Professional Documents
Culture Documents
6-2
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Objectives editover
Control Master title
Inventory style
Two primary objectives of control over inventory are:
Cost of purchased
Cost of Merchandise Merchandise 6-2
Sold
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Inventory Cost Flow
Inventory
Beginning (+) Cost of goods
Cost of GP (+) sold (-)
(=) Ending
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Perpetual Inventory Method
Perpetual (continuous) record is kept for
each item in inventory.
When sale is made, cost of goods sold is
immediately updated.
Merchandise inventory account is reduced,
cost of goods sold account is increased.
Balance in Merchandise Inventory:
Is goods available for sale at all times.
Is also ending inventory at all times.
6-12
Inventory Systems
Two accounting systems are used to record
transactions involving inventory:
GENERAL JOURNAL
Date Description Debit Credit
2009 Accounts Receivable 820,000
Sales 820,000
Beginning Inventory
+ Cost of Goods Purchased
Cost of Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold
Periodic Inventory System
LWBC purchases on account $600,000
of merchandise for resale to customers.
GENERAL JOURNAL
Date Description Debit Credit
2009 Purchases 600,000
Accounts Payable 600,000
Periodic method.
Less recordkeeping.
Perpetual method.
Detailed record is useful for reordering.
Built in check (i.e., identifies shrinkage by
inventory item during physical inventory).
Income statement can be prepared
without taking a physical inventory.
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Retail Method
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Manufacturing Inventory
Accounts
Materials inventory.
Not yet used in production.
Adjusted for returns and freight-in.
Work-in-process inventory.
Goods started, but not yet finished.
Materials + conversion costs.
Finished goods inventory.
Manufactured, but not yet shipped.
6-25
Manufacturing Companies
Materials
Inventory
Work in Finished Cost of
Direct
Process Goods Goods
Labor
Inventory Inventory Sold
Overhead
Cost of Goods
Manufactured
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Flow Through Accounts
Materials Inventory
Beginning (+) Materials Work in Process
Net purchases (+) Used (-) Inventory
(=) Ending Beginning (+)
Materials
Used (+) Cost of Goods
Manufactured
Conversion (-)
Costs (+)
(=) Ending
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Flow Through Accounts
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Manufacturing Companies:
Additional Items
• Product costing systems.
– Perpetual inventory system for
manufacturing companies (covered in
Chapters 17-19).
• Product (inventoriable) costs.
– Items of cost used to produce goods (i.e.,
materials, labor, overhead).
– Do not impact income until product is
sold.
6-29
Service Companies
Personal services organizations.
E.g., hotels, beauty salons, dentists.
No inventories, just supplies.
Building trade and repair businesses.
May have parts inventory.
Professional service firms.
E.g., law and accounting firms.
Jobs in progress account (similar to work in
process inventory).
6-30
Inventory Costing Methods
(Cost Flow Assumptions)
What if inventory prices fluctuate?
• Goods available for sale:
• How much becomes cost of goods sold?
• How much becomes ending inventory?
Will need to choose a cost flow assumption:
• Specific identification.
• Average cost.
• First-in, first-out (FIFO).
• Last-in, last-out (LIFO).
6-31
Inventory Costing
Inventory CostingMethods
Method 7-2
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Inventory Costing Method 7-2
(Continued)
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Inventory Costing Method 7-2
(Continued)
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Inventory Costing Method 7-2
(Concluded) 13
Perpetual Average Cost
The following schedule shows the Frame
inventory for Yore Frame, Inc. for September.
The physical inventory count at September 30
shows 600 frames in ending inventory.
Use the perpetual average cost method to
determine:
(1) Ending inventory cost
(2) Cost of goods sold
Perpetual Average Cost
Sum
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
Weighted-Average Periodic
System
Let’s use the same information to assign costs to
ending inventory and cost of goods sold using the
periodic system.
Ending Inventory
(600 units)
Beginning Inventory
Available
(800 units)
for Sale
(1,950 units)
Goods Sold
(1,350)
7-3
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Objective 3
Determine the cost of
inventory under the perpetual
inventory system, using
FIFO, LIFO, and average
cost methods.
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The cost was in Rp000
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The cost was in Rp000
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On
22 January 22, theSoldfirm sold twenty
Cost of Merchandise 810 000
units atMerchandise
$30. Inventory 810 000
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Unit Cost and Total Cost is in Rp000
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Unit Cost and Total Cost is in Rp000
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7-3
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7-3
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For Practice: PE 7-2A, PE 7-2B
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The unit cost and total cost is in Rp000
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The unit cost and total cost is in Rp000
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On
22 January 22, theSoldfirm sold twenty
Cost of Merchandise 840 000
units atMerchandise
$30. Inventory 840 000
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The unit cost and total cost is in Rp000
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7-3
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For Practice: PE 7-3A, PE 7-3B
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7-4
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Objective 4
Determine the cost of inventory
under the periodic inventory
system, using FIFO, LIFO, and
average cost methods.
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Sold 30 of these
Jan. 10 80 units @ $21 = 1,050,000
50 units @ Rp21,000
Jan. 30 100
100 units
units @ $22
@ Rp22,000 = 2,200,000
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Jan. 30 100units
100 units @ $22
@ Rp22,000 = 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
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Ending merchandise inventory: 150 units at Rp21,000=
Rp3,150,000
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7-4
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7-4
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For Practice: PE 7-4A, PE 7-4B
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7-5
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Objective 5
Compare and contrast the
use of the three inventory
costing methods.
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Recap 7-5
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Weighted
FIFO Average LIFO
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
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Last-In, First-Out
2009 2008
Total inventories at FIFO $ 15,429 $ 15,387
Less: LIFO allowance (1,508) (1,525)
Inventories, at LIFO cost $ 13,921 $ 13,862
Specific Identification
6-109
Other LIFO Features
LIFO layers.
Can distort income if company reduces level of
inventory (i.e., old costs being expensed).
LIFO Reserve.
Difference between LIFO valuation and FIFO (or
average cost) valuation.
Disclosed in financial statements.
6-110
Arguments for FIFO
6-111
Arguments for LIFO
• Conceptually better for pricing products.
When using cost-plus pricing, prices will be based
on current costs.
Therefore, better matching and a more useful
income statement (i.e., closest to reflecting
current or replacement cost of goods sold).
NOTE: LIFO amounts are still historical costs
and could differ from current costs.
6-112
Arguments for LIFO
6-113
Why Not More LIFO?
6-114
Lower of Cost or Market (LCM)
7-6
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7-6
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For Practice: PE 7-5A, PE 7-5B
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7-6
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7-6
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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
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For Practice: PE 7-6A, PE 7-6B
Analysis of Inventory
Inventory turnover.
Cost of goods sold ÷ Inventory.
For inventory, can use period average or ending.
Measures velocity with which merchandise
moves through business.
Days’ inventory.
Inventory turnover expressed in number of days.
Inventory ÷ (Cost of goods sold 365).
Gross margin percentage.
Gross margin as % of net sales.
Profitability measure, earnings before period 6-121
costs.
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7-7
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Inventory turnover measures the
relationship between the volume of goods
(merchandise) sold and the amount of
inventory carried during the period.
Cost of merchandise sold
Inventory turnover =
Average inventory
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7-7
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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
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7-7
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7-7
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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’ Average inventory
sales in inventory = Average daily cost of
merchandise sold
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7-7
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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
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