inventory presentation part 2
TRANSCRIPT
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A Presentation by:
Prof. Thadeus Abilla, CPA
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BALANCE SHEETAsset
InventoryPurchasecosts (or
Mfg. costs)
WhenGoods are
Sold
INCOME STATEMENT
Revenue
Cost of goods sold
Gross profit
Expenses
Net income
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Goods in Inventory.
Goods in Transit.FOB Shipping Point: buyers inventoryfrom time of shipment.
FOB Destination: sellers inventory untilreceipt by buyer.
Goods on Consignment: inventoryof the consignor, not the consignee.
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FOB Shipping PointFOB Shipping Point
FOB Shipping PointFOB Shipping Point
Buyer
QualityProduce
Seller
Goods being shipped areincluded in inventory of
buyer while in transit.
Goods being shipped areincluded in inventory of
buyer while in transit.
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FOB DestinationFOB Destination
FOB DestinationFOB Destination
Buyer
QualityProduce
Seller
Goods being shipped areincluded in inventory of
seller until received bybu er.
Goods being shipped areincluded in inventory ofseller until received bybuyer.
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Title to goodssold onconsignment
remains with theshipper until theirsale or use by the
dealer or
Title to goodssold onconsignment
remains with theshipper until theirsale or use by the
dealer or
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1. ABC Inc. sold Php 1 Million to DEF Inc.
for Php 1.5 Million. The goods wereshipped on March 1 and was receivedon March 5. Terms of shipment was
FOB Destination.Question:
As of March 4, who owns theinventory and for how much?
When should the sale be recordedand for how much?
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1. ABC Inc. sold Php 1 Million to DEF Inc.
for Php 1.5 Million. The goods wereshipped on March 1 and was receivedon March 5. Terms of shipment was
FOB Destination.Question:
If the term was FOB Shipping point,as of March 4, who owns theinventory and for how much?
When should the sale be recordedand for how much?
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2. TUV Inc. sold Php 5 Million to WXY
Inc. for Php 8 Million. The goods wereshipped on May 15 and was receivedon May 28. Terms of shipment was
FOB Shipping Point.Question:
If the term was FOB Shipping point,as of May 25, who owns the inventoryand for how much?
When should the sale be recordedand for how much?
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2. TUV Inc. sold Php 5 Million to WXY
Inc. for Php 8 Million. The goods wereshipped on May 15 and was receivedon May 28. Terms of shipment was
FOB Shipping Point.Question:
If the term was FOB Destination, asof May 25, who owns the inventoryand for how much?
For the month ended May 31, whoowns the inventory and for howmuch?
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1. Perpetual Inventory System
2. Periodic Inventory System
An Illustration
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We use one of these inventory valuationmethods to determine cost of inventory
sold.
SpecificIdentification
Averag
e
Cost
LIFO
FIFOFIFO
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The Bike Company
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When a unit issold, itsspecific cost isadded to cost
of goods sold.
When a unit issold, itsspecific cost isadded to costof goods sold.
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On August 14, TBC sold 20 bikes for $130On August 14, TBC sold 20 bikes for $130
each.each.
Of the bikes sold 9 originally cost $91 andOf the bikes sold 9 originally cost $91 and
11 cost $106.11 cost $106.
On August 14, TBC sold 20 bikes for $130On August 14, TBC sold 20 bikes for $130
each.each.
Of the bikes sold 9 originally cost $91 andOf the bikes sold 9 originally cost $91 and11 cost $106.11 cost $106.
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The Cost of Goods Sold for the August 14 saleThe Cost of Goods Sold for the August 14 sale
is $1,985, leaving $515 and 5 units inis $1,985, leaving $515 and 5 units ininventory.inventory.
The Cost of Goods Sold for the August 14 saleThe Cost of Goods Sold for the August 14 sale
is $1,985, leaving $515 and 5 units inis $1,985, leaving $515 and 5 units ininventory.inventory.
Lets look at the entries for the Aug. 14Lets look at the entries for the Aug. 14
sale.sale.
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Cost of
Goods Soldfor August
31 = $2,610
Cost of
Goods Soldfor August
31 = $2,610
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IncomeStatement
COGS =$4,595
Balance SheetInventory = $1,395
1 @ 111$ = 111$
1 @ 111$ = 111
1 @ 111$ = 111
End. Inv. ,1111$
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When a unit is sold,the average cost of eachaverage cost of each
unitunit in inventory isassigned to costof goods sold.
When a unit is sold,the average cost of eachaverage cost of each
unitunit in inventory isassigned to costof goods sold.
Cost of
GoodsAvailablefor Sale
Units on
hand onthe dateof sale
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On August 14, TBC sold 20 bikes for $130On August 14, TBC sold 20 bikes for $130
each.each.
On August 14, TBC sold 20 bikes for $130On August 14, TBC sold 20 bikes for $130
each.each.
The average cost perunit must be
computed prior toeach sale.
The average cost perunit must be
computed prior toeach sale.
$2,500 / 25 = $100$2,500 / 25 = $100
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The average costThe average cost
per unit is $100.per unit is $100.
The average costThe average cost
per unit is $100.per unit is $100.
Lets look at theentries for the Aug.
14 sale.
$100 = $2,500 25
$100 = $2,500 25
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Additional purchases were made on AugustAdditional purchases were made on August17 and August 28.17 and August 28.
On August 31, an additional 23 units wereOn August 31, an additional 23 units were
sold.sold.
Additional purchases were made on AugustAdditional purchases were made on August17 and August 28.17 and August 28.
On August 31, an additional 23 units wereOn August 31, an additional 23 units were
sold.sold.
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$114 = $3,990 35
$114 = $3,990 35
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$114 = $3,990 35
$114 = $3,990 35
The average costper unit is $114.
The average costper unit is $114.
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Income Statement
COGS = $4,622
Balance Sheet Inventory = $1,368
$114 12 =1 368
$114 12 =$1,368
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Costs of
Goods Sold
Costs ofGoods Sold
EndingInventory
EndingInventory
Oldest
Costs
OldestCosts
RecentCosts
RecentCosts
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On August 14, TBC sold 20 bikes for $130On August 14, TBC sold 20 bikes for $130
each.each.
On August 14, TBC sold 20 bikes for $130On August 14, TBC sold 20 bikes for $130
each.each.
The Cost of Goods Sold for the August 14 sale isThe Cost of Goods Sold for the August 14 sale is
$1,970, leaving $530 and 5 units in inventory.$1,970, leaving $530 and 5 units in inventory.
The Cost of Goods Sold for the August 14 sale isThe Cost of Goods Sold for the August 14 sale is
$1,970, leaving $530 and 5 units in inventory.$1,970, leaving $530 and 5 units in inventory.
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Additional purchases were made on Aug. 17 and Aug. 28.
On August 31, an additional 23 units were sold.
Additional purchases were made on Aug. 17 and Aug. 28.
On August 31, an additional 23 units were sold.Cost of Goods Sold for August 31 =Cost of Goods Sold for August 31 =
$2,600$2,600
Cost of Goods Sold for August 31 =Cost of Goods Sold for August 31 =
$2,600$2,600
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Balance SheetInventory = $1,420
Income Statement
COGS = $4,570
1 @ 111$ = 111$
11 @ 111$ = ,1111
End. Inv. ,1111$
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Costs of
Goods Sold
Costs ofGoods Sold
EndingInventory
EndingInventory
Recent
Costs
RecentCosts
OldestCosts
OldestCosts
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On August 14, TBC sold 20 bikes for$130 each.
On August 14, TBC sold 20 bikes for$130 each.
The Cost of Goods Sold for the August 14
sale is $2,045, leaving $455 and 5 unitsin inventory.
The Cost of Goods Sold for the August 14
sale is $2,045, leaving $455 and 5 unitsin inventory.
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Additional purchases were made on Aug. 17 and Aug.Additional purchases were made on Aug. 17 and Aug.
28.28.
On Aug. 31, an additional 23 units were sold.On Aug. 31, an additional 23 units were sold.
Additional purchases were made on Aug. 17 and Aug.Additional purchases were made on Aug. 17 and Aug.
28.28.
On Aug. 31, an additional 23 units were sold.On Aug. 31, an additional 23 units were sold.
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Cost of Goods Sold for August 31 =$2,685
Cost of Goods Sold for August 31 =$2,685
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Balance SheetInventory = $1,260
Income Statement
COGS = $4,730
1@ 11$ = 111$
1@ 111$ = 111
End. Inv. ,1111$
Inventory Valuation Methods: A Summary
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Costs Allocated to:
Valuation
Method
Cost of Goods
Sold Inventory Comments
Specific Actual cost of Actual cost of units Parallels physical flow
identification the units sold remaining Logical method when units
are uniqueMay be misleading for
identical units
Average cost Number of units
sold times the
Number of units on
hand times the
Assigns all units the same
average unit cost
average unit cost average unit cost Current costs are averaged
in with older costs
First-in, First-out(FIFO)
Cost of earliestpurchases on
Cost of mostrecently
Cost of goods sold is basedon older costs
hand prior to the
sale
purchased units Inventory valued at current
costs
May overstate income during
periods of rising prices; may
increase income taxes due
Last-in, First-out
(LIFO)
Cost of most
recently
Cost of earliest
purchases
Cost of goods sold shown at
recent prices
purchased units (assumed still in
inventory)
Inventory shown at old (and
perhaps out of date) costs
Most conservative method
during periods of rising
prices; often results in lowerincome taxes
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Once a company hasadopted a particularaccounting method,
it should follow thatmethod consistentlyrather than switch
methods from oneyear to the next.
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The inventory onhand and the
cost of goodssold for the year
are notdetermined until
year-end.
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Specific
identification
LIFO
Average
cost
FIFO
We use one of these inventory
valuation methods in a periodicinventory system.
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Computers, Inc.
Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111
June 11 111 .111 .11111Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111
Goods
Available
for Sale ,1111 , .111111$
Ending
Inventory ,1111 ?
Cost of
Goods Sold 111 ?
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Computers, Inc.
Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111
June 11 111 .111 .11111Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111
Goods
Available
for Sale ,1111 , .111111$
Ending
Inventory ,1111 ?
Cost of
Goods Sold 111 ?
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By reviewing actualpurchase invoices,Computers, Inc.
determines that the1,200 mouse pads onhand at year-end havean actual total cost of
$6,400.
Determine the cost ofgoods sold for theyear.
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Computers, Inc.
Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111
June11 111
.111
.11111
Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111
Goods
Available
for Sale ,1111 , .111111$
EndingInventory ,1111 , .111111$
Cost of
Goods Sold 111 , .111111$
Cost of Goods Sold$9,725 - $6,400 = $3,325
Cost of Goods Sold$9,725 - $6,400 = $3,325
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Total Cost ofTotal Cost of
GoodsGoods
Available forAvailable for
SaleSale
TotalTotal
Number ofNumber of
UnitsUnitsAvailable forAvailable for
SaleSale
The averagecost is
calculated at
year-end asfollows:
The averagecost is
calculated at
year-end asfollows:
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Computers, Inc.Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111June 11 111 .111 .11111
Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111Goods
Available
for Sale ,1111 , .111111$
Ending
Inventory ,1111 ?
Cost of
Goods Sold 111 ?
Avg. Cost $9,725 1,800 = $5.40278
Avg. Cost $9,725 1,800 = $5.40278
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111June 11 111 .111 .11111
Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111Goods
Available
for Sale ,1111 , .111111$
Ending
Inventory ,1111 , .111111$
Cost of
Goods Sold 111 , .111111$
Ending InventoryAvg. Cost $5.40278 1,200 = $6,483
Ending InventoryAvg. Cost $5.40278 1,200 = $6,483Cost of Goods SoldAvg. Cost $5.40278
600 = $3,242
Cost of Goods SoldAvg. Cost $5.40278
600 = $3,242
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Costs of
Goods Sold
Costs ofGoods Sold
EndingInventory
EndingInventory
Oldest
Costs
OldestCosts
RecentCosts
RecentCosts
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Remember:Start with the
11/29purchase and
then add otherpurchases
until you reachthe number of
units in endinginventory.
Remember:Start with the
11/29purchase and
then add otherpurchases
until you reachthe number of
units in endinginventory.
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111June 11 111 .111 .11111
Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111Goods
Available
for Sale ,1111 , .111111$
Ending
Inventory ,1111 ?
Cost of
Goods Sold 111 ?
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Date Beg. Inv. Purchases End. Inv.
Cost of
Goods Sold, @$ .1111 111 @$ .111 111
@$ .111 111
Jan. 1 @$ .111 111 @$ .111 111
June11
@$ .111 111
@$ .111 111
Sept. 11 @$ .111 111 @$ .111 111
Nov. 11 @$ .111 111 @$ .111 111
Units ,1111 111
Costs $ ,11 1 1 $ ,1111
Cost of Goods Available for Sale $ ,1111
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Completingthe table
summarizesthe
computations justmade.
Completingthe table
summarizesthe
computations justmade.
Computers, Inc.
Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111
June 11 111 .111 .11111
Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111Goods
Available
for Sale ,1111 , .111111$
Ending
Inventory ,1111 , .111111$
Cost of
Goods Sold 111 , .111111$
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Costs ofGoods Sold
Costs ofGoods Sold
EndingInventory
EndingInventory
RecentCosts
RecentCosts
OldestCosts
OldestCosts
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Remember:Start withbeginning
inventory andthen add otherpurchases
until you reach
the number ofunits in ending
inventory.
Remember:Start withbeginning
inventory andthen add otherpurchases
until you reach
the number ofunits in ending
inventory.
Computers, Inc.Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111June 11 111 .111 .11111
Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111Goods
Available
for Sale ,1111 , .111111$
Ending
Inventory ,1111 ?
Cost of
Goods Sold 111 ?
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Completingthe table
summarizesthe
computations just made.
Completingthe table
summarizesthe
computations just made.
Computers, Inc.
Mouse Pad Inventory
Date Units $/Unit Total
Beginning
Inventory ,1111 .111$ , .111111$
Purchases:
Jan. 1 111 .111 , .111111
June 11 111 .111 .11111
Sept. 11 111 .111 , .111111
Nov. 11 111 .111 .11111Goods
Available
for Sale ,1111 , .111111$
Ending
Inventory ,1111 , .111111$
Cost of
Goods Sold 111 , .111111$
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FOBs
Periodic vs. Perpetual Cost Flow Assumptions