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

Transcription

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

2 Describe the importance of control over inventory. Control of Inventory LO 1 Two primary objectives of control over inventory are: 1. Safeguarding the inventory from damage or theft. 2. Reporting inventory in the financial statements.

3 Safeguarding Inventory LO 1 The Purchase Order authorizes the purchase of the inventory from an approved vendor. The Receiving Report establishes an initial record of the receipt of the inventory. Recording inventory using a perpetual inventory system is also an effective means of control. The amount of inventory is always available in the Subsidiary Inventory Ledger Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4 LO 1 Safeguarding Inventory Controls for safeguarding inventory should include security measures to prevent damage and customer or employee theft. Some examples of security measures include: 1. Storing inventory in areas that are restricted to only authorized employees. 2. Locking high-priced inventory in cabinets. 3. Using two-way mirrors, cameras, security tags, and guards.

5 LO 1 Reporting Inventory A Physical Inventory or count of inventory should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate.

6 Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet.

7 Under the Specific Identification Inventory Cost Flow Method, the unit sold is identified with a specific purchase. This method is used by automobile dealerships, jewelry stores and art galleries. Under the First-in, First-out (FIFO) Inventory Cost Flow Method, the first units purchased are assumed to be sold first and the ending inventory is made up of the most recent purchases. This method is used for Perishable items. Under Last-in, First-out (LIFO) Inventory Cost Flow Method, the last units purchased are assumed to be sold first and the ending inventory is made up of the first units purchased. This method is used for hardware stores. Customers buy newest first. Under the Average Inventory Cost Flow Method, the cost of the units sold and in ending inventory is an average of the purchase costs. This method is used for mines, gas, stone, dirt.

8 Determine the cost of inventory under the perpetual inventory system, using the FIFO, LIFO, and average cost methods. Inventory Costing Methods For purposes of illustration, the data for Item 127B are used, as shown below. We will examine the first. LO 3

9 First-In, First-Out Method LO 3

10 Last-In, First-Out Method LO 3

11 Average Cost Method When the average cost method is used in a perpetual system, an average unit cost for each item is computed each time a purchase is made. LO 3 This unit cost is then used to determine the cost of each sale until another purchase is made and a new average is computed. This averaging technique is called a moving average.

12 First-In, First-Out Method Determine the cost of inventory under the periodic inventory system, using the FIFO, LIFO, and average cost methods. Beginning inventory and purchases of Item 127B in January are as follows: The physical count on January 31 shows that 150 units are on hand. (Conclusion: 130 units were sold.) What is the cost of the ending inventory?

13 Last-In, First-Out Method Beginning inventory and purchases of Item 127B in January are as follows: LO 4 The physical count on January 31 shows that 150 units are on hand. (Conclusion: 130 units were sold.) What is the cost of the ending inventory? Using the last-in, first-out method, the cost of the ending inventory on January 31 is determined as follows:

14 Average Cost Method Beginning inventory and purchases of Item 127B in January are as follows: LO 4 The physical count on January 31 shows that 150 units are on hand. (Conclusion: 130 units were sold.) What is the cost of the ending inventory? The weighted average unit cost is determined as follows: Average Unit Cost = Average Unit Cost = Average Unit Cost = $21 per unit Total cost of Units Available for Sale Units Available for Sale units

15 Compare and contrast the use of the three inventory costing methods. Comparing Inventory Cost Methods LO 5 Using the Periodic inventory system illustration with sales of $3,900 (130 units x $30), the differences in ending inventory, cost of merchandise sold, and gross profit illustrated below.

16 LO 6 Reporting Merchandise Inventory Cost is the primary basis for valuing and reporting inventories in the Financial Statements. However, inventory may be valued at other than cost in the following cases: The cost of replacing items in inventory is Below the recorded cost. The inventory cannot be sold at normal prices due to imperfections, style changes, or other causes. Describe and illustrate the reporting of merchandise inventory in the financial statements.

17 Valuation at Lower of Cost or Market LO 6 Market, as used in Lower-of-cost-or-market metnod, is the cost to replace the merchandise on the inventory date. Cost and replacement cost can be determined for: Each item in the inventory. Each major class or category of inventory. Total inventory as a whole Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18 Valuation at Net Realizable Value Merchandise that is out of date, spoiled, or damaged should be written down to its Net Realizable Value. This is the estimated selling price less any direct costs of disposal, such as sales commissions or special advertising. Assume the following data about an item of damaged merchandise: Original cost $1,000 Estimated selling price 800 Selling expenses 150 The merchandise should be valued at its net realizable value of $650($800 $150).

19 Merchandise Inventory on the Balance Sheet Merchandise inventory is usually presented in the Current Assets section of the balance sheet, following Receivables. The method of determining the Cost of the inventory (FIFO, LIFO, or weighted average) and the method of valuing the inventory (cost or the lower of cost or market) should be shown.

20 Inventory Errors Some reasons that inventory errors may occur include: Physical inventory on hand was miscounted. Costs were incorrectly assigned to inventory. Inventory in transit was incorrectly included or excluded from inventory. Consigned inventory was incorrectly included or excluded from inventory.

21 Inventory Errors LO 6 Inventory errors often arise from Consigned Inventory. Manufacturers sometimes ship merchandise to retailers who act as the manufacturer s agent. The manufacturer, called the Consignor retains title until the goods are sold. Such merchandise is said to be shipped on consignment to the retailer, called the Consignee.

22 Describe and illustrate the inventory turnover and the number of days sales in inventory in analyzing the efficiency and effectiveness of inventory management. Inventory Turnover Inventory Turnover measures the relationship between cost of merchandise sold and the amount of inventory carried during the period. It is calculated as follows: Inventory Turnover = Cost of Merchandise Sold Average Inventory

23 LO 7 Inventory Turnover Inventory turnover for Best Buy is shown below (in millions).

24 LO 7 Inventory Turnover The Number of days sales in inventory measures the length of time it takes to acquire, sell, and replace the inventory. It is computed as follows: Number of Days Sales in Inventory = Average Inventory Average Daily Cost of Merchandise Sold

25 LO 7 Inventory Turnover The number of days sales in inventory for Best Buy is computed below (in millions).