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1、Chapter 06Inventory and Cost of Goods SoldInventoryoIncludes items a company intends for sale to customers. For example, clothes at The Limited, shoes at Payless ShoeSource, building supplies at Home Depot, and so on. oAlso includes items that are not yet finished products. For instance, lumber at a
2、 cabinet manufacturer, and rubber at a tire manufacturer are part of inventory because the firm will use them to make a finished product for sale to customers.6-2Part AUnderstanding Inventory and Cost of Goods Sold 6-3LO1 Trace the flow of inventory costs from manufacturing companies to merchandisin
3、g companiesInventory Merchandise companyManufacturing companyWholesalerRetailer Raw materialWork in progressFinished goods6-4Merchandising Companies Wholesalers resell inventory to retail companies or to professional users. Retailers purchase inventory from manufacturers or wholesalers and then sell
4、 this inventory to end users. Merchandising companies purchase inventories that are primarily in finished form for resale to customers6-5Manufacturing Companies oThese companies manufacture the inventories they sell, rather than buying them in finished form from suppliers.oManufacturers classify inv
5、entory into three categories:oRaw materials inventory: Includes the cost of components that will become part of the finished product but have not yet been used in production. oWork-in-process inventory: Refers to the products that have started the production process but are not yet complete at the e
6、nd of the period.oFinished goods inventory: It includes the cost of the units that have been completed by the end of the period but not yet sold. 6-6LO2 Calculate cost of goods soldInventory represents the cost of inventory not sold, while cost of goods sold represents the cost of inventory sold.Als
7、o referred to as cost of sales, cost of merchandise sold, or cost of products sold.The costs of beginning inventory plus additional purchases make up the cost of goods (or inventory) available for sale.6-7Relationship between Inventory and Cost of Goods Sold6-8LO3 Determine the cost of goods sold an
8、d ending inventory using different inventory cost methodsInventory cost methodSpecific IdentificationFirst in,first out(FIFO)Last in,first out(LIFO)Average CostThis method you might think of as the most logical. It matches or identifies each unit of inventory with its actual cost. Practicable only f
9、or companies selling unique, expensive products. Specific Identification Method 6-9oIt has 100 units of inventory at the beginning of the year and then makes two purchases during the yearone on April 25 and one on October 19. oThere are 1,000 game cartridges available for sale.oDuring the year, it s
10、ells 800 video game cartridges for $15 each. This means that 200 cartridges remain in ending inventory at the end of the year.Inventory Transactions for Marios Game Shop6-10First-In, First-Out (FIFO)First units purchased are the first ones sold. Beginning inventory sells first, followed by the inven
11、tory from the first purchase during the year, followed by the inventory from the second purchase during the year, and so on.oMarios Game Shop, which 800 units were sold? oThey were the first 800 units purchased, and that all other units remain in ending inventory.6-11Last units purchased are the fir
12、st ones sold.oIf Mario sold 800 units, we assume all the 600 units purchased on October 19 (the last purchase) were sold, along with 200 units from the April 25 purchase. That leaves 100 of the units from the April 25 purchase and all 100 units from beginning inventory assumed to remain in ending in
13、ventory.Last-In, First-Out (LIFO)6-12Weighted-Average CostoBoth cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale. oEach unit of inventory has a cost equal to the weighted-average cost of all inventory items. 6-13LO4 Explain the financial stateme
14、nt effects and tax effects of inventory cost flow assumptionsEffects of Managers Choice of Inventory Reporting MethodsWhy Choose LIFO? o Results in tax savings when inventory costs are rising.o Has an income statement focus. Why Choose FIFO? o Matches physical flow for most companies.o Results in hi
15、gher assets and net income when inventory costs are rising.o Has a balance sheet focus. 6-14Comparison of Inventory Cost Flow Assumptions When Prices Are RisingA comparison of FIFO, LIFO, and average cost for Marios Game Shop:6-15Part BRecording Inventory Transactions 6-16Perpetual inventory system
16、and Periodic inventory systemPerpetual Inventory SystemIt maintains a continualthat is,perpetualtracking of inventory.A continual tracking helps a company to better manage its inventorylevels.Periodic Inventory SystemIt does not continually modify inventory amounts, but instead periodically adjusts
17、for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory on hand.6-17LO5 Record inventory transactions using a perpetual inventory system.To see how to record inventory transactions using a perpetual inventory system, we will look again at the in
18、ventory transactions for Marios Game Shop.6-18Inventory PurchasesTo record the purchase of new inventory, we debit inventory (an asset) to show that the companys balance of this asset account has increased. At the same time, if the purchase was paid in cash, we credit cash. Or more likely, if the co
19、mpany made the purchase on account, we credit accounts payable, increasing total liabilities. Thus, Mario records the first purchase of 300 units for $2,700 on April 25 as:6-19On July 17, Mario sold 300 units of inventory on account for $15 each, resulting in total sales of $4,500. We make two entri
20、es to record the sale: (1)The first entry shows an increase to the asset account (in this case, Accounts Receivable) and an increase in sales revenue. (2)The second entry adjusts the Inventory and Cost of Goods Sold accounts.Inventory Sales6-20Other inventory transactions6-21Additional Inventory Tra
21、nsactions Freight Charges6-22Freight Charges: A significant cost associated with inventory for most merchandising companies includes freight (also called shipping) charges. This includes the cost of shipments of inventory from suppliers, as well as the cost of shipments to customers. When goods are
22、shipped, they are shipped with terms FOB shipping point or FOB destination. FOB stands for “free on board” and indicates when title (ownership) passes from the seller to the buyer. FOB shipping point means title passes when the seller ships the inventory , not when the buyer receives it. The fact th
23、at a buyer does not have actual physical possession of the inventory does not preventtransfer of title to the buyers inventory. In contrast, if the seller ships the inventoryFOB destination, then title does not transfer to the buyer when the inventory is shipped. The buyer would not record the purch
24、ase transaction until the shipped inventory reached its destination, the buyers location.Additional Inventory Transactions Freight ChargesMario pays $300 for freight charges associated with the purchase of inventory on April 256-23Additional Inventory Transactions Purchase Discounts.Mario on April 3
25、0, pays for the units purchased on April 25, less a 2% purchase discount.6-24Additional Inventory Transactions Purchase Returns.Mario decides on October 22 to return 50 defective units from the 600 units purchased on October 19 for $11 each6-25Part CLOWER-OF-COST-OR-MARKET METHOD6-26LO7 Apply the lo
26、wer-of-cost-or-market method for inventoriesoWhen the value of inventory falls below its cost, companies are required to report inventory at the lower market value. And it is considered to be the replacement cost.oOnce it has determined both the cost and market value of inventory, the company report
27、s ending inventory in the balance sheet at the lower of the two amounts.6-27Calculating the Lower of Cost or Market6-28LO9 Record inventory transactions using a periodic inventory system.Recall that under a perpetual inventory system we maintain a continualor perpetual record of inventory purchased
28、and sold. In contrast, using a periodic inventory system we do not continually modify inventory amounts. Instead, we periodically adjust for purchases and sales of inventory at the end of the reporting period, based on a physical count of inventory on hand.6-29Comparing Perpetual and Periodic inventory system Inventory Purchase and Sales6-30Comparing Perpetual and Periodic inventory system Freight charges, Purchase discounts and returns6-31End of chapter 066-32
