reporting and interpreting cost of goods sold and inventory
DESCRIPTION
Reporting and Interpreting Cost of Goods Sold and Inventory. Chapter 7. Merchandiser. Merchandise Purchases. Merchandise Inventory. Cost of Goods Sold. Manufacturer. Raw Materials. Raw Materials Inventory. Work in Process Inventory. Finished Goods Inventory. Direct Labor. - PowerPoint PPT PresentationTRANSCRIPT
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Reporting and Interpreting Cost of Goods Sold and Inventory
Chapter 7
7-2
Flow of Inventory Costs
MerchandiseMerchandisePurchasesPurchases
Cost ofCost ofGoods SoldGoods Sold
MerchandiseMerchandiseInventoryInventory
Merchandiser
RawRawMaterialsMaterials
Raw MaterialsRaw MaterialsInventoryInventory
Work in ProcessWork in ProcessInventoryInventory
Finished GoodsFinished GoodsInventoryInventory
Cost ofCost ofGoods SoldGoods Sold
Manufacturer
DirectDirectLaborLabor
FactoryFactoryOverheadOverhead
7-3
Nature of Cost of Goods SoldBeginningBeginningInventoryInventory
PurchasesPurchasesfor the Periodfor the Period
Ending InventoryEnding Inventory(Balance Sheet)(Balance Sheet)
Goods AvailableGoods Availablefor Salefor Sale
Cost of Goods SoldCost of Goods Sold(Income Statement)(Income Statement)
Beginning inventory + Purchases = Goods Available for Sale
Goods Available for Sale – Ending inventory = Cost of goods sold
7-4
Specific Identification
When units are sold, the
specific cost of the unit sold is
added to cost of goods sold.
7-5
First-In, First-Out Method
Cost of Cost of Goods SoldGoods SoldOldest CostsOldest Costs
Ending Ending InventoryInventoryRecent CostsRecent Costs
7-6
Last-In, First-Out Method
Ending Ending InventoryInventory
Cost of Cost of Goods SoldGoods Sold
Oldest CostsOldest Costs
Recent CostsRecent Costs
7-7
Average Cost Method
When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold.
Cost of Goods Available for
Sale
Number of Units
Available for Sale
÷
7-8
Financial Statement Effects of Costing Methods
Advantages of Methods
Ending inventory Ending inventory approximates approximates
current current replacement cost.replacement cost.
First-In, First-In, First-OutFirst-Out
Last-In, Last-In, First-OutFirst-Out
Weighted Weighted AverageAverage
7-9
Valuation at Lower of Cost or Market
Ending inventory is reported at the lower of cost or market (LCM).
Replacement CostThe current purchase
price for identical goods.
The company will recognize a “holding” loss in the current period rather than the period in which
the item is sold.This practice is conservative.
7-10
Inventory Methods and Financial Statement Analysis
Beginning inventory FIFO- Beginning inventory LIFO
Beginning LIFO Reserve(Excess of FIFO over LIFO)
Ending inventory FIFO- Ending inventory LIFO
Ending LIFO Reserve(Excess of FIFO over LIFO)
U.S. public companies using LIFO also report beginning and ending inventory on a FIFO basis in the financial statement notes if the
FIFO values are materially different.
7-11
Perpetual and Periodic Inventory Systems
Inventory System
Item Periodic System Perpetual System
Beginning Inventory Carried over from prior period
Carried over from prior period
Add: PurchasesAccumulated in the Purchases
account
Accumulated in the Inventory
account
Less: Ending Inventory
Measured at end of period by
physical inventory count
Perpetual record updated at every
sale
Cost of Goods Sold
Computed as a residual amount at end of period
Measured at every sale based
on perpetual record
7-12
Errors in Measuring Ending Inventory
Errors in Measuring InventoryEnding Inventory Beginning Inventory
Overstated Understated Overstated Understated
Ending Inventory + - N/A N/ARetained Earnings + - - +
Goods Available for Sale N/A N/A + -Cost of Goods Sold - + + -Gross Profit + - - +Net Income + - - +
Effect on Current Period's Balance Sheet
Effect on n Current Period's Income Statement
7-13
Supplement A: LIFO LiquidationsWhen a LIFO company sells more inventory than it purchases or manufactures, items from beginning
inventory become part of cost of goods sold. This is called a LIFO liquidation.
When inventory costs are rising, these lower cost items in
beginning inventory produce a higher gross profit, higher
taxable income, and higher taxes when they are sold.
7-14
Supplement B: Additional Issues in Measuring Purchases
Purchase returns and allowances are a reduction
in the cost of purchases associated with
unsatisfactory goods.
A purchase discount is a cash discount
received for prompt payment of an account.
7-15
Supplement B: Additional Issues in Measuring Purchases
Terms
Time
Due
Discount Period
Full amountless discount
Credit Period
Full amount due
Purchase or SalePurchase or Sale 2/10,n/30Discount Percent
Number of Days Discount
Is Available
CreditPeriod
7-16
End of Chapter 7