previous lecture uncollectible accounts reflecting uncollectible accounts in the financial...
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Previous Lecture Internal Controls for Receivable Management of Accounts Receivable Ways to Minimize Amounts in Accounts Receivable Evaluating the Quality of Accounts Receivable 3TRANSCRIPT
Previous Lecture
• Uncollectible Accounts• Reflecting Uncollectible Accounts in the
Financial Statements• The Allowance for Doubtful Accounts• Writing Off an Uncollectible Account
Receivable• Recovery of an Account Receivable Previously
Written Off
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Previous Lecture
• Monthly Estimates of Credit Losses• Estimating Credit Losses — The “Balance
Sheet” Approach• An Alternative Approach to Estimating Credit
Losses• Direct Write-Off Method• Income Tax Regulations and Financial
Reporting
2
Previous Lecture
• Internal Controls for Receivable• Management of Accounts Receivable• Ways to Minimize Amounts in Accounts
Receivable• Evaluating the Quality of Accounts Receivable
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SAFWAY, INC
Having the right merchandise available at the right time and in the right place is critically important to all companies that sell products to their customers.
These business include chain stores such as grocery store, drugstores, and department stores.
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Consider SafewayHaving 1700 stores nationwideWhen Customer shop at Safeway, they expect to
find the items they want in stock and ready to purchase. If not, then they will find other place for shop.
For this purpose Safeway store must stock more than 10,000 products
Controlling such a diverse selection is big challenge in highly competitive environment
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INVENTORIES AND THECOST OF GOODS SOLD
Chapter
8
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Inventory
Goods ownedand held for sale
to customers
Current asset
Inventory Defined
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INCOME STATEMENT
Revenue Cost of goods sold Gross profit Expenses Net income
As purchase costs (or manufacturing costs) are incurred
as goods are sold
BALANCE SHEET
Current assets: Inventory
$ $
$
The Flow of Inventory Costs
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GENERAL JOURNAL
Date Account Titles and ExplanationPR Debit Credit
Entry on Purchase DateInventory $$$$
Accounts Payable $$$$
Entry on Sale DateCost of Goods Sold $$$$
Inventory $$$$
In a perpetual inventory system, inventory entries parallel the flow of costs.
The Flow of Inventory Costs
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When identical units of inventory have different unit costs, a question naturally
arises as to which of these costs should be used in recording a sale of inventory.
Which Unit Did We Sell?
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Inventory Subsidiary Ledger
A separate subsidiary account is maintained for each item in inventory.
How can we determine the unit cost for the Sept. 10 sale?
Item LL002 Primary supplier Electronic CityDescription Laser Light Secondary supplier Electric CompanyLocation Storeroom 2 Inventory level: Min: 25 Max: 200
Purchased Sold Balance
Date UnitsUnit Cost Total Units
Unit Cost
Cost of Goods Sold Units
Unit Cost Total
Sept. 5 100 30$ 3,000$ 100 30$ 3,000$ Sept. 9 75 50 3,750 100 30 3,000
75 50 3,750 Sept. 10 10 ? ? ? ? ?
? ? ?
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Specific identification
LIFO
Average cost
FIFO
We use one of these inventory valuation methods to determine cost of inventory sold.
Inventory Cost Flows
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The Bike Company (TBC)
Information for the Following Inventory Examples
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Specific Identification
When a unitis sold, the
specific cost of the unit sold is added to cost of goods sold.
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On August 14, TBC sold 20 bikes for $130 each.
Nine bikes originally cost $91 and 11 bikes originally cost $106.
Continue
Specific Identification – Example
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The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in inventory.
ContinueLet’s look at the entries for
the Aug. 14 sale.
Specific Identification – Example
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Continue
Retail
Cost
A similar entry ismade after each sale.
Specific Identification – Example
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Additional purchases were made on August 17 and 28.
Costs associated with sales on August 31 were as follows: 1 @ $91, 3 @ $106, 15 @ $115, & 4 @ $119.
Continue
Specific Identification – Example
Cost of Goods Sold for
August 31 = $2,610
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Balance Sheet Inventory = $1,395
Income Statement COGS = $4,595
1 @ 106$ = 106$ 5 @ 115$ = 575 6 @ 119$ = 714
End. Inv. 1,395$
Specific Identification – Example
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Since specific identification is so
easy, can’t we use it all the time?
Not really. Specific identification is hard to use
when we sell a lot of inventory that has lots of
different costs.
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Cost of Goods Available for
Sale
Units on hand on the date of
sale÷
Average-Cost Method
When a unit is sold,the average cost of each unit
in inventory is assigned to cost
of goods sold.
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On August 14, TBC sold 20 bikes for $130 each.
Continue
The average cost per unit must be computed prior
to each sale.
Average-Cost Method – Example
$100 = $2,500 25
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Continue
The average cost per unit is $100.
Let’s look at the entries for the Aug. 14 sale.
Average-Cost Method – Example
$100 = $2,500 25
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Continue
Retail
Cost
A similar entry ismade after each sale.
Average-Cost Method – Example
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Additional purchases were made on August 17 and August 28.
On August 31, an additional 23 units were sold.
Continue
Average-Cost Method – Example
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$114 = $3,990 35
Average-Cost Method – Example
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$114 = $3,990 35The average cost per unit is $114.
Average-Cost Method – Example
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Income Statement COGS = $4,622
Balance Sheet Inventory = $1,368
$114 × 12 = $1,368
Average-Cost Method – Example
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Costs of Goods Sold
Ending Inventory
Oldest Costs
Recent Costs
First-In, First-Out Method (FIFO)
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On August 14, TBC sold 20 bikes for $130 each.
Continue
The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory.
FIFO – Example
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Retail
Cost
ContinueA similar entry is
made after each sale.
FIFO – Example
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Additional purchases were made on Aug. 17 and Aug. 28.On August 31, an additional 23 units were sold.
Continue
FIFO – Example
Cost of Goods Sold for August 31 = $2,600
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Balance Sheet Inventory = $1,420
Income Statement COGS = $4,570
2 @ 115$ = 230$ 10 @ 119$ = 1,190
End. Inv. 1,420$
FIFO – Example
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Costs of Goods Sold
Ending Inventory
Recent Costs
Oldest Costs
Last-In, First-Out Method (LIFO)
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On August 14, TBC sold 20 bikes for $130 each.
Continue
LIFO – Example
The Cost of Goods Sold for the August 14 sale is $2,045, leaving $455 and 5 units in inventory.
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Continue
Retail
Cost
A similar entry ismade after each sale.
LIFO – Example
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Continue
LIFO – Example
Additional purchases were made on Aug. 17 and Aug. 28.On Aug. 31, an additional 23 units were sold.Cost of Goods Sold for August 31 = $2,685
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Balance Sheet Inventory = $1,260
Income Statement COGS = $4,730
LIFO – Example
5 @ 91$ = 455$ 7 @ 115$ = 805
End. Inv. 1,260$
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Inventory Valuation Methods: A SummaryCosts 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 earliest purchases on
Cost of most recently
Cost of goods sold is based on older costs
hand prior to the sale
purchased units Inventory valued at current costsMay 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) costsMost conservative method during periods of rising prices; often results in lower income taxes
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End of Today's Session
Allah HafizAllah Hafiz
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