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 statement and balance sheet. 2
3 After studying this chapter, you should be able to: 3. Determine the cost of inventory under the perpetual system, using the FIFO, LIFO, and average cost methods. 4. Determine the cost of inventory under the periodic system, using the FIFO, LIFO, and average cost methods. 5. Compare and contrast the use of the three inventory costing methods. 3
4 After studying this chapter, you should be able to: 6. Describe and illustrate the reporting of merchandise inventory in the financial statement. 7. Estimate the cost of inventory using the retail method and the gross profit method. 4
5 7-1 Objective 1 Describe the importance of control over inventory. 5
6 7-1 Two primary objectives of control over inventory are: 1) Safeguarding the inventory, and 2) Properly reporting it in the financial statements. 6
7 7-1 Controls over inventory include developing and using security measures to prevent inventory damage or customer or employee theft. 7
8 7-1 To ensure the accuracy of the amount of inventory reported in the financial statements, a merchandising business should take a physical inventory. 8
9 7-2 Objective 2 Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet. 9
10 Inventory Costing Methods 7-2 10
11 7-2 (Continued) 11
12 7-2 (Continued) 12
13 7-2 (Concluded) 13
14 Inventory Costing Methods In Indonesia 7-2 250 200 150 100 50 0 FIFO Average Specific Indentification 14
15 Inventory Costing Methods In USA 7-2 400 300 371 299 Number of firms (> $1B Sales) 200 100 130 0 FIFO LIFO Average cost 15 14
16 Example Exercise 7-1 The three identical units of Item QBM are purchased during February, as shown below. Item QBM Units Cost Feb. 8 Purchase 1 Rp45,000 15 Purchase 1 48,000 26 Purchase 1 51,000 Total 3 Rp144,000 Average cost per unit Rp48,000 (Rp144,000 3 units) Assume that one unit is sold on February 27 for Rp70,000. 7-2 - Determine the gross profit for February and ending inventory on February 28 using (a) first-in, first-out (FIFO); (b) last-in, first-out (LIFO); and (c) average cost methods. 16 15
17 7-2 Follow My Example 7-1 Gross Profit Ending Inventory (a) First-in, first-out (FIFO): Rp25,000 (Rp70,000 Rp45,000) Rp99,000 (Rp48,000 Rp51,000) (b) Last-in, first-out (LIFO): Rp19,000 (Rp70,000 Rp51,000) Rp93,000 (Rp45,000 + Rp48,000) (c) Average cost: Rp22,000 (Rp70,000 Rp48,000) Rp96,000 (Rp48,000 x 2) $144/3 units For Practice: PE 7-1A, PE 7-1B 17 16
18 7-3 Objective 3 Determine the cost of inventory under the perpetual inventory system, using FIFO, LIFO, and average cost methods. 18
19 FIFO Perpetual 7-3 On January 1, the firm had 100 units of Item 127B that cost Rp20,000 per unit. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 19 18
20 FIFO Perpetual 7-3 On January 4, the firm sold 70 units of 127B at Rp30,000 each. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 20 19
21 FIFO Perpetual 7-3 On January 4, the firm sold 70 units of 127B at Rp30,000 each. 4 Accounts Receivable 2 100 000 Sales 2 100 000 On 4 January Cost of Merchandise 22, the Sold firm sold 1 twenty 400 000 units at $30. Merchandise Inventory 1 400 000 21 20
22 FIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 The cost was in Rp000 22 21
23 FIFO Perpetual 7-3 On January 10, the firm purchased 80 units at Rp21,000 each. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 10 Purchase 80 21,000 23 22
24 FIFO Perpetual 7-3 On January 10, the firm purchased 80 units at Rp21,000 each. 10 Merchandise Inventory 1 680 000 Accounts Payable 1 680 000 24 23
25 FIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 The cost was in Rp000 25 24
26 FIFO Perpetual On January 22, the firm sold 40 units for Rp30,000 each. 7-3 Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 10 Purchase 80 21,000 22 Sale 40 26 25
27 FIFO Perpetual On January 22, the firm sold 40 units for Rp30,000 each. 7-3 22 Accounts Receivable 1 200 000 Sales 1 200 000 On 22 January Cost of Merchandise 22, the Sold firm sold twenty 810 000 units at $30. Merchandise Inventory 810 000 27 26
28 FIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600 10 21 210 70 21 1,470 Of the forty sold, thirty are considered to be from those acquired at Rp20,000 each. The other ten are considered to be from the January 10 purchase. The cost was in Rp000 28 27
29 FIFO Perpetual 7-3 On January 28, the firm sold 20 units at Rp30,000 each. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 10 Purchase 80 21,000 22 Sale 40 28 Sale 20 29 28
30 FIFO Perpetual 7-3 On January 28, the firm sold 20 units at Rp30,000 each. 28 Accounts Receivable 600 000 Sales 600 000 28 Cost of Merchandise Sold 420 000 Merchandise Inventory 420 000 30 29
31 FIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600 10 21 210 70 21 1,470 28 20 21 420 50 21 1,050 Unit Cost and Total Cost is in Rp000 31 30
32 FIFO Perpetual 7-3 On January 30, purchased ten additional units of Item 127B at Rp22,000 each. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 10 Purchase 80 21,000 22 Sale 40 28 Sale 20 30 Purchase 100 22,000 32 31
33 FIFO Perpetual 7-3 On January 30, purchased ten additional units of Item 127B at Rp22,000 each. 30 Merchandise Inventory 2 200 000 Accounts Payable 2 200 000 33 32
34 FIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600 10 21 210 70 21 1,470 28 20 21 420 50 21 1,050 30 100 22 2,200 50 21 1,050 100 22 2,200 Unit Cost and Total Cost is in Rp000 34 33
35 FIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600 10 21 210 70 21 1,470 28 20 21 420 50 21 1,050 30 100 22 2,200 50 21 1,050 100 22 2,200 Unit Cost and Total Cost is in Rp000 Cost of merchandise sold for January is Rp2,630,000. 35 34
36 FIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 30 20 600 10 21 210 70 21 1,470 28 20 21 420 50 21 1,050 30 100 22 2,200 50 21 1,050 100 22 2,200 The cost was in Rp000 January 31, inventory is Rp3,250,000 (Rp1,050,000 + Rp2,200,000) 36 35
37 Example Exercise 7-2 Beginning inventory, purchases, and sales for Item ER27 are as follows: Nov. 1 Inventory 40 units at Rp5,000 5 Sale 32 units 11 Purchase 60 units at Rp7,000 21 Sale 45 units Assuming a perpetual inventory system and the first-in, first-out (FIFO) method, determine (a) the cost of the merchandise sold for the November 21 sale and (b) the inventory on November 30. 37 36 7-3 -
38 7-3 Follow My Example 7-2 a) Cost of merchandise sold: 8 units @ Rp5,000 Rp40,000 37 units @ Rp7,000 259,000 45 units Rp299,000 b) Inventory, November 30: Rp161,000 = (23 units x Rp7,000) For Practice: PE 7-2A, PE 7-2B 38 37
39 LIFO Perpetual 7-3 On January 1, the firm had 100 units of Item 127B that cost Rp20,000 per unit. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 39 38
40 LIFO Perpetual 7-3 On January 4, the firm sold 70 units of 127B at Rp30,000 each. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 40 39
41 LIFO Perpetual 7-3 On January 4, the firm sold 70 units of 127B at Rp30,000 each. 4 Accounts Receivable 2 100 000 Sales 2 100 000 On 4 January Cost of Merchandise 22, the Sold firm sold 1 400 twenty 000 units at $30. Merchandise Inventory 1 400 000 41 40
42 LIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 The unit cost and total cost is in Rp000 42 41
43 LIFO Perpetual 7-3 On January 10, the firm purchased 80 units at Rp21,000 each. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 10 Purchase 80 21,000 43 42
44 LIFO Perpetual 7-3 On January 10, the firm purchased 80 units at Rp21,000 each. 10 Merchandise Inventory 1 680 000 Accounts Payable 1 680 000 44 43
45 LIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 The unit cost and total cost is in Rp000 45 44
46 LIFO Perpetual On January 22, the firm sold 40 units for Rp30,000 each. 7-3 Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 10 Purchase 80 21,000 22 Sale 40 46 45
47 LIFO Perpetual On January 22, the firm sold 40 units for Rp30,000 each. 7-3 22 Accounts Receivable 1 200 000 Sales 1 200 000 On 22 January Cost of Merchandise 22, the Sold firm sold twenty 840 000 units at $30. Merchandise Inventory 840 000 47 46
48 LIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 40 21 840 30 20 600 40 21 840 All of the 40 sold are considered to be from the January 10 purchase. The unit cost and total cost is in Rp000 48 47
49 LIFO Perpetual 7-3 On January 28, the firm sold 20 units at Rp30,000 each. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 10 Purchase 80 21,000 22 Sale 40 28 Sale 20 49 48
50 LIFO Perpetual 7-3 On January 28, the firm sold 20 units at Rp30,000 each. 28 Accounts Receivable 600 000 Sales 600 000 28 Cost of Merchandise Sold 420 000 Merchandise Inventory 420 000 50 49
51 LIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 40 21 840 30 20 600 40 21 840 28 20 21 420 30 20 600 20 21 420 The unit cost and total cost is in Rp000 All of the 20 sold are considered to be from the January 22 purchase. 51 50
52 LIFO Perpetual 7-3 On January 30, the firm purchased one hundred additional units of Item 127B at Rp22,000 each. Item 127B Units Cost Jan. 1 Inventory 100 Rp20,000 4 Sale 70 10 Purchase 80 21,000 22 Sale 40 28 Sale 20 30 Purchase 100 22,000 52 51
53 LIFO Perpetual 7-3 On January 30, the firm purchased one hundred additional units of Item 127B at Rp22,000 each. 30 Merchandise Inventory 2 200 000 Accounts Payable 2 200 000 53 52
54 LIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 40 21 840 30 20 600 40 21 840 28 20 21 420 30 20 600 20 21 420 30 100 22 2,200 30 20 600 20 21 420 100 22 2,200 The unit cost and total cost is in Rp000 54 33 53
55 LIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 40 21 840 30 20 600 40 21 840 28 20 21 420 30 20 600 20 21 420 30 100 22 2,200 30 20 600 20 21 420 100 22 2,200 Cost of merchandise sold The unit cost and total cost is in Rp000 Rp2,660,000 55 33 54
56 LIFO Perpetual 7-3 Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Jan. 1 100 20 2,000 4 70 20 1,400 30 20 600 10 80 21 1,680 30 20 600 80 21 1,680 22 40 21 840 30 20 600 40 21 840 28 20 21 420 30 20 600 20 21 420 30 100 22 2,200 30 20 600 20 21 420 100 22 2,200 January 31, inventory..rp3,220,000 The unit cost and total cost is in Rp000 56 33 55
57 Example Exercise 7-3 Beginning inventory, purchases, and sales for Item ER27 are as follows: Nov. 1 Inventory 40 units at Rp5,000 5 Sale 32 units 11 Purchase 60 units at Rp7,000 21 Sale 45 units Assuming a perpetual inventory system and the last-in, first-out (LIFO) method, determine (a) the cost of the merchandise sold for the November 21 sale and (b) the inventory on November 30. 57 56 7-3 -
58 7-3 Follow My Example 7-3 a) Cost of merchandise sold: Rp315,000 = (45 units x Rp7,000) b) Inventory, November 30: 8 units @ Rp5,000 Rp 40,000 15 units @ Rp7,000 105,000 23 Rp145,000 For Practice: PE 7-3A, PE 7-3B 58 57
59 7-4 Objective 4 Determine the cost of inventory under the periodic inventory system, using FIFO, LIFO, and average cost methods. 59
60 FIFO Periodic 7-4 Using FIFO, the earliest batch purchased is considered the first batch of merchandise sold. The physical flow does not have to match the accounting method chosen. 60
61 FIFO Periodic 7-4 Jan. 1 Jan. 10 Jan. 30 100 units @ Rp20,000 80 units @ Rp21,000 100 units @ Rp22,000 =Rp2,000,000 = 1,680,000 = 2,200,000 280 units available for sale during year Rp5,880,000 Cost of merchandise available for sale 61 60
62 FIFO Periodic 7-4 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? Jan. 1 Jan. 10 Jan. 30 100 Sold units these @ $20 Sold 30 of these 80 units @ $21 50 units @ Rp21,000 100 units @ $22 100 units @ Rp22,000 = Rp 0 = 1,050,000 = 2,200,000 Ending inventory Rp3,250,000 62 61
63 FIFO Periodic 7-4 Now we can calculate the cost of goods sold as follows: Beginning inventory, January 1 (Slide 60) Rp2,000,000 Purchases (Rp1,680,000 + Rp2,200,000) 3,880,000 Cost of merchandise available for sale Rp5,880,000 Ending inventory, January 31(Slide 61) 3,250,000 Cost of merchandise sold Rp2,630,000 63 62
64 LIFO Periodic 7-4 Using LIFO, the most recent batch purchased is considered the first batch of merchandise sold. The actual flow of goods does not have to be LIFO. For example, a store selling fresh fish would want to sell the oldest fish first (which is FIFO) even though LIFO is used for accounting purposes. 64
65 LIFO Periodic 7-4 Jan. 1 Jan. 10 Jan. 30 100 units @ Rp20,000 80 units @ Rp21,000 100 units @ Rp22,000 =Rp2,000,000 = 1,680,000 = 2,200,000 280 units available for sale during year Rp5,880,000 Cost of merchandise available for sale 65 64
66 LIFO Periodic 7-4 Assume again that the physical count on January 31 is 150 units (and that 130 units were sold). What is the cost of the ending inventory? Jan. 1 100 units @ Rp20,000 =Rp2,000,000 Jan. 10 Jan. 30 50 units @ Rp21,000 80 units @ $21 Sold 30 of these 100 units @ $22 = 1,050,000 680 Sold these = 2,2000 Ending inventory Rp3,050,000 66 65
67 LIFO Periodic 7-4 Now we can calculate the cost of goods sold as follows: Beginning inventory, January 1 (Slide 64) Rp2,000,000 Purchases (Rp1,680,000 + Rp2,200,000) 3,880,000 Cost of merchandise available for sale Rp5,880,000 Ending inventory, January 31(Slide 65) 3,050,000 Cost of merchandise sold Rp2,830,000 67 66
68 Average Cost 7-4 The weighted average unit cost method is based on the average cost of identical units. The total cost of merchandise available for sale is divided by the related number of units of that item. 68
69 Average Cost 7-4 Jan. 1 Jan. 10 Jan. 30 100 units @ Rp20,000 80 units @ Rp21,000 100 units @ $22 100 units @ Rp22,000 =Rp2,000,000 = 1,680,000 = 2,200,000 280 Rp5,880,000 Average unit cost: Rp5,880,000 280 = Rp21,000 Cost of merchandise sold: 130 units at Rp21,000 = Rp2,730,000 69 68 Ending merchandise inventory: 150 units at Rp21,000= Rp3,150,000
70 Average Cost 7-4 Now we can calculate the cost of goods sold as follows: Beginning inventory, January 1 (Slide 68) Rp2,000,000 Purchases (Rp1,680,000 + Rp2,200,000) 3,880,000 Cost of merchandise available for sale Rp5,880,000 Ending inventory, January 31(Slide 68) 3,150,000 Cost of merchandise sold Rp2,730,000 70 69
71 7-4 - Example Exercise 7-4 The units of an item available for sale during the year were as follows: Jan. 1 Inventory 6 units @ Rp50,000 Rp 300,000 Mar. 20 Purchase 14 units @ Rp55,000 770,000 Oct. 30 Purchase 20 units @ Rp62,000 1,240,000 Available for sale 40 units Rp 2,310,000 There are 16 units of the item in the physical inventory at December 31. The periodic inventory system is used. Determine the inventory cost by (a) the first-in, first-out (FIFO) method, (b) the last-in, first-out (LIFO) method, and (c) the average cost method. 71 70
72 7-4 Follow My Example 7-4 a) First-in, first-out (FIFO) method: Rp992,000 (16 units x Rp62,000) b) Last-in, first-out (LIFO) method: Rp850,000 (6 units x Rp50,000) + (10 units x Rp55,000) c) Average method: Rp924,000 (16 units x Rp57,750) where average cost = Rp57,750 (Rp2,310,000 40 units) For Practice: PE 7-4A, PE 7-4B 72 71
73 7-5 Objective 5 Compare and contrast the use of the three inventory costing methods. 73
74 Partial Income Statements 7-5 First-In, First-Out Net sales Rp3,900,000 Cost of merchandise sold: Beginning inventory Rp2,000,000 Purchases 3,880,000 Merchandise available for sale Rp5,880,000 Less ending inventory 3,250,000 Cost of merchandise sold 2,630,000 Gross profit Rp1,270,000 74 73
75 Partial Income Statements 7-5 Average Cost Net sales Rp3,900,000 Cost of merchandise sold: Beginning inventory Rp2,000,000 Purchases 3,880,000 Merchandise available for sale Rp5,880,000 Less ending inventory 3,150,000 Cost of merchandise sold 2,730,000 Gross profit Rp1,170,000 75 74
76 Partial Income Statements 7-5 Last-In, First-Out Net sales Rp3,900,000 Cost of merchandise sold: Beginning inventory Rp2,000,000 Purchases 3,880,000 Merchandise available for sale Rp5,880,000 Less ending inventory 3,050,000 Cost of merchandise sold 2,830,000 Gross profit Rp1,070,000 76 75
77 Recap 7-5 Weighted FIFO LIFO Average Ending inventory Rp3,250,000 Rp3,150,000 Rp3,050,000 Cost of merchandise sold Rp2,630,000 Rp2,730,000 Rp2,830,000 Gross profit Rp1,270,000 Rp1,170,000 Rp1,070,000 77
78 7-6 Objective 6 Describe and illustrate the reporting of merchandise inventory in the financial statements. 78
79 Lower-of-Cost-or-Market Method 7-6 If the cost of replacing an item in inventory is lower than the original purchase cost, the lower-of-cost-ormarket (LCM) method is used to value the inventory. 79
80 7-6 Market, as used in lower of cost or market, is the cost to replace the merchandise on the inventory date. 80
81 7-6 Cost and replacement cost can be determined for 1) each item in the inventory, 2) major classes or categories of inventory, or 3) the inventory as a whole. 81
82 Click to Determining edit Inventory Master at title style Lower-of-Cost-or-Market Method 7-6 A B C D E F G Unit Unit Total Inventory Cost Market Lower Commodity Quantity Price Price Cost Market of C or M 1 A 400 Rp10,250 Rp 9,500 Rp4,100,000 Rp3,800,000 Rp3,800,000 1 2 B 120 22,500 24,100 2,700,000 2,892,000 2,700,000 2 3 C 600 8,000 7,750 4,800,000 4,650,000 4,650,000 3 4 D 280 14,000 14,750 3,920,000 4,130,000 3,920,000 4 5 Total Rp15,520,000 Rp15,472,000 Rp15,070,000 5 82
83 7-6 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 cost of disposal, such as sales commissions. 83
84 Merchandise Inventory on the Balance Sheet 7-6 Merchandise inventory is usually presented in the Current Assets section of the balance sheet, following receivables. 84
85 7-6 The method of determining the cost of inventory (FIFO, LIFO, or weighted average) should be shown. 85
86 7-6 - Example Exercise 7-5 On the basis of the following data, determine the value of the inventory at the lower of cost or market. Apply lower of cost or market to each inventory item as shown in Exhibit 7. Inventory Unit Unit Commodity Quantity Cost Price Market Price C17Y 10 Rp 39,000 Rp 40,000 B563 7 Rp 110,000 98,000 86 85
87 7-6 - Follow My Example 7-5 Unit Unit Lower of Commodity Qty Cost Price Market Price Cost Market C or M C17Y 10 Rp 39,000 Rp 40,000 Rp 390,000 Rp 400,000 Rp 390,000 B563 7 110,000 98,000 770,000 686,000 686,000 Total Rp1,160,000 Rp1,086,000 Rp1,076,000 For Practice: PE 7-5A, PE 7-5B 87 86
88 7-6 - Example Exercise 7-6 Agung Jaya Motor Shop incorrectly counted its December 31, 2008 inventory as Rp250,000,000 instead of the correct amount of Rp220,000,000. Indicate the effect of the misstatement on Agung Jaya Motor Shop December 31, 2008 balance sheet and income statement for the year ended December 31, 2008. 88 87
89 7-6 - Follow My Example 7-6 Amount of Misstatement Overstatement (Understatement) Balance Sheet: Merchandise inventory overstated Rp 30,000,000 Current assets overstated 30,000,000 Total assets overstated 30,000,000 Owner s equity overstated 30,000,000 Income Statement: Cost of merchandise sold understated Rp(30,000,000) Gross profit overstated 30,000,000 Net income overstated 30,000,000 For Practice: PE 7-6A, PE 7-6B 89 88
90 7-7 Objective 7 Estimate the cost of inventory, using the retail method and the gross profit method. 90
91 Retail Inventory Method 7-7 The retail inventory method of estimating inventory cost is based on the relationship of the cost of merchandise available for sale to the retail price of the same merchandise. 91
92 Click to Determining edit Master Inventory by title style the Retail Method 7-7 A B C Cost Retail 1 Merchandise inventory, January 1 Rp19,400,000 Rp36,000,000 1 2 Purchases in January (net) 42,600,000 64,000,000 2 3 Merchandise available for sale Rp62,000,000 Rp100,000,000 3 Ratio of cost to retail price: (Rp 62,000,000:Rp 4 100,000,000) = 62% 4 5 Sales for January (net) 70,000,000 5 6 Merchandise inventory, January 31, at retail Rp30,000,000 6 7 Merchandise inventory, January 31, at estimated cost 7 8 (Rp30,000,000 x 62%) Rp18,600,000 8 92
93 7-7 Example Exercise 7-7 A business using the retail method of inventory costing determines that merchandise inventory at retail is Rp900,000,000. If the ratio of cost to retail price is 70%, what is the amount of inventory to be reported on the financial statements? Follow My Example 7-7 Rp630,000,000 (Rp900,000,000 x 70%) For Practice: PE 7-7A, PE 7-7B 93 92
61 94 Gross Profit Method 7-7 The gross profit method uses the estimated gross profit for the period to estimate the inventory at the end of the period. 94
95 Click to Estimating edit Inventory Master by title style Gross Profit Method 7-7 A B C Cost Retail 1 Merchandise inventory January 1 Rp 57,000,000 1 2 Purchases in January (net) 180,000,000 2 3 Merchandise available for sale Rp 237,000,000 3 4 Sales for January (net) Rp 250,000,000 4 5 Less estimated gross profit (Rp250,000 x 30%) 75,000,000 5 6 Estimated cost of merchandise sold 175,000,000 6 7 Estimated merchandise inventory, January 31 Rp 62,000,000 7 95
96 7-7 The gross profit method is useful for estimating inventories for monthly or quarterly financial statements in a periodic inventory system. 96
97 7-7 Example Exercise 7-8 Based on the following data, estimate the cost of ending merchandise inventory: Sales (net) Rp1,250,000,000 Estimated gross profit rate 40% Beginning merchandise inventory Rp100,000,000 Purchases (net) 800,000,000 Merchandise available for sale Rp900,000,000 97 96
98 7-7 Follow My Example 7-8 Merchandise available for sale Rp900,000,000 Less cost of merchandise sold [Rp1,250,000,000 x (100% 40%)] 750,000,000 Estimated ending merchandise inventory Rp150,000,000 For Practice: PE 7-8A, PE 7-8B 98 97
99 7-7 Inventory turnover measures the relationship between the volume of goods (merchandise) sold and the amount of inventory carried during the period. Inventory turnover = Cost of merchandise sold Average inventory 99
100 7-7 HERO RIMO Cost Of Merchandise Sold Rp4,035,116,000,000 Rp87,696,796,439 Inventories Beginning Of Year Rp427,941,000,000 Rp24,907,993,901 End Of Year Rp494,919,000,000 Rp28,537,693,305 Average Rp461,430,000,000 Rp26,722,843,603 Inventory Turnover 8.74 times 3.28 times 100
101 7-7 Generally, the larger the inventory turnover, the more efficient and effective the management of inventory. 101
102 7-7 The number of days sales in inventory is a rough measure of the length of time it takes to acquire, sell, and replace the inventory. Number of days sales in inventory = Average inventory Average daily cost of merchandise sold 102
103 7-7 HERO RIMO Average Daily Cost Of Merchandise Sold Rp16,681,472,000/365 Rp11,055,112,328.77 Rp1,157,226,000/365 Rp240,265,196 Average Inventory Rp461,430,000,000 Rp26,722,843,603 Number Of Days' Sales in Inventory 41.74 days 111.22 days 103