1、,Inventories,6,Learning Objectives,Discuss how to classify and determine inventory.,Apply inventory cost flow methods and discuss their financial effects.,Indicate the effects of inventory errors on the financial statements.,3,Explain the statement presentation and analysis of inventory.,2,1,4,One C

2、lassification: Inventory,Three Classifications: Raw Materials Work in Process Finished Goods,Merchandising Company,Manufacturing Company,Helpful Hint Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.,LO 1,Classifying Inventory,LEARNING OBJE

3、CTIVE,Discuss how to classify and determine inventory.,1,LO 1,Physical Inventory taken for two reasons:,Perpetual System Check accuracy of inventory records. Determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft. Periodic System Determine the inventory on han

4、d. Determine the cost of goods sold for the period.,Determining Inventory Quantities,LO 1,Involves counting, weighing, or measuring each kind of inventory on hand. Companies often “take inventory” when the business is closed or business is slow. at the end of the accounting period.,TAKING A PHYSICAL

5、 INVENTORY,Determining Inventory Quantities,LO 1,LO 1,GOODS IN TRANSIT Purchased goods not yet received. Sold goods not yet delivered.,DETERMINING OWNERSHIP OF GOODS,Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by th

6、e terms of sale.,Determining Inventory Quantities,LO 1,Illustration 6-2 Terms of sale,GOODS IN TRANSIT,Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.,Ownership of the goods remains with the seller until the goods reach the buyer.,Determining Own

7、ership of Goods,LO 1,Goods in transit should be included in the inventory of the buyer when the: public carrier accepts the goods from the seller. goods reach the buyer. terms of sale are FOB destination. terms of sale are FOB shipping point.,Question,LO 1,Determining Ownership of Goods,CONSIGNED GO

8、ODS To hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods. Many car, boat, and antique dealers sell goods on consignment, why?,LO 1,Determining Ownership of Goods,LO 1,1.Goods of $15,000 held on consignment should be deducted from

9、the inventory count. 2.The goods of $10,000 purchased FOB shipping point should be added to the inventory count. 3.Item 3 was treated correctly.,Hasbeen Company completed its inventory count. It arrived at a total inventory value of $200,000. You have been given the information listed below. Discuss

10、 how this information affects the reported cost of inventory. 1. Hasbeen included in the inventory goods held on consignment for Falls Co., costing $15,000. 2. The company did not include in the count purchased goods of $10,000, which were in transit (terms: FOB shipping point). 3. The company did n

11、ot include in the count inventory that had been sold with a cost of $12,000, which was in transit (terms: FOB shipping point).,Solution,Inventory should be $195,000 ($200,000 - $15,000 + $10,000).,LO 1,DO IT!,Rules of Ownership,1,Inventory is accounted for at cost. Cost includes all expenditures nec

12、essary to acquire goods and place them in a condition ready for sale. Unit costs are applied to quantities to compute the total cost of the inventory and the cost of goods sold using the following costing methods: Specific identification First-in, first-out (FIFO) Last-in, first-out (LIFO) Average-c

13、ost,Cost Flow Assumptions,LEARNING OBJECTIVE,Apply inventory cost flow methods and discuss their financial effects.,2,LO 2,Illustration: Crivitz TV Company purchases three identical 50-inch TVs on different dates at costs of $700, $750, and $800. During the year Crivitz sold two sets at $1,200 each.

14、 These facts are summarized below.,Illustration 6-3 Data for inventory costing example,Inventory Costing,LO 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 6-4,Specific Identification

15、,LO 2,Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.,LO 2,Practice is relatively rare. Most companies make assumptions (cost flow assumptions) about which units were sold.,Specific Identification,Illu

16、stration 6-12 Use of cost flow methods in major U.S. companies,Cost flow assumptions DO NOT need to be consistent with the physical movement of the goods,Cost Flow Assumptions,LO 2,Illustration: Data for Houston Electronics Astro condensers.,Illustration 6-5,(Beginning Inventory + Purchases) - Endin

17、g Inventory = Cost of Goods Sold,Cost Flow Assumptions,LO 2,Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold. Often parallels actual physical flow of merchandise. Companies determine the cost of the ending inventory by taking the unit cost of the

18、 most recent purchase and working backward until all units of inventory have been costed.,FIRST-IN, FIRST-OUT (FIFO),Cost Flow Assumptions,LO 2,FIRST-IN, FIRST-OUT (FIFO),LO 2,Illustration 6-6,Helpful Hint Another way of thinking about the calculation of FIFO ending inventory is the LISH assumptionl

19、ast in still here.,FIRST-IN, FIRST-OUT (FIFO),Illustration 6-6,LO 2,Costs of the latest goods purchased are the first to be recognized in determining cost of goods sold. Seldom coincides with actual physical flow of merchandise. Exceptions include goods stored in piles, such as coal or hay.,Cost Flo

20、w Assumptions,LAST-IN, FIRST-OUT (LIFO),LO 2,LAST-IN, FIRST-OUT (LIFO),Illustration 6-8,LO 2,Helpful Hint Another way of thinking about the calculation of LIFO ending inventory is the FISH assumptionfirst in still here.,LAST-IN, FIRST-OUT (LIFO),Illustration 6-8,LO 2,Allocates cost of goods availabl

21、e for sale on the basis of weighted-average unit cost incurred. Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.,AVERAGE-COST,Cost Flow Assumptions,LO 2,AVERAGE-COST,LO 2,Illustration 6-11,Illustration 6-11,LO 2,AVERAGE-COST,Each of the three cost fl

22、ow methods is acceptable for use. Reebok International Ltd. and Wendys International currently use the FIFO method. Campbell Soup Company, Krogers, and Walgreen Drugs use LIFO for part or all of their inventory. Bristol-Myers Squibb, Starbucks, and Motorola use the average-cost method. Stanley Black

23、 & Decker Manufacturing Company uses LIFO for domestic inventories and FIFO for foreign inventories.,Financial Statement and Tax Effects of Cost Flow Methods,Inventory Costing,LO 2,INCOME STATEMENT EFFECTS,Illustration 6-13 Comparative effects of cost flow methods,Financial Statement and Tax Effects

24、,LO 2,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 major shortcoming of the LIFO method is that in a period of inflation, the costs allocated to ending inventory may be significantly understated

25、in terms of current cost.,BALANCE SHEET EFFECTS,Financial Statement and Tax Effects,LO 2,Both inventory and net income are higher when companies use FIFO in a period of inflation. LIFO results in the lowest income taxes (because of lower net income) during times of rising prices.,TAX EFFECTS,Financi

26、al Statement and Tax Effects,Helpful Hint A tax rule, often referred to as the LIFO conformity rule, requires that if companies use LIFO for tax purposes they must also use it for financial reporting purposes.,LO 2,Using Cost Flow Methods Consistently,Method should be used consistently, enhances com

27、parability. Although consistency is preferred, a company may change its inventory costing method.,Inventory Costing,Illustration 6-14 Disclosure of change in cost flow method,LO 2,The cost flow method that often parallels the actual physical flow of merchandise is the: FIFO method. LIFO method. aver

28、age cost method. gross profit method.,Question,Cost Flow Assumptions,LO 2,In a period of inflation, the cost flow method that results in the lowest income taxes is the: FIFO method. LIFO method. average cost method. gross profit method.,Question,Cost Flow Assumptions,LO 2,LO 2,LO 2,DO IT!,Cost Flow

29、Methods,2,Common Cause: 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 balance sheet.,LO 3,LEARNING OBJECTIVE,Indicate the effects of inventory errors on the financial statements.,3,

30、Inventory errors affect the computation of cost of goods sold and net income in two periods.,Illustration 6-16,Illustration 6-15,Income Statement Effects,LO 3,Inventory errors affect the computation of cost of goods sold and net income in two periods. An error in ending inventory of the current peri

31、od 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. Ending inventory depends entirely on the accuracy of taking and costing the inventory.,LO 3,Income Statement Effects,($3,000) Net Incom

32、e understated,$3,000 Net Income overstated,Combined income for 2-year period is correct.,LO 3,Income Statement Effects,Illustration 6-17 Effects of inventory errors on two years income statements,Understating ending inventory will overstate: assets. cost of goods sold. net income. owners equity,Ques

33、tion,LO 3,Income Statement Effects,Effect of inventory errors on the balance sheet is determined by using the basic accounting equation: Assets = Liabilities + Owners Equity. Errors in the ending inventory have the following effects.,LO 3,Balance Sheet Effects,Illustration 6-18 Effects of ending inv

34、entory errors on balance sheet,Ending inventory Cost of goods sold Owners equity,Ending inventory $22,000 overstated No effect Cost of goods sold $22,000 understated $22,000 overstated Owners equity $22,000 overstated No effect,Visual Company overstated its 2016 ending inventory by $22,000. Determin

35、e the impact this error has on ending inventory, cost of goods sold, and owners equity in 2016 and 2017. Solution,2016,2017,LO 3,DO IT!,Inventory Errors,3,Balance Sheet - Inventory classified as current asset. Income Statement - Cost of goods sold is subtracted from sales. There also should be discl

36、osure of the major inventory classifications, basis of accounting (cost or LCM), and costing method (FIFO, LIFO, or average-cost).,Presentation,LO 4,LEARNING OBJECTIVE,Explain the statement presentation and analysis of inventory.,4,When the value of inventory is lower than its cost Companies must “w

37、rite down” the inventory to its net realizable value. Net realizable value: Amount that a company expects to realize (receive from the sale of inventory). Example of conservatism.,Lower-of-Cost-or-Net Realizable Value,LO 4,Illustration: Assume that Ken Tuckie TV has the following lines of merchandis

38、e with costs and market values as indicated.,LO 4,Lower-of-Cost-or-Net Realizable Value,Illustration 6-20 Computation of lower-of-cost-or-net realizable value,Inventory management is a double-edged sword High Inventory Levels - may incur high carrying costs (e.g., investment, storage, insurance, obs

39、olescence, and damage). Low Inventory Levels may lead to stock-outs and lost sales.,Statement Presentation and Analysis,Analysis,LO 4,Inventory turnover measures the number of times on average the inventory is sold during the period.,Cost of Goods Sold,Average Inventory,Inventory Turnover,=,Days in

40、inventory measures the average number of days inventory is held.,Days in Year (365),Inventory Turnover,Days in Inventory,=,Analysis,LO 4,Illustration: Wal-Mart reported in its 2014 annual report a beginning inventory of $43,803 million, an ending inventory of $44,858 million, and cost of goods sold

41、for the year ended January 31, 2014, of $358,069 million. The inventory turnover formula and computation for Wal-Mart are shown below.,Illustration 6-21,Days in Inventory: Inventory turnover of 8.1 times divided into 365 is approximately 45.1 days. This is the approximate time that it takes a compan

42、y to sell the inventory.,LO 4,Analysis,LO 4,Tracy Company sells three different types of home heating stoves (gas, wood, and pellet). The cost and net realizable value of its inventory of stoves are as follows. Cost Net Realizable Value Gas $ 84,000 $ 79,000 Wood 250,000 280,000 Pellet 112,000 101,0

43、00 Determine the value of the companys inventory under the lower-of-cost-or-net realizable value approach. Solution,Lowest value for each inventory type is gas $79,000, wood $250,000, and pellet $101,000. The total inventory value is the sum of these amounts, $430,000.,LO 4,DO IT!,LCNRV and Inventor

44、y Turnover,4,Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO, LIFO, and average-cost.,Illustration 6A-1 Inventoriable units and costs,Illustration,LEARNING OBJECTIVE,APPENDIX 6A: Apply the inventory cost flow methods to perpetual inventory records.

45、,5,LO 5,Ending Inventory,Illustration 6A-2,Cost of Goods Sold,LO 5,First-In, First-Out (FIFO),Perpetual Inventory System,Ending Inventory,Illustration 6A-3,Cost of Goods Sold,LO 5,Last-In, First-Out (LIFO),Perpetual Inventory System,Moving Average Method,Illustration 6A-4,Cost of Goods Sold,Ending I

46、nventory,Average-Cost,LO 5,A method of estimating the cost of ending inventory by applying a gross profit rate to net sales. A company needs to know its net sales, cost of goods available for sale, and gross profit rate.,Gross Profit Method,LEARNING OBJECTIVE,APPENDIX 6B: Describe the two methods of

47、 estimating inventories.,6,Illustration 6B-1 Gross profit method formulas,LO 6,Illustration 6B-1,Illustration: Kishwaukee Company records show net sales of $200,000, beginning inventory $40,000, and cost of goods purchased $120,000. In the preceding year, the company realized a 30% gross profit rate

48、. It expects to earn the same rate this year. Compute the estimated cost of the ending inventory at January 31 under the gross profit method.,Gross Profit Method,Illustration 6B-2 Example of gross profit method,LO 6,Retail companies establish a relationship between cost and sales price. Company appl

49、ies cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost.,Illustration 6B-3 Retail inventory method formulas,Retail Inventory Method,Illustration: It is not necessary to take a physical inventory to determine the estimated cost of goods on hand at any given t

50、ime.,Illustration 6B-4,The major disadvantage of the retail method is that it is an averaging technique. It may produce an incorrect inventory valuation if the mix of the ending inventory is not representative of the mix in the goods available for sale.,LO 6,Retail Inventory Method,Relevant Facts,Si

51、milarities IFRS and GAAP account for inventory acquisitions at historical cost and value inventory at the lower-of-cost-or-net-realizable value subsequent to acquisition. Who owns the goodsgoods in transit or consigned goodsas well as the costs to include in inventory are essentially accounted for t

52、he same under IFRS and GAAP.,LEARNING OBJECTIVE,Compare the accounting for inventories under GAAP and IFRS.,7,LO 7,A Look at IFRS,Differences The requirements for accounting for and reporting inventories are more principles-based under IFRS. That is, GAAP provides more detailed guidelines in inventory accounting. A major difference between IFRS and GAAP relates to the LIFO cost flow assumption. GAAP permits the use of LIFO for inventory valuation. IFRS prohibits its use. FIFO and average-cost are the only two acceptable cost flow assumptions p