Post on 14-Dec-2015
transcript
Determining Inventory Items
Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory
is counted.
Items requiring special attention include:
Goods in Transit
Goods Damaged or
ObsoleteGoods on Consignment
C 1
FOB Destination Point
Public Carrier
Seller Buyer
Goods in Transit
Public Carrier
Seller Buyer
FOB Shipping Point
Ownership passes to the buyer here.
C 1
Goods on Consignment
Merchandise is included in the inventory of the consignor, the owner of the inventory.
Consignor
Consignee
Thanks for selling my inventory in
your store.
C 1
Goods Damaged or Obsolete
Damaged or obsolete goods are not counted in inventory.
Cost should be reduced to net realizable value.
C 1
Determining Inventory Costs
Invoice Cost
Include all expenditures necessary to bring an item to a salable condition and location.
Minus Discounts
and Allowances
Plus Import Duties Plus
Freight
Plus Storage
Plus Insurance
C 2
Internal Controls and Taking a Physical Count
Most companies take a physical count of inventory at least once each year.
When the physical count does not match the Merchandise Inventory account, an adjustment must be made.
Most companies take a physical count of inventory at least once each year.
When the physical count does not match the Merchandise Inventory account, an adjustment must be made.
InventoryCount Tag
Countedby _______
Quantity Counted ___
C 2
Inventory Cost Flow Assumptions
First-In, First-Out(FIFO)
Assumes costs flow in the order incurred.
Last-In, First-Out(LIFO)
Assumes costs flow in the reverse order incurred.
Weighted Average
Assumes costs flow at an average of the costs available.
P1
Specific Identification
When units are sold, the specific cost of
the unit sold is added to cost of
goods sold.
When units are sold, the specific cost of
the unit sold is added to cost of
goods sold.
P1
First-In, First-Out (FIFO)
Cost of Goods Sold
Cost of Goods Sold
Ending InventoryEnding
Inventory
Oldest Costs
Oldest Costs
Recent Costs
Recent Costs
P1
Last-In, First-Out (LIFO)
Cost of Goods Sold
Cost of Goods Sold
Ending InventoryEnding
Inventory
Recent Costs
Recent Costs
Oldest Costs
Oldest Costs
P1
Weighted Average
When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold.
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
Units on hand on the date of
sale÷
P1
Financial Statement Effects of Costing Methods
Because prices change, inventory methods nearly always assign different cost amounts.
Because prices change, inventory methods nearly always assign different cost amounts.
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Financial Statement Effects of Costing Methods
Advantages of MethodsAdvantages of MethodsAdvantages of MethodsAdvantages of Methods
Smoothes out Smoothes out price changes.price changes.Smoothes out Smoothes out price changes.price changes.
Better matches Better matches current costs in cost current costs in cost of goods sold with of goods sold with
revenues.revenues.
Better matches Better matches current costs in cost current costs in cost of goods sold with of goods sold with
revenues.revenues.
Ending inventory Ending inventory approximates approximates
current current replacement cost.replacement cost.
Ending inventory Ending inventory approximates approximates
current current replacement cost.replacement cost.
First-In, First-In, First-OutFirst-OutFirst-In, First-In, First-OutFirst-Out
Weighted Weighted AverageAverage
Weighted Weighted AverageAverage
Last-In, Last-In, First-OutFirst-OutLast-In, Last-In,
First-OutFirst-Out
A1
Tax Effects of Costing Methods
The Internal Revenue Service (IRS) The Internal Revenue Service (IRS) identifies several acceptable methods identifies several acceptable methods
for inventory costing for reporting for inventory costing for reporting taxable income.taxable income.
The Internal Revenue Service (IRS) The Internal Revenue Service (IRS) identifies several acceptable methods identifies several acceptable methods
for inventory costing for reporting for inventory costing for reporting taxable income.taxable income.
If LIFO is used for If LIFO is used for tax tax purposespurposes, the IRS requires , the IRS requires
it be used in financial it be used in financial statements.statements.
If LIFO is used for If LIFO is used for tax tax purposespurposes, the IRS requires , the IRS requires
it be used in financial it be used in financial statements.statements.
A1
Consistency in Using Costing Methods
The The consistency principleconsistency principle requires a requires a company to use the same accounting company to use the same accounting methods period after period so that methods period after period so that
financial statements are comparable financial statements are comparable across periods.across periods.
The The consistency principleconsistency principle requires a requires a company to use the same accounting company to use the same accounting methods period after period so that methods period after period so that
financial statements are comparable financial statements are comparable across periods.across periods.
A1
Financial Statement Effects of Inventory Errors
Income Statement EffectsIncome Statement Effects
Exh. 5.10
A2
Financial Statement Effects of Inventory Errors
Balance Sheet EffectsBalance Sheet Effects
Exh. 5.12
A2