Chapter 6 Inventories 高立翰
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1 Chapter 6 Inventories 高立翰
2 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 financial effects of the inventory cost flow assumptions. 4. Explain the lower-of-cost-or-net realizable value basis of accounting for inventories. 5. Indicate the effects of inventory errors on the financial statements. 6. Compute and interpret the inventory turnover ratio. 會 計 學 ( 一 ) 2
3 Inventories Classifying Inventory Determining Inventory Quantities Inventory Costing Inventory Errors Statement Presentation and Analysis Finished goods Work in process Raw materials Taking a physical inventory Determining ownership of goods Specific identification Cost flow assumptions Financial statement and tax effects Consistent use Lower-of-costor-net realizable value Income statement effects Statement of financial position effects Presentation Analysis using inventory turnover 會 計 學 ( 一 ) 3
4 Classifying Inventory Merchandising Company One Classification: Merchandise Inventory Manufacturing Company Three Classifications: Raw Materials Work in Process Finished Goods Regardless of the classification, companies report all inventories under Current Assets on the statement of financial position. 會 計 學 ( 一 ) 4
5 Determining Inventory Quantities (1/5) Physical Inventory taken for two reasons: Perpetual System Check accuracy of inventory records. Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft). Periodic System Determine the inventory on hand. Determine the cost of goods sold for the period. 會 計 學 ( 一 ) 5
6 Determining Inventory Quantities (2/5) Taking a Physical Inventory Involves counting, weighing, or measuring each kind of inventory on hand. Taken when the business is closed or when business is slow. Taken at end of the accounting period. 會 計 學 ( 一 ) 6
7 Determining Inventory Quantities (3/5) Determining Ownership of Goods Goods in Transit ( 在 途 存 貨 ) Purchased goods not yet received. Sold goods not yet delivered. Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of sale. 會 計 學 ( 一 ) 7
8 Determining Inventory Quantities (4/5) Goods in Transit Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. ( 起 運 點 交 貨 ) Ownership of the goods remains with the seller until the goods reach the buyer. ( 目 的 地 交 貨 ) 會 計 學 ( 一 ) 8
9 Determining Inventory Quantities (5/5) Determining Ownership of Goods Consigned Goods ( 寄 銷 品 ) In some lines of business, it is common to hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of goods. These are called consigned goods. 會 計 學 ( 一 ) 9
10 Inventory Costing Unit costs can be applied to quantities on hand using the following costing methods: Specific Identification ( 個 別 認 定 法 ) First-in, first-out (FIFO) ( 先 進 先 出 法 ) Average-cost ( 平 均 成 本 法 ) Cost Flow Assumptions ( 成 本 流 動 假 設 ) 會 計 學 ( 一 ) 10
11 Specific Identification Method An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory. Practice is relatively rare. Most companies make assumptions (Cost Flow Assumptions) about which units were sold. 會 計 學 ( 一 ) 11
12 Illustrations Illustration (1): Assume that Crivitz TV Company purchases three identical 46-inch TVs on different dates at costs of $700, $750, and $800. During the year Crivitz sold two sets at $1,200 each. Illustration 6-2 Illustration (2): If Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold is $1,500 ($700 $800), and its ending inventory is $750 Illustration 6-3 會 計 學 ( 一 ) 12
13 Cost Flow Assumptions Illustration 6-4 Ishikawa uses a periodic inventory system. Physical inventory determined that Ishikawa sold 550 units and had 450 units in inventory at December 31. 會 計 學 ( 一 ) 13
14 First-In-First-Out (FIFO) First-In-First-Out (FIFO) ( 先 進 先 出 法 ) Earliest goods purchased are first to be sold. Often parallels actual physical flow of merchandise. Generally good business practice to sell oldest units first. Illustration 6-5 會 計 學 ( 一 ) 14
15 Average-Cost Average-Cost ( 平 均 成 本 法 ) Allocates cost of goods available for sale on the basis of weighted average unit cost incurred. Assumes goods are similar in nature. Applies weighted average unit cost to the units on hand to determine cost of the ending inventory. Illustration 6-8 會 計 學 ( 一 ) 15
16 Financial Statement and Tax Effects (1/2) Income Statement Effects Illustration 6-9 會 計 學 ( 一 ) 16
17 Financial Statement and Tax Effects (2/2) Statement of Financial Position Effects A major advantage of the FIFO method is that in a period of inflation, the costs allocated to ending inventory will approximate their current cost. A shortcoming of the average-cost method is that in a period of inflation, the costs allocated to ending inventory may be understated in terms of current cost. Tax Effects In a period of inflation: FIFO - inventory and net income higher. AVERAGE Cost - lower income taxes. Using Cost Flow Methods Consistently Method should be used consistently, enhances comparability. Although consistency is preferred, a company may change its inventory costing method. 會 計 學 ( 一 ) 17
18 Lower-of-Cost-or-Net Realizable Value Lower-of-Cost-or-Net Realizable Value ( 成 本 與 淨 變 現 價 值 孰 低 ) When the value of inventory is lower than its cost Companies can write down the inventory to its net realizable value in the period in which the price decline occurs. Net realizable value refers to the net amount that a company expects to realize (receive) from the sale of inventory. Illustration Assume that Ken Tuckie TV has the following lines of merchandise with costs and market values as indicated. Illustration 6-10 會 計 學 ( 一 ) 18
19 Inventory Errors (1/5) Failure to count or price inventory correctly. Not properly recognizing the transfer of legal title to goods in transit. Errors affect both the income statement and statement of financial position. 會 計 學 ( 一 ) 19
20 Inventory Errors (2/5) Income Statement Effects Inventory errors affect the computation of cost of goods sold and net income. Illustration 6-11 Illustration 6-12 會 計 學 ( 一 ) 20
21 Inventory Errors (3/5) Income Statement Effects Inventory errors affect the computation of cost of goods sold and net income in two periods. An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period. Over the two years, the total net income is correct because the errors offset each other. The ending inventory depends entirely on the accuracy of taking and costing the inventory. 會 計 學 ( 一 ) 21
22 Inventory Errors (4/5) Illustration Incorrect Correct Incorrect Correct Sales $ 80,000 $ 80,000 $ 90,000 $ 90,000 Beginning inventory 20,000 20,000 12,000 15,000 Cost of goods purchased 40,000 40,000 68,000 68,000 Cost of goods available 60,000 60,000 80,000 83,000 Ending inventory 12,000 15,000 23,000 23,000 Cost of good sold 48,000 45,000 57,000 60,000 Gross profit 32,000 35,000 33,000 30,000 Operating expenses 10,000 10,000 20,000 20,000 Net income $ 22,000 $ 25,000 $ 13,000 $ 10,000 Combined income for 2-year period is correct. ($3,000) Net Income understated $3,000 Net Income overstated 會 計 學 ( 一 ) 22
23 Inventory Errors (5/5) Statement of Financial Position Effects Effect of inventory errors on the statement of financial position is determined by using the accounting equation: Illustration 6-11 Illustration 6-14 會 計 學 ( 一 ) 23
24 Statement Presentation and Analysis Presentation Statement of Financial Position - Inventory classified as current asset Income Statement - Cost of goods sold. There also should be disclosure of major inventory classifications, basis of accounting (cost, or lower-of-cost-or-net realizable value), and Cost method (specific identification, FIFO, or average-cost). Analysis Using Inventory Turnover (p 不 上 ) 會 計 學 ( 一 ) 24
25 Appx. 6A: Cost Flow Methods in Perpetual Systems (1/3) Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO and Average cost Illustration 6A-1 會 計 學 ( 一 ) 25
26 Appx. 6A: Cost Flow Methods in Perpetual Systems (2/3) First-In-First-Out (FIFO) Illustration 6A-2 Answer on notes page Cost of Goods Sold Ending Inventory 會 計 學 ( 一 ) 26
27 Appx. 6A: Cost Flow Methods in Perpetual Systems (3/3) Average Cost (Moving-Average System) Illustration 6A-3 Cost of Goods Sold Ending Inventory 會 計 學 ( 一 ) 27
28 Appx. 6B: Estimating Inventories (1/4) Gross Profit Method The gross profit method estimates the cost of ending inventory by applying a gross profit rate to net sales. Illustration 6B-1 會 計 學 ( 一 ) 28
29 Appx. 6B: Estimating Inventories (2/4) Illustration Kishwaukee Company s records for January show net sales of $200,000, beginning inventory $40,000, and cost of goods purchased $120,000. The company expects to earn a 30% gross profit rate. Compute the estimated cost of the ending inventory at January 31 under the gross profit method. Illustration 6B-2 會 計 學 ( 一 ) 29
30 Appx. 6B: Estimating Inventories (3/4) Retail Inventory Method Company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost. Illustration 6B-3 會 計 學 ( 一 ) 30
31 Appx. 6B: Estimating Inventories (4/4) Illustration Illustration 6B-4 Note that it is not necessary to take a physical inventory to determine the estimated cost of goods on hand at any given time 會 計 學 ( 一 ) 31
32 Appx. 6C: LIFO Inventory Method (1/3) Last-In, First-Out (LIFO) ( 後 進 先 出 法 ) Latest goods purchased are first to be sold. Seldom coincides with actual physical flow of merchandise. Exceptions include goods stored in piles, such as coal or hay. Under IFRS, LIFO is not permitted for financial reporting purposes. 會 計 學 ( 一 ) 32
33 Appx. 6C: LIFO Inventory Method (2/3) Illustration Illustration 6-4 Ishikawa uses a periodic inventory system. Physical inventory determined that Ishikawa sold 550 units and had 450 units in inventory at December 31. 會 計 學 ( 一 ) 33
34 Appx. 6C: LIFO Inventory Method (3/3) Last-In-First-Out (LIFO) Illustration 6C-1 會 計 學 ( 一 ) 34
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