Professional Documents
Culture Documents
Sales revenue is based on sales price Cost of Goods sold is based on cost
Inventory on the balance sheet is based on cost Gross profit is sales revenue minus cost of goods sold
Specific Identification
This method can only be used when we can identify the costs for each individual unit. Identification numbers are used to determine which item has been sold. The specific identification method is rarely used.
If the items are homogenous in nature then a cost flow assumption may be used.
A method of valuing all units in inventory at the same average per-unit cost, which is recomputed after every purchase. The average cost method assumes that units are withdrawn from the inventory in random order.
Cost of Goods Sold in September Sale Date Units Cost/Unit Total 9/1 600 22.000 $ 13,200.00 9/10 300 23.200 6,960.00 9/30 450 26.181 11,781.45 Total 1,350 31,941.45
Sum
Sales 14,000 To record the sale of one frame Cost of Goods Sold 13,200 Inventory 13,200 To record the cost of one frame sold determined by the average cost method
Last-In, First-Out
The LIFO method assumes that the newest items are sold first, leaving the older units in inventory.
The cost of the newest inventory items are charged to COGS when goods are sold. The cost of the oldest inventory items remain in inventory.
Last-In, First-Out
Unlike FIFO, using the LIFO method may result in COGS and Ending Inventory Cost that differ under the periodic and perpetual approaches.
Last-In, First-Out
Last-In, First-Out
Yore Frame, Inc. Frame Inventory
Date Beg. Inventory 9/3 9/15 9/21 9/29 Goods Available for Sale Ending Inventory Cost of Goods Sold Units 800 300 250 200 400 1,950 600 1,350 $/Unit $ 22.00 24.00 25.00 27.00 28.00 Total $ 17,600.00 7,200.00 6,250.00 5,400.00 11,200.00 $ 47,650.00 13,200.00
Last-In, First-Out
Yore Frame, Inc. Frame Inventory
Date Beg. Inventory 9/3 9/15 9/21 9/29 Goods Available for Sale Ending Inventory Cost of Goods Sold Units 800 300 250 200 400 1,950 600 1,350 $/Unit $ 22.00 24.00 25.00 27.00 28.00 Total $ 17,600.00 7,200.00 6,250.00 5,400.00 11,200.00
Last-In, First-Out
Yore Frame, Inc. Frame Inventory
Date Beg. Inventory 9/3 9/15 9/21 9/29 Goods Available for Sale Ending Inventory Cost of Goods Sold Units 800 300 250 200 400 1,950 600 1,350 $/Unit $ 22.00 24.00 25.00 27.00 28.00 Total $ 17,600.00 7,200.00 6,250.00 5,400.00 11,200.00 $ 47,650.00 13,200.00 $34,450.00
Principle of Consistency
Once a company has adopted a particular method it should follow that method consistently. If a change is to be made the reasons for the change and the effects of the change on the company's net income must be disclosed.
A technique designed to minimize a companys investment in inventory This method increases efficiency
In a manufacturing company purchases are received just before starting production The manufactured goods are completed in time for sales orders
Perpetual inventory records are adjusted for unrecorded shrinkage losses, such as theft, spoilage, or breakage The physical inventory is taken at the end of the year
A year end physical count shows only 148 units on hand The loss in 10 units is to be adjusted
Lower-of-Cost-or-Market Rule
In addition to shrinkage losses the inventory may become obsolete or unsalable A write down of inventory reduces both the inventory balance as well as the net income Report inventory at the lower of its historical cost or market (replacement) value If the replacement cost falls below its historical cost, write down the value of the inventory, the difference in the amounts will be debited to COGS
The sales revenue and COGS relating to sales transactions occurring near year end are recorded in the same accounting period. If goods are in transit:
FOB shipping- the title passes to the buyer at the point of shipment FOB destination- the title passes to the buyer at the destination point
At the end of the year all goods on hand are counted and priced at cost The ending inventory is used to calculate COGS for the year
Inventory at the beginning of the year Add: Purchases during the year Cost of goods available during the year Less: Inventory at the end of the year Cost of goods sold
July 1
Oct 1 Dec 1 Available for sale Units in ending inventory
5
5 5 30
100
120 130
500
600 650 $3,000
(12)
Units sold
18
Average cost
cost per # of units unit Beg inventory March1 10 5 $80 90 total cost $800 450
July 1
Oct 1 Dec 1 Available for sale Units in ending inventory
5
5 5 30
100
120 130
500
600 650 $3,000
(12)
Units sold
18
FIFO
cost per # of units unit Beg inventory March1 10 5 $80 90 total cost $800 450
July 1
Oct 1 Dec 1 Available for sale Units in ending inventory
5
5 5 30
100
120 130
500
600 650 $3,000
(12)
Units sold
18
LIFO
cost per # of units unit Beg inventory March1 10 5 $80 90 total cost $800 450
July 1
Oct 1 Dec 1 Available for sale Units in ending inventory
5
5 5 30
100
120 130
500
600 650 $3,000
(12)
Units sold
18
An error in the valuation of inventory affects the financial statements of the current year as well as the income statement of the next year
Year of the Error Beginning Inventory Cost of Goods available for sale Ending Inventory COGS NE NE U O Following Year U U NE U
Gross Profit
Net Income Owners Equity at year end
U
U U
O
O NE
The retail method is similar to the gross profit method. The difference between the two is that the retail method uses the cost ratio of the current year rather than the previous period. In order to use this method the company must keep track of the cost of goods available for sale and the retail sales price assigned to the goods
Cont
Cost of goods available for sale= $40,000 Retail price= $100,000 Cost ratio = 40,000/100,000 = 40%
Inventory Management
Inventory = turnover ratio
This ratio measures how many times a companys inventory has been sold and replaced during the year.
Length of the operating cycle- The shorter the cycle, the better it is for the company