine the s to be included in the value of inventory 3. Describe the four

More information

Inventories. Learning Objectives. After studying this chapter, you should be able to:

Inventories. Learning Objectives. After studying this chapter, you should be able to: Prepared by Coby Harmon University of California, Santa Barbara Westmont College 6-1 6 Inventories Learning Objectives After studying this chapter, you should be able to: [1] Determine how to classify

More information

With 11,000 employees serving 2 million customers weekly,

With 11,000 employees serving 2 million customers weekly, Chapter 13 MARK LENNHIAN/AP PHOTO PHOTO: CARY BENBOW LEARNING OBJECTIVES Careful study of this chapter should enable you to: LO1 Explain the impact of merchandise inventory on the financial statements.

More information

Accounts Receivable 7200 Sales 7200 (No entry )

Accounts Receivable 7200 Sales 7200 (No entry ) INVENTORY. Inventory: It is defined as tangible personal property: 1. Held for sale in the ordinary course of business. 2. In the process of production for such sale. 3. To be used currently in the production

More information

Ch6. Student: 2. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement.

Ch6. Student: 2. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income statement. Ch6 Student: 1. Inventory is usually reported as a long-term asset in the balance sheet. 2. Cost of goods sold is an asset reported in the balance sheet and inventory is an expense reported in the income

More information

Chapter 8 Inventories: Measurement

Chapter 8 Inventories: Measurement Chapter 8 Inventories: Measurement AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may

More information

Ending inventory: Ending Inventory = Goods available for sale Cost of goods sold Ending Inventory = $16,392 - $13,379 Ending Inventory = $3,013

Ending inventory: Ending Inventory = Goods available for sale Cost of goods sold Ending Inventory = $16,392 - $13,379 Ending Inventory = $3,013 BE7 1 CHAPTER 7 MERCHANDISE INVENTORY BRIEF EXERCISES The inventory purchases made by Hewlett-Packard during 2008 can be calculated as follows: Beginning inventory $ 8.0 billion + Purchases X Cost of Goods

More information

Inventories. 2014 Level I Financial Reporting and Analysis. IFT Notes for the CFA exam

Inventories. 2014 Level I Financial Reporting and Analysis. IFT Notes for the CFA exam Inventories 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Cost of Inventories... 3 3. Inventory Valuation Methods... 4 4. Measurement of Inventory

More information

Chapter 7 Inventory and the Cost of Sales

Chapter 7 Inventory and the Cost of Sales Chapter 7 Inventory and the Cost of Sales Types of Inventory Raw materials Materials purchased for use in manufacturing process Work in process Partially completed units in production Finished goods Manufactured

More information

Chapter 6 Inventories 高立翰

Chapter 6 Inventories 高立翰 Chapter 6 Inventories 高立翰 Study Objectives 1. Describe the steps in determining inventory quantities. 2. Explain the accounting for inventories and apply the inventory cost flow methods. 3. Explain the

More information

Inventories: Measurement

Inventories: Measurement RECORDING AND MEASURING INVENTORY TYPES OF INVENTORY There are two types of inventories depending on the kind of business operation. Merchandise Inventory A merchandising concern buys and resells inventory

More information

Merchandise Inventory, Cost of Goods Sold, and Gross Profit. Pr. Zoubida SAMLAL

Merchandise Inventory, Cost of Goods Sold, and Gross Profit. Pr. Zoubida SAMLAL Merchandise Inventory, Cost of Goods Sold, and Gross Profit Pr. Zoubida SAMLAL 1 Accounting for Inventory Inventory (balance sheet) = Number of units of inventory on hand X Cost per unit of inventory Cost

More information

Valuation of inventories

Valuation of inventories Valuation of inventories The sale of inventory at a price greater than total cost is the primary source of income for manufacturing and retail businesses. Inventories are asset items held for sale in the

More information

Chapter 9: Inventories. Raw materials and consumables Finished goods Work in Progress Variants of valuation at historical cost other valuation rules

Chapter 9: Inventories. Raw materials and consumables Finished goods Work in Progress Variants of valuation at historical cost other valuation rules Chapter 9: Inventories Raw materials and consumables Finished goods Work in Progress Variants of valuation at historical cost other valuation rules 1 Characteristics of Inventories belong to current assets

More information

CHAPTER 6. Inventories ASSIGNMENT CLASSIFICATION TABLE. B Problems. A Problems. Brief Exercises Do It! Exercises

CHAPTER 6. Inventories ASSIGNMENT CLASSIFICATION TABLE. B Problems. A Problems. Brief Exercises Do It! Exercises CHAPTER 6 Inventories ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Do It! Exercises A Problems B Problems 1. Describe the steps in determining inventory quantities. 1, 2,

More information

CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY. True-False Statements. Multiple Choice Questions

CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY. True-False Statements. Multiple Choice Questions CHAPTER 6 INVENTORIES SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM S TAXONOMY Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT True-False Statements 1. 1 C 8. 2 C 15. 3 K 2. 1 C 9. 2 C 16.

More information

Chapter 6. Learning Objectives. Account for inventory by the FIFO, LIFO and average cost methods. Objective 1. Retail Inventory

Chapter 6. Learning Objectives. Account for inventory by the FIFO, LIFO and average cost methods. Objective 1. Retail Inventory PowerPoint to accompany Chapter 6 Retail Inventory Learning Objectives 1. Account for inventory by the FIFO, LIFO and average cost methods. 2. Compare the effects of FIFO, LIFO and average cost. 3. Apply

More information

Accounting for Inventory

Accounting for Inventory Accounting for Inventory There are a lot of accounting issues relating to inventory. Manufacturing inventories (Raw materials, work in process, finished goods). Perpetual vs. periodic inventory systems

More information

Merchandise Inventory

Merchandise Inventory 6 Merchandise Inventory WHAT YOU PROBABLY ALREADY KNOW Assume that you want to invest in the stock market. You purchase 100 shares of a stock mutual fund in January at $24/share, another 100 shares in

More information

Accounting Notes. Purchasing Merchandise under the Perpetual Inventory system:

Accounting Notes. Purchasing Merchandise under the Perpetual Inventory system: Systems: Perpetual VS Periodic " Keeps running record of all goods " Does not keep a running record bought and sold " is counted once a year " is counted at least once a year " Used for all types of goods

More information

Chapter Six. Accounting for Inventory. Summary. Inventory appears on Income Statement as well as on Balance Sheet.

Chapter Six. Accounting for Inventory. Summary. Inventory appears on Income Statement as well as on Balance Sheet. Chapter Six Accounting for Inventory Summary Inventory appears on Income Statement as well as on Balance Sheet. Inventory affects both the balance sheet and the income statement. Inventory Bought and sold

More information

Accounting 303 Exam 3, Chapters 7-9 Fall 2012 Section Row

Accounting 303 Exam 3, Chapters 7-9 Fall 2012 Section Row Accounting 303 Name Exam 3, Chapters 7-9 Fall 2012 Section Row I. Multiple Choice Questions. (2 points each, 34 points in total) Read each question carefully and indicate your answer by circling the letter

More information

Intermediate Accounting

Intermediate Accounting Intermediate Accounting Thomas H. Beechy Schulich School of Business, York University Joan E. D. Conrod Faculty of Management, Dalhousie University PowerPoint slides by: Bruce W. MacLean, Faculty of Management,

More information

Perpetual vs. Periodic Inventory Accounting

Perpetual vs. Periodic Inventory Accounting Chapter 6 INVENTORY In the balance sheet of merchandising and manufacturing companies, inventory is frequently the most significant current asset. In the income statement, inventory is vital in determining

More information

CHAPTER 8 Valuation of Inventories: A Cost Basis Approach

CHAPTER 8 Valuation of Inventories: A Cost Basis Approach CHAPTER 8 Valuation of Inventories: A Cost Basis Approach 8-1 LECTURE OUTLINE This chapter can be covered in three to four class sessions. Students should have had previous exposure to inventory accounting

More information

Click to edit Master title style. Inventories

Click to edit Master title style. Inventories 1 7 Inventories 1 2 After studying this chapter, you should be able to: 1. Describe the importance of control over inventory. 2. Describe three inventory cost flow assumptions and how they impact the income

More information

CHAPTER 8. Valuation of Inventories: A Cost-Basis Approach 1, 2, 3, 4, 5, 6, 8, 9. 2. Perpetual vs. periodic. 2 9, 13, 14, 17

CHAPTER 8. Valuation of Inventories: A Cost-Basis Approach 1, 2, 3, 4, 5, 6, 8, 9. 2. Perpetual vs. periodic. 2 9, 13, 14, 17 CHAPTER 8 Valuation of Inventories: A Cost-Basis Approach ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Inventory accounts; determining

More information

ACCT 652 Accounting. Review of last week. Review of last time (2) 1/25/16. Week 3 Merchandisers and special journals

ACCT 652 Accounting. Review of last week. Review of last time (2) 1/25/16. Week 3 Merchandisers and special journals ACCT 652 Accounting Week 3 Merchandisers and special journals Some slides Times Mirror Higher Education Division, Inc. Used by permission Michael D. Kinsman, Ph.D. Review of last week Some highlights of

More information

Before Class starts.(make sure your name is on all submissions)

Before Class starts.(make sure your name is on all submissions) Before Class starts.(make sure your name is on all submissions) Third Homework due 10/20(MW) or 10/21(TR) before class. Help Session 10/19 1:00-3:30pm in GBS130. Fourth Homework due 10/27(MW) or 10/28(TR)

More information

Accounting 303 Exam 3, Chapters 7-9 Fall 2013 Section Row

Accounting 303 Exam 3, Chapters 7-9 Fall 2013 Section Row Accounting 303 Name Exam 3, Chapters 7-9 Fall 2013 Section Row I. Multiple Choice Questions. (2 points each, 28 points in total) Read each question carefully and indicate your answer by circling the letter

More information

2 Under a perpetual inventory system merchandise is purchased for cash. Which is the correct journal entry to record this purchase?

2 Under a perpetual inventory system merchandise is purchased for cash. Which is the correct journal entry to record this purchase? KRUG PRACTICE TEST ACCTG 1 - CHAP 5,6 PRACTICE TEST -- The following is a practice test for Accounting 1, Chapters 5 and 6 It is only a representation of wha the test could be like. It is not a guarantee

More information

Chapter 5. Accounting for merchandising operations. Appendix 5A: Periodic inventory system

Chapter 5. Accounting for merchandising operations. Appendix 5A: Periodic inventory system 1 Chapter 5 Accounting for merchandising operations Appendix 5A: Periodic inventory system 2 Learning objectives 1. Record purchase and sales transactions under the periodic inventory system 2. Prepare

More information

Inventories: Cost Measurement and Flow Assumptions

Inventories: Cost Measurement and Flow Assumptions CHAPTER Inventories: Cost Measurement and Flow Assumptions OBJECTIVES After careful study of this chapter, you will be able to: 1. Describe how inventory accounts are classified. 2. Explain the uses of

More information

Chapter 8 Topic 1. Chapter 8: Topic 1 Valuation of Inventories The Basics. Student Learning Outcomes. Inventories: Financial Analysis

Chapter 8 Topic 1. Chapter 8: Topic 1 Valuation of Inventories The Basics. Student Learning Outcomes. Inventories: Financial Analysis Chapter 8: Topic 1 Valuation of Inventories The Basics Dr. Chula King ACG 3101 Student Learning Outcomes Perpetual versus periodic inventory system Effects of inventory errors Items to include in inventory

More information

Week 9/ 10, Chap7 Accounting 1A, Financial Accounting

Week 9/ 10, Chap7 Accounting 1A, Financial Accounting Week 9/ 10, Chap7 Accounting 1A, Financial Accounting Reporting and Interpreting Cost of Goods Sold and Inventory Instructor: Michael Booth Understanding the Business Primary Goals of Inventory Management

More information

Cost flow assumptions: a framework for Inventory analysis

Cost flow assumptions: a framework for Inventory analysis Cost flow assumptions: a framework for Inventory analysis The problem is which cost or costs should be assigned to the 6,000 units of ending inventory and the 4,000 units sold. The solution depends on

More information

Principlesofaccounting.com

Principlesofaccounting.com Principlesofaccounting.com chapter 8 Inventory Your goals for this inventory chapter are to learn about: The correct components to include in inventory. Inventory costing methods, including specific identification,

More information

Multiple-Choice Questions

Multiple-Choice Questions True-False 1 Periodic inventory systems provide a greater degree of management control over inventory. 2 In the perpetual inventory system inventory losses must be recoded in the accounts. 3 In a periodic

More information

FINANCIAL ACCOUNTING Fourth Edition

FINANCIAL ACCOUNTING Fourth Edition FINANCIAL ACCOUNTING Fourth Edition Thomas R. Dyckman Robert P. Magee Glenn M. Pfeiffer CHAPTER 7 Reporting and Analyzing Inventory Learning Objective 1 Interpret disclosures of information concerning

More information

CHAPTER 6. Inventories ASSIGNMENT CLASSIFICATION TABLE. B Problems. A Problems. Brief. 1. Describe the steps in determining inventory quantities.

CHAPTER 6. Inventories ASSIGNMENT CLASSIFICATION TABLE. B Problems. A Problems. Brief. 1. Describe the steps in determining inventory quantities. CHAPTER 6 Inventories ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises A Problems B Problems 1. Describe the steps in determining inventory quantities. 1, 2, 3, 4, 5

More information

CHAPTER 6 Reporting and Analyzing Inventory Study Objectives.

CHAPTER 6 Reporting and Analyzing Inventory Study Objectives. CHAPTER 6 Reporting and Analyzing Inventory Study Objectives. Describe the steps in determining inventory quantities. Explain the basis of accounting for inventories and apply the inventory cost flow methods

More information

SOLUTIONS. Learning Goal 27

SOLUTIONS. Learning Goal 27 Learning Goal 27: Record, Report, and Control Merchandise Inventory S1 Learning Goal 27 Multiple Choice 1. c FIFO puts the oldest costs into cost of goods sold and in a period of rising prices the oldest

More information

CHAPTER 7. 7-2 The two steps are obtaining (1) a physical count and (2) a cost valuation.

CHAPTER 7. 7-2 The two steps are obtaining (1) a physical count and (2) a cost valuation. CHAPTER 7 7-1 Sales transactions are accompanied by recording of the cost of goods sold (or cost of sales). This is literally true under the perpetual system and conceptually descriptive under the periodic

More information

FINANCIAL ACCOUNTING WEEK 6 Merchandise Inventory

FINANCIAL ACCOUNTING WEEK 6 Merchandise Inventory I. Learning Objectives FINANCIAL ACCOUNTING WEEK 6 Merchandise Inventory A. Define inventory, and describe how the methods used to account for it affect the financial statements. B. Describe the general

More information

Accounting 300A 23-A Inventory Valuation Methods Page 1 of 13

Accounting 300A 23-A Inventory Valuation Methods Page 1 of 13 Accounting 300A 23-A Inventory Valuation Methods Page 1 of 13 I. Review of Key Concepts and Terms: INVENTORIES: ALTERNATIVES FOR INVENTORY VALUATION A. Inventory is defined by ARB-43 as items of tangible

More information

CHAPTER 9 INVENTORIES: ADDITIONAL VALUATION ISSUES. MULTIPLE CHOICE Conceptual

CHAPTER 9 INVENTORIES: ADDITIONAL VALUATION ISSUES. MULTIPLE CHOICE Conceptual CHAPTER 9 INVENTORIES: ADDITIONAL VALUATION ISSUES Answer No. Description MULTIPLE CHOICE Conceptual d 1. Knowledge of lower of cost or market valuations. d 2. Appropriate use of LCM valuation. c 3. Definition

More information

EXERCISES. Ex. 6 1. Ex. 6 2

EXERCISES. Ex. 6 1. Ex. 6 2 EXERCISES Ex. 6 1 Switching to a perpetual inventory system will strengthen A4A Hardware s internal controls over inventory, since the store managers will be able to keep track of how much of each item

More information

Dutchess Community College ACC 104 Financial Accounting Chapter 6 Quiz Prep

Dutchess Community College ACC 104 Financial Accounting Chapter 6 Quiz Prep Dutchess Community College ACC 104 Financial Accounting Chapter 6 Quiz Prep Reporting & Analyzing Peter Rivera March 2007 Revised March 26, 2007 Disclaimer This Quiz Prep is provided as an outline of the

More information

Accounting. Chapter 22

Accounting. Chapter 22 Accounting Chapter 22 Merchandise inventory on hand is typically the largest asset of a merchandising business Cost of Merchandise inventory is reported on both the balance sheet and income statement The

More information

Investments Advance to subsidiary company 81,000

Investments Advance to subsidiary company 81,000 EXERCISE 7-3 (10 15 minutes) Current assets Accounts receivable Customers Accounts (of which accounts in the amount of $40,000 have been pledged as security for a bank loan) $79,000 Installment accounts

More information

inven_wbn_outs_st01 Title page Inventories» What's Behind the Numbers?»» Cost Outflows» Scenic Video www.navigatingaccounting.com

inven_wbn_outs_st01 Title page Inventories» What's Behind the Numbers?»» Cost Outflows» Scenic Video www.navigatingaccounting.com Title page Inventories» What's Behind the Numbers?»» Cost Outflows» Scenic Video www.navigatingaccounting.com Agenda IFRS and US GAAP Introduction Cost methods Permissible IFRS methods Measurement Perpetual

More information

1. $45000 2. $108000 3. $63000 4. $135000

1. $45000 2. $108000 3. $63000 4. $135000 For the last several years Monte Cristo Corp. has operated with a gross profit rate of 30%. On January 1 of the current year, the company had on hand inventory with a cost of $150,000. Purchases of merchandise

More information

Inventories and Cost of Goods Sold

Inventories and Cost of Goods Sold C H A P T E R 9 Inventories and Cost of Goods Sold Merchandising companies buy and sell large quantities and varieties of goods. These activities lead to complex accounting problems in measuring profits.

More information

Chapter 04 - Accounting for Merchandising Operations. Chapter Outline

Chapter 04 - Accounting for Merchandising Operations. Chapter Outline I. Merchandising Activities Products that a company acquires to resell to customers are referred to as merchandise (also called goods). A merchandiser earns net income by buying and selling merchandise.

More information

Accounting 303 Exam 3, Chapters 7-9

Accounting 303 Exam 3, Chapters 7-9 Accounting 303 Exam 3, Chapters 7-9 Spring 2012 Name Row I. Multiple Choice Questions. (2 points each, 30 points in total) Read each question carefully and indicate your answer by circling the letter preceding

More information

CHAPTER 6. Inventories , 12

CHAPTER 6. Inventories , 12 CHAPTER 6 Inventories ASSIGNMENT CLASSIFICATION TABLE Learning Objectives Questions Brief Exercises Do It! Exercises A Problems B Problems 1. Determine how to classify inventory and inventory quantities.

More information

BUS312A/612A Financial Reporting I. Homework Inventory Chapter 8

BUS312A/612A Financial Reporting I. Homework Inventory Chapter 8 BUS312A/612A Financial Reporting I Homework Inventory Chapter 8 Objectives Chapter 8 You should be able to Discuss the relevance of inventory methods Compare the periodic and perpetual inventory systems

More information

Merchandise Accounts. Chapter 7 - Unit 14

Merchandise Accounts. Chapter 7 - Unit 14 Merchandise Accounts Chapter 7 - Unit 14 Merchandising... Merchandising... There are many types of companies out there Merchandising... There are many types of companies out there Service company - sells

More information

Lower-of-Costor-Market. " Ceiling and floor. " How LCM works. " Application of LCM. " Market. " Use of an allowance. " Multiple periods

Lower-of-Costor-Market.  Ceiling and floor.  How LCM works.  Application of LCM.  Market.  Use of an allowance.  Multiple periods Chapter 9 Inventories: Additional Valuation Issues Inventory Chapters Topic of chapters 8 and 9 Inventory: Asset on balance sheet of goods sold: Expense on I/S See Target, co, Intel, Radio Shack, Tiffany

More information

2. A service company earns net income by buying and selling merchandise. Ans: False

2. A service company earns net income by buying and selling merchandise. Ans: False Chapter 6: Accounting For Merchandising Activities True/False 1. Merchandise consists of products that a company acquires for the purpose of reselling them to customers. 2. A service company earns net

More information

Test 2 Review - Fall 2008 Friday class ONLY Chapters 5,6,7 & 8

Test 2 Review - Fall 2008 Friday class ONLY Chapters 5,6,7 & 8 Test 2 Review - Fall 2008 Friday class ONLY Chapters 5,6,7 & 8 Name The following review includes 80 multiple choice questions of which I will choose 33 on the test. MULTIPLE CHOICE. Choose the one alternative

More information

CHAPTER 6 Solutions INVENTORIES

CHAPTER 6 Solutions INVENTORIES CHAPTER 6 Solutions INVENTORIES Chapter 6, SE 1. 1. c 3. d 5. 2. c 4. b a Chapter 6, SE 2. Inventory Turnover Days' Inventory on Hand = = = = Cost of Goods Sold Average Inventory $2,200,000 ( $560,000

More information

Dr. M.D. Chase Accounting Principles Examination 2J Page 1

Dr. M.D. Chase Accounting Principles Examination 2J Page 1 Accounting Principles Examination 2J Page 1 Code 1 1. The term "net sales" refers to gross sales revenue reduced by sales discounts and transportation-in. 2. The cost of goods available for sale in a given

More information

CHAPTER 8 VALUATION OF INVENTORIES: A COST BASIS APPROACH. MULTIPLE CHOICE Conceptual

CHAPTER 8 VALUATION OF INVENTORIES: A COST BASIS APPROACH. MULTIPLE CHOICE Conceptual CHAPTER 8 VALUATION OF INVENTORIES: A COST BASIS APPROACH Answer No. Description MULTIPLE CHOICE Conceptual d 1. Entries under perpetual inventory system. b 2. Classification of goods in transit. a 3.

More information

Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability

Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability Chapter 6 Liquidity of Short-term Assets: Related Debt-Paying Ability TO THE NET 1. a. 1. Quaker develops, produces, and markets a broad range of formulated chemical specialty products for various heavy

More information

Accounting 303 Exam 3, Chapters 8-9 Spring 2011 Section Row

Accounting 303 Exam 3, Chapters 8-9 Spring 2011 Section Row Accounting 303 Name Exam 3, Chapters 8-9 Spring 2011 Section Row I. Multiple Choice Questions. (2 points each, 34 points in total) Read each question carefully and indicate your answer by circling the

More information

SECTION IX. ACCOUNTING FOR INVENTORY

SECTION IX. ACCOUNTING FOR INVENTORY SECTION IX. ACCOUNTING FOR INVENTORY A. IAS 2 IAS 2 Inventories pertains to inventories that are: Assets held for sale in the ordinary course of business (finished goods and merchandise); Assets in the

More information

CHAPTER 8. Valuation of Inventories: A Cost-Basis Approach 1, 2, 3, 4, 5, 6, 8, Perpetual vs. periodic. 2 9, 13, 14, 17, 20

CHAPTER 8. Valuation of Inventories: A Cost-Basis Approach 1, 2, 3, 4, 5, 6, 8, Perpetual vs. periodic. 2 9, 13, 14, 17, 20 CHAPTER 8 Valuation of Inventories: A Cost-Basis Approach ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Inventory accounts; determining

More information

Inventory and Cost of Goods Sold

Inventory and Cost of Goods Sold 9 Inventory and Cost of Goods Sold Overview Chapter 9 is quite long and covers a number of issues involving both inventory and cost of goods sold. Hopefully, you learned something about inventory methods

More information

CHAPTER 8 INVENTORIES AND THE COST OF GOODS SOLD

CHAPTER 8 INVENTORIES AND THE COST OF GOODS SOLD CHAPTER 8 INVENTORIES AND THE COST OF GOODS SOLD OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Brief Exercises Topic Learning Objectives Skills B. Ex. 8.1 FIFO inventory

More information

Accounting 1. Lesson Plan. Topic: Accounting for Inventory Unit: 4 Chapter 23

Accounting 1. Lesson Plan. Topic: Accounting for Inventory Unit: 4 Chapter 23 Accounting 1 Lesson Plan Name: Terry Wilhelmi Day/Date: Topic: Accounting for Inventory Unit: 4 Chapter 23 I. Objective(s): By the end of today s lesson, the student will be able to: define accounting

More information

Chapter 6 Homework BRIEF EXERCISE 6-6

Chapter 6 Homework BRIEF EXERCISE 6-6 Chapter 6 Homework BRIEF EXERCISE 6-6 Dec. 31 Sales... 630,000 Merchandise Inventory (December 31)... 90,000 Purchase Returns and Allowances... 11,000 Capital... 731,000 Dec. 31 Capital... 476,000 Merchandise

More information

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 5, 6 9, 10 9

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 5, 6 9, 10 9 CHAPTER 9 Inventories: Additional Valuation Issues ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Lower of cost or market. 1, 2,

More information

CHAPTER 6 - INVENTORIES. Material Copyright- Protected: Barbara Wagers

CHAPTER 6 - INVENTORIES. Material Copyright- Protected: Barbara Wagers CHAPTER 6 - INVENTORIES Material Copyright- Protected: Barbara Wagers CHAPTER 6 Inventories Learning Objectives 1. Internal Control of Inventories 2. Inventory Flow Assumptions 3. Perpetual Inventory ing

More information

CHAPTER 7 INVENTORIES

CHAPTER 7 INVENTORIES 1. The receiving report should be reconciled to the initial purchase order and the vendor s invoice before recording or paying for inventory purchases. This procedure will verify that the inventory received

More information

Name: Date: 2. Sales revenue less cost of goods sold is called A) gross profit. B) net profit. C) net income. D) marginal income.

Name: Date: 2. Sales revenue less cost of goods sold is called A) gross profit. B) net profit. C) net income. D) marginal income. Name: Date: 1. Two categories of expenses for merchandising companies are A) cost of goods sold and financing expenses. B) operating expenses and financing expenses. C) cost of goods sold and operating

More information

Chapter 6 Inventory and Cost of Goods Sold

Chapter 6 Inventory and Cost of Goods Sold REVIEW QUESTIONS Chapter 6 Inventory and Cost of Goods Sold Question 6-1 (LO 6-1) Inventory includes items a company intends for sale to customers. Inventory also includes items that are not yet finished

More information

Chapter 5 Merchandising Operations

Chapter 5 Merchandising Operations Chapter 5 Merchandising Operations Financial Statements of a Service Company and a Merchandiser: - Service Companies: Revenues earned through performance of services. Examples: Dentists, Accounting Firms,

More information

Inventories: Cost Measurement and Flow Assumptions

Inventories: Cost Measurement and Flow Assumptions CHAPTER 8 O BJECTIVES After reading this chapter, you will be able to: 1 Describe how inventory accounts are classified. 2 Explain the uses of the perpetual and periodic inventory systems. 3 Identify how

More information

Chapter 6 Merchandising Inventory

Chapter 6 Merchandising Inventory Chapter 6 Merchandising Inventory Account for inventory by the FIFO, LIFO, and average cost methods: Inventory Costing Methods: - Specific Unit Cost. 2- First-In, First-Out (FIFO). 3- Last-In, First-Out

More information

Chapter 5. Learning Objectives. Income Statements. Retailing Operations. Horngren, Best, Fraser, Willett: Accounting 6e 2010 Pearson Australia

Chapter 5. Learning Objectives. Income Statements. Retailing Operations. Horngren, Best, Fraser, Willett: Accounting 6e 2010 Pearson Australia PowerPoint to accompany Chapter 5 Retailing Operations Learning Objectives 1. Account for the purchase of inventory and GST 2. Account for the sale of inventory and GST 3. Adjust and close the accounts

More information

Inventories. 15.501/516 Accounting Spring 2004. Professor S. Roychowdhury. Feb 25 / Mar 1, 2004

Inventories. 15.501/516 Accounting Spring 2004. Professor S. Roychowdhury. Feb 25 / Mar 1, 2004 Inventories 15.501/516 Accounting Spring 2004 Professor S. Roychowdhury Sloan School of Management Massachusetts Institute of Technology Feb 25 / Mar 1, 2004 1 Inventory Definition: Inventory is defined

More information

Accounting II Second Semester Final

Accounting II Second Semester Final Name: Class: Date: Accounting II Second Semester Final Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1. Profit is the difference between:

More information

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 7, 8 11, 12 10 6

CHAPTER 9. Inventories: Additional Valuation Issues. 3. Purchase commitments. 9 7, 8 11, 12 10 6 CHAPTER 9 Inventories: Additional Valuation Issues ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis 1. Lower-of-cost-or-NRV. 1, 2, 3,

More information

Accounting 201 Comprehensive Practice Exam 2C Page 1

Accounting 201 Comprehensive Practice Exam 2C Page 1 Accounting 201 Comprehensive Practice Exam 2C Page 1 1. A business organized as a corporation a. is not a separate legal entity in most states. b. requires that stockholders be personally liable for the

More information

Section A Fundamentals of Accountancy,Chapter 4 CA (Dr.) Akash Gupta FCA, M.COM, PHD

Section A Fundamentals of Accountancy,Chapter 4 CA (Dr.) Akash Gupta FCA, M.COM, PHD Section A Fundamentals of Accountancy,Chapter 4 CA (Dr.) Akash Gupta FCA, M.COM, PHD Meaning of Inventory Types of Inventories Inventory valuation Basis of Inventory Valuation Valuation Inventory Techniques

More information

Tax Accounting: Valuation of Inventories: A Cost Basis Approach under GAAP

Tax Accounting: Valuation of Inventories: A Cost Basis Approach under GAAP Tax Accounting: Valuation of Inventories: A Cost Basis Approach under GAAP Adopted in part from Kieso, Weygandt, and Warfield s Intermediate Accounting and Originally prepared by Jep Robertson and Renae

More information

OPERATIONAL AND CONSUMABLE INVENTORY POLICY

OPERATIONAL AND CONSUMABLE INVENTORY POLICY OPERATIONAL AND CONSUMABLE INVENTORY POLICY PURPOSE The purpose of this policy is to establish guidelines for the management of inventory as a key institutional resource. This policy lays the foundation

More information

Inventory - A current asset whose ending balance should report the cost of a merchandiser's products waiting to be sold.

Inventory - A current asset whose ending balance should report the cost of a merchandiser's products waiting to be sold. Accounting Fundamentals Lesson 6 6.0 Inventory & Cost of Sales Inventory - A current asset whose ending balance should report the cost of a merchandiser's products waiting to be sold. The inventory of

More information

Reporting and Analyzing Inventory. Learning Objectives coverage by question 13, 14, 15, 17 26, 27, 29, 30, 31 18, 19, 20, 21, 23 26, 29, 30, 31

Reporting and Analyzing Inventory. Learning Objectives coverage by question 13, 14, 15, 17 26, 27, 29, 30, 31 18, 19, 20, 21, 23 26, 29, 30, 31 Chapter 7 Reporting and Analyzing Inventory Learning Objectives coverage by question Miniexercises Exercises Problems Cases LO1 Interpret disclosures of information concerning operating expenses, including

More information

Accounting 303 Exam 3, Chapters 7-9 Fall 2011 Section Row

Accounting 303 Exam 3, Chapters 7-9 Fall 2011 Section Row Accounting 303 Name Exam 3, Chapters 7-9 Fall 2011 Section Row I. Multiple Choice Questions. (2 points each, 34 points in total) Read each question carefully and indicate your answer by circling the letter

More information

ACCT 201 Pre-Quiz #4 (Ch. 7, 8 and 9) - Professor Farina

ACCT 201 Pre-Quiz #4 (Ch. 7, 8 and 9) - Professor Farina ACCT 201 Pre-Quiz #4 (Ch. 7, 8 and 9) - Professor Farina Student: INSTRUCTIONS: For the true-false questions, circle either True or False. For the multiple-choice questions, circle the letter of the best

More information