INVENTORY AND COST OF GOODS SOLD

Chapter Six

Types of Inventory

MERCHANDISING

MANUFACTURING
Buy from several suppliers to make a product Sell to wholesalers and sometimes retailers

Wholesalers
Buy from manufacturers sell to retailer

Retailers
Buy from wholesalers Sell to general public

Acctg

101

Merchandise Inventory

Acctg 102 Raw Materials Work in Process Finished Goods

Inventory Normal Balance

Inventory is an asset so its normal balance is a Debit. To increase inventory Debit To decrease inventory Credit

Purchases Normal Balance

Purchases is like expense Purchases is always increased with a debit Purchase returns and allowances credit balance Purchase discount credit balance

Cost of Goods Sold (COGS)

Cost of Goods Sold is an expense so it has a debit balance

Gross Margin

Sales -Sales Return and Allowances -Sales Discount =Net Sales -Cost of Goods Sold =Gross Margin

Cost of Goods Sold

Beginning Inventory
12000 -Purchase Discount -600 -Purchases Return and Allow -400 + Net Purchases 11000 + Freight In 1000
+Purchases

3000

=Cost of Merchandise Purchased 10000 =Goods Available for Sale 13000 - Ending Inventory (or Goods not Sold) 4000 = Cost of Goods Sold 9000

Brief Exercise 6-3 page 281 Exercise 6-1 page 283 MUST KNOW THIS FORMULA MEMORIZE IT

Estimating Inventory-Why important

Sales Beginning Inventory

+Purchases 110,000 -Purchase Discount (1,000) -Purchases Ret & Allow (2,000)

150,000

8,000

+ Net Purchases 107,000 Goods Available for Sale 115,000 - Ending Inventory (or Goods not Sold) 15,000 = Cost of Goods Sold 100,000 Gross Margin 50,000

Overstating/Understating Ending Inventory

SALES Beg Inventory + Net Purchases =Goods Available - Ending Inventory = COGS =Gross Margin

Over 150

Under 150

Cant Change 115 115 20 10 95 105 55 45

WHAT EVER I DO TO ENDING INVENTORY, I ALSO DO TO NET INCOME

Two methods to TRACK inventory

Periodic
At

some period of time

Perpetual
All

the time--- everytime there is a purchase and everytime there is a sale

IF YOU KNOW PERIODIC YOU WILL KNOW PERPETUAL SO LETS DO PERIODIC FIRST

4 METHODS TO DETERMINE COST OF ENDING INVENTORY

Specific Indentification First in First Out Last In First Out Average Cost

Specific Indentification

Not estimated Actual items Or specific identification Page 252 example

First In First Out

GUMBALL MACHINE Physical Flow matches Cost Flow First one purchased is first one sold Page 252 Used if few inventory items BE 6-4 page 281 Increasing costs --- higher cost in Ending Inventory Lower cost in COGS so higher net income

Last In First Out

COOKIE JAR Last one purchased first one sold Page 253 Used if want to put replacement cost in Cost of Goods sold Increasing costs --- higher cost in COGS Lower cost in Ending Inventory so lower net income BE 6-5 pg 281 IFRS Not used US tax savings

LIFO RESERVE

Additional amount of inventory a company would report if it used FIFO instead of LIFO
Cost

of Goods Sold Inventory

MUST BE CONSISTENT
Cant change inventory methods without IRS approval. Can use different type of methods for different types of inventory

Average Cost

Weighted Average 500@$10, 600@$11, 800@$12 $50+$66+$96= 212/19 = $11.16 Used if a lot of little inventory items BE 6-6 page 281 Costs are evenly distributed in COGS and Ending Inventory

Periodic versus Perpetual

Have been using Periodic Perpetual uses the periodic method every time there is a sale and every time there is a sale. Perpetual needs exact dates it was purchased and sold.

Perpetual Tracking pg 272

FIFO
Usually

not different under perpetual and periodic

LIFO
Usually

different than periodic

Exercise 6-15 pg 286

Recording inventory transactions

Periodic Method

Purchase

Purchase A/P A/R Sales A/P Purchase Ret and Allowance A/P Cash Purchase Discount

Sale

Return & Allowance

Purchase Discount

Perpetual Method

Purchase

Inventory A/P A/R Sales COGS Inventory A/P Inventory A/P Cash Inventory

Sale

Return & Allowance

Purchase Discount

Periodic

Perpetual

Purchase

Purchase

Purchase A/P

Inventory A/P A/R Sales COGS Inventory A/P Inventory A/P Cash Inventory

Sale

Sale

A/R Sales A/P Purchase Ret and Allowance

Return & Allowance

Return & Allowance

Purchase Discount

A/P
Cash Purchase Discount

Purchase Discount

Freight - In
Freight In Purchases or COGS account Bringing it into the business Freight In A/P

Freight out

Selling Expense Cost of Sending it to the customer Freight Expense Cash or A/P

Exercises

6-6 pg 284 6-7

Perpetual Periodic

Lower Cost or Market pg 266

Normally Inventory is replacement cost --- cost to restock the item after identical items are sold

If Market Value is less than Cost (if what you paid for the item is less than you can sell it for) you must make an adjustment. COGS Inventory

Exercises

Page 285 6-11 6-12

Inventory Ratios

Inventory Turnover pg 269

COGS/ Average Inventory

# of Days in Inventory
365/ Inventory T/O (Seasons)

6-13 pg 285 Inventory

Gross Profit Ratio Gross Profit pg 271

Gross Profit/ Net Sales

Exercise 6-14 pg 286

Homework

Problem 6-2 Problem 6-3 Problem 6-4 Problem 6-6 Problem 6-8

COGS, Ending Inventory Periodic Perpetual Lower of Cost or Market Ratios