describe the issues in managing different types of inventory. 7-1
TRANSCRIPT
Describe the issues in managing different types of inventory.
7-1
The primary goals of inventory managers are to:
1. Maintain a sufficient quantity to meet customers’ needs2. Ensure quality meets customers’ expectations and company standards3. Minimize the costs of acquiring and
carrying the inventory
7-2
Merchandisers . . . Buy finished
goods. Sell finished
goods.
Manufacturers . . . Buy raw
materials. Produce and sell
finished goods.
Raw MaterialsWork in ProcessFinished goods
Merchandise inventory
Materials waiting toMaterials waiting tobe processedbe processed
Partially Partially complete productscomplete products
Completed products Completed products awaiting sale awaiting sale
7-3
Explain how to report inventory and cost of
goods sold.
7-4
7-5
Beginning Inventory 4,800$ + Purchases 10,200 = Cost of Goods Available for Sale 15,000 – Cost of Goods sold 9,000 = Ending Inventory 6,000$
Cost of Goods Sold Calculation
BI + P – CGS = EIBI + P – CGS = EI
American Eagle Outfitters’ beginning inventory was $4,800. During the period, the company purchased inventory for $10,200. The cost of goods sold for the period is $9,000.
Compute the ending inventory.
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BeginningInventory
$4,800
BeginningInventory
$4,800+
Goods Availablefor Sale$15,000
Purchases$10,000
Purchases$10,000
EndingInventory
$6,000
EndingInventory
$6,000(Balance Sheet)
Cost ofGoods Sold
$9,000
Cost ofGoods Sold
$9,000(Income Statement)
7-7
Compute costs using four inventory
costing methods.
7-8
First-in, first-out(FIFO)
First-in, first-out(FIFO)
Last-in, first-out(LIFO)
Last-in, first-out(LIFO)
Weighted average
Weighted average
Specificidentification
Specificidentification
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May 3 Purchased 1 unit for $70May 5 Purchased 1 more unit for $75May 6 Purchased 1 more unit for $95May 8 Sold 2 units for $125 each
Consider the following information
This method individually identifies and records the cost of This method individually identifies and records the cost of each item sold as part of cost of goods sold. If the items sold each item sold as part of cost of goods sold. If the items sold were identified as the ones that cost $70 and $95, the total were identified as the ones that cost $70 and $95, the total cost of those items ($70 + 95 = $165) would be reported as cost of those items ($70 + 95 = $165) would be reported as
Cost of Goods Sold. The cost of the remaining item ($75) Cost of Goods Sold. The cost of the remaining item ($75) would be reported as Inventory on the balance sheet at the would be reported as Inventory on the balance sheet at the
end of the period. end of the period.
Specific Identification
May 5$75 cost
May 3$70 cost
May 6$95 cost
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FIFO LIFO Weighted average
May 6$95 cost
May 5$75 cost
May 3$70 cost
May 6$95 cost
May 5$75 cost
May 3$70 cost
May 6$95 cost
May 5$75 cost
May 3$70 cost
So
ld
Sti
ll t
her
e
Net Sales 250$ Cost of Goods Sold 145 Gross Profit 105$
Inventory 95$
Income Statement
Balance Sheet
So
ld
Sti
ll t
her
eNet Sales 250$ Cost of Goods Sold 170 Gross Profit 80$
Inventory 70$
Income Statement
Balance Sheet
Sold
Still there
$2403
= $80per unit
Net Sales 250$ Cost of Goods Sold 160 Gross Profit 90$
Inventory 80$
Income Statement
Balance Sheet
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WeightedFIFO LIFO Average
Cost of Goods sold (Income Statement) Oldest cost Newest cost Average costInventory (Balance sheet) Newest cost Oldest cost Average cost
Summary
Date Description # of Units Cost per Unit Total CostOct 1 Beginning Inventory 10 7 70$ Oct 3 Purchase 30 8 240 Oct 5 Purchase 10 10 100 Oct 6 Sales (35) To calculate To calculate
Ending Inventory 15 To calculate To calculate
Let’s consider a more complex example.
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FIFO Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory = Cost of Goods Sold
FIFO Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory 140 = Cost of Goods Sold
FIFO Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory 140 = Cost of Goods Sold 270$
(10 units @ $10) + (5 units @ $8)
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LIFO Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory Cost of Goods Sold
LIFO Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory 110 Cost of Goods Sold
LIFO Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory 110 Cost of Goods Sold 300$
(10 units @ $10) + (25 units @ $8)
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# of Cost TotalDescription Units per Unit Cost
Beginning Inventory 10 7 70$ Purchase 30 8 240 Purchase 10 10 100 Cost of Goods Available for Sale 50 410$
Weighted Average
WeightedAverage Cost
=Cost of goods Available for Sale
Number of Units Available for Sale
WeightedAverage Cost
=$410
50 units= $8.20 per unit
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Weighted Average Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory Cost of Goods Sold
Weighted Average Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory 123 Cost of Goods Sold
Weighted Average Beginning Inventory 10 units × 7$ = 70$ + Purchases 30 units × 8$ = 240
10 units × 10$ = 100 Cost of Goods Available for Sale 410$ – Ending Inventory 123 Cost of Goods Sold 287$
15 units @ $8.20
35 units @ $8.20
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WeightedEffects on the Income Statement FIFO LIFO AverageSales 525$ 525$ 525$ Cost of Goods Sold 270 300 287 Gross Profit 255 225 238 Operating Expenses 125 125 125 Income from Operations 130 100 113 Other Revenue (Expenses) 20 20 20 Income before Income Tax Expense 150 120 133 Income Tax Expense (30%) 45 36 40 Net Income 105$ 84$ 93$
Effects on the Balance SheetInventory 140$ 110$ 123$
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Effects of Increasing Costs on the Financial Statements
FIFO LIFOInventory (Balance sheet) Higher LowerCost of Goods Sold (Income Statement) Lower Higher
Effects of Decreasing Costs on the Financial Statements
FIFO LIFOInventory (Balance sheet) Lower HigherCost of Goods Sold (Income Statement) Higher Lower
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Advantages of MethodsAdvantages of MethodsAdvantages of MethodsAdvantages of Methods
First-In, First-OutFirst-In,
First-OutWeighted Average
Weighted Average
Last-In, First-OutLast-In,
First-Out
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WeightedEffects on the Income Statement FIFO LIFO AverageSales 525$ 525$ 525$ Cost of Goods Sold 270 300 287 Gross Profit 255 225 238 Operating Expenses 125 125 125 Income from Operations 130 100 113 Other Revenue (Expenses) 20 20 20 Income before Income Tax Expense 150 120 133 Income Tax Expense (30%) 45 36 40 Net Income 105$ 84$ 93$
Effects on the Balance SheetInventory 140$ 110$ 123$
7-20
Report inventory at the
lower of cost or market.
7-21
The value of inventory can fall below its recorded cost for two reasons:
1. it’s easily replaced by identical goods at a lower cost, or
2. it’s become outdated or damaged.
The value of inventory can fall below its recorded cost for two reasons:
1. it’s easily replaced by identical goods at a lower cost, or
2. it’s become outdated or damaged.
When the value of inventory falls below its recorded cost, the amount recorded for inventory is written down to its lower
market value. This is known as the lower of cost or market (LCM) rule.
When the value of inventory falls below its recorded cost, the amount recorded for inventory is written down to its lower
market value. This is known as the lower of cost or market (LCM) rule.
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Cost Market LCM Total Lowerper Value per of cost Total
Item Item per Item Item Quantity or Market cost WritedownLeather coats 165$ 150$ 150$ 1,000 150,000$ 165,000$ 15,000$ Vintage jeans 20 25 20 400 8,000 8,000 -
Record2
400 items @ $201,000 items @ $150
1,000 items @ $165
Assets = Liabilities + Stockholders' EquityInventory –15,000 Cost of Goods sold (+E) –15,000
Analyze1
7-23
Analyze and record inventory purchases,
transportation, returns and
allowances, and discounts.
7-24
We will now look at the accounting We will now look at the accounting for purchases, transportation costs, for purchases, transportation costs, purchase returns and allowances, purchase returns and allowances, and purchase discounts. We will and purchase discounts. We will
record all inventory-related record all inventory-related transactions in the Inventory transactions in the Inventory
account. account.
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American Eagle Outfitters purchasesAmerican Eagle Outfitters purchases$10,500 of vintage jeans on credit.$10,500 of vintage jeans on credit.
1
Assets = Liabilities + Stockholders' EquityInventory –10,500 Accounts Payable +10,500
Analyze
2 Record
7-26
American Eagle pays $400 cash to a trucker whoAmerican Eagle pays $400 cash to a trucker whodelivers the $10,500 of vintage jeans to one of its stores.delivers the $10,500 of vintage jeans to one of its stores.
1
Assets = Liabilities + Stockholders' EquityCash - 400Inventory + 400
Analyze
2 Record
7-27
American Eagle returned some of the vintage jeans to theAmerican Eagle returned some of the vintage jeans to thesupplier and received a $500 reduction in the balance owed.supplier and received a $500 reduction in the balance owed.
1
Assets = Liabilities + Stockholders' Equity
Inventory - 500 Accounts Payable - 500
Analyze
2 Record
7-28
American Eagle’s vintage jeans purchase for $10,500 had American Eagle’s vintage jeans purchase for $10,500 had terms of 2/10, n/30. Recall that American Eagle returned terms of 2/10, n/30. Recall that American Eagle returned
inventory costing $500 and received a $500 reduction in its inventory costing $500 and received a $500 reduction in its Accounts Payable. American Eagle paid within Accounts Payable. American Eagle paid within
the discount period.the discount period.
1
Assets = Liabilities + Stockholders' EquityCash - 9,800 Accounts Payable -10,000Inventory -200
Analyze
2 Record
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7-30
Evaluate inventory management by computing and interpreting the
inventory turnover ratio.
7-31
7-32
7-33
The Effects of Errors in Ending
Inventory
Cost of Goods Sold Equation
BI + P – CGS = EIBI + P – CGS = EI
Errors in EndingInventory will affect
the Balance Sheet andthe Income Statement.
Assume that Ending Inventory was overstated in 2009 by$10,000 due to an error that was not discovered until 2010.
2009Beginning Inventory Accurate
+ Purchases Accurate– Ending Inventory Overstated $10,000= Cost of Goods Sold Understated $10,000
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2010Beginning Inventory Overstated $10,000
+ Purchases Accurate– Ending Inventory Accurate= Cost of Goods Sold Overstated $10,000
Now let’s examine the effects of theNow let’s examine the effects of the2009 Ending Inventory Error on 2010.2009 Ending Inventory Error on 2010.
Assume that Ending Inventory was overstated in 2009 by$10,000 due to an error that was not discovered until 2010.
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