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14 Inventory
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Inventory held for sale by retailers,
manufacturers and wholesalers.
Learning Objectives1. Identify all costs and apply
the lower of cost or market to merchandise inventory
2. Assign costs to sold inventory using four different methods
3. Compare periodic with perpetual inventory systems
4. Estimate ending inventory
5. Analysis: Calculate and explain inventory turnover and days sales in inventory
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ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Inventory subsidiary ledgers are separate records for each item of inventory.
Inventory subsidiary ledgers are separate records for each item of inventory.
Control LedgerInventory
Acct #150
Subsidiary Ledgers
InventoryBrass Chimes#150.236822
Balance
The Subsidiary Ledgers must add up to the
Control Ledger
Overview
Subsidiary example
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Units Cost Total Units Cost Total Units Cost Total
2005 12 11.20 134.40
10-Jan 5 11.20 56.00 56.00 17 11.20 190.40
12-Jan 7 11.20 78.40 78.40 10 11.20 112.00
Sales
Item: Brass Chimes, INVENTORY Acct #: 150.236822
SUBSIDIARY LEDGER -Merchandise Inventory
BALANCE
Date Debit Credit
Purchases
Balance Forward
The number of units and the cost paid per unit are collected for each purchase
and sale
Overview
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
Subsidiary Ledgers
InventoryBrass Chimes#150.236822
With a Perpetual Inventory system,
sales and purchases are
updated as they happen to the
Inventory Control Ledger
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Objective 14.1: Identify all costs and apply the lower
of cost or market to inventory
O14.1
The Cost Concept guides the initial valuation of inventory. Purchases are recorded at cost less any purchase discounts earned.
The Cost Concept guides the initial valuation of inventory. Purchases are recorded at cost less any purchase discounts earned.
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Cost of Inventory
However, Inventory values should also include any incidental costs incurred to bring inventory to the sales location and into a saleable condition including:
Freight In , storage and insurance costsCosts to prepare, condition and assemble inventory for sale
However, Inventory values should also include any incidental costs incurred to bring inventory to the sales location and into a saleable condition including:
Freight In , storage and insurance costsCosts to prepare, condition and assemble inventory for sale
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Freight In is the cost incurred to bring inventory to the sale location
FOB (for Free On Board) describes shipping terms1. FOB shipping point means freight is free
to the purchaser only to the shipping point
2. FOB destination means freight is free to the purchaser to the purchaser’s destination
Freight In is the cost incurred to bring inventory to the sale location
FOB (for Free On Board) describes shipping terms1. FOB shipping point means freight is free
to the purchaser only to the shipping point
2. FOB destination means freight is free to the purchaser to the purchaser’s destination
Freight In
Shipping Point
DestinationO14.1
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FOB terms also indicate ownership of the inventory in transit 1. For FOB shipping point, the purchaser owns the
inventory from the shipping point on
2. FOB destination means the seller owns the inventory in transit until it arrives at the seller’s location
FOB terms also indicate ownership of the inventory in transit 1. For FOB shipping point, the purchaser owns the
inventory from the shipping point on
2. FOB destination means the seller owns the inventory in transit until it arrives at the seller’s location
Inventory ownership while in transit
Shipping Point
Destination
FOB DestinationSeller owns
FOB Shipping PointPurchaser owns
In transit
O14.1
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Inventory in transit owned by the sellerInventory on consignment (for sale by the firm but owned by others )Damaged or obsolete goods that are not saleable*
Inventory in transit owned by the sellerInventory on consignment (for sale by the firm but owned by others )Damaged or obsolete goods that are not saleable*
Items not included in Inventory
*If saleable, the Conservatism Concept argues that damaged & obsolete goods should be recorded at their net realizable value
O14.1
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Many firms rely on both the materiality and the cost benefit concept to argue that the incidental inventory acquisition costs of freight, storage, insurance, etc. are not material and further, the cost of appropriately assigning these costs to items of inventory outweigh any benefits received. They justify recording inventory costs using invoice prices only.
Inventory and the Cost Benefit Concept
O14.1
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The Conservatism Concept governs the issue of changing market values for inventory
When preparing end of fiscal period financial statements the Lower of Cost or Market values should be used when the end of period inventory adjusting entry is considered.
The Conservatism Concept governs the issue of changing market values for inventory
When preparing end of fiscal period financial statements the Lower of Cost or Market values should be used when the end of period inventory adjusting entry is considered.
Lower of cost or market
O14.1
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In practice, lower of cost or market can be applied to inventory on the following bases:
•An item by item •Category by category •Inventory as a whole
In practice, lower of cost or market can be applied to inventory on the following bases:
•An item by item •Category by category •Inventory as a whole
Lower of cost or market
Example
O14.1
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Items of Inventory
Units Cost (Book value)
Market each
Total Cost
Total Market
Items Category Whole
Brass
Chimes 35 45 45 1,575 1,575 1,575
Pendants 70 23 21 1,610 1,470 1,470
Candle holders 60 46 50 2,760 3,000 2,760
Rings 125 6 6 750 750 750
Brass subtotal 6,695 6,795 6,695
Cry stal
Chimes 88 92 94 8,096 8,272 8,096
Pendants 110 16 13 1,760 1,430 1,430
Candle holders 50 65 65 3,250 3,250 3,250
Vases 21 120 119 2,520 2,499 2,499
Crystal subtotal 15,626 15,451 15,451
Totals 22,321 22,246 21,830 22,146 22,246
Lower of Cost or Market Worksheet
Application of Lower of Cost or Market
Lower of cost or market
The item total
column brings
over the lower
from the total
cost or total
market column for each inventory item.
O14.1
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Lower of cost or marketAdjusting Entry (assumes item by item
analysis)
The value of inventory is
reduced by the adjustment.
O14.1
Page 15
Date Description PR Debit Credit
Adjusting Entry
31-Dec Cost of Goods Sold 510 491
Inventory 165 491
Lower of cost or market adjustment
GENERAL JOURNAL
Total cost of $22,321 minus Total market value on an item by item basis of $21,830 =
$491
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LIFOFIFO
Weighted AverageSpecific
Identification
Objective 14.2: Assign costs to sold inventory
using four different methods
O14.2
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Cost of sold inventory
Cost Concept -followed in recording the value of inventory purchased for sale in the ordinary course of business
Cost Concept -followed in recording the value of inventory purchased for sale in the ordinary course of business
Matching Concept -match expenses with the revenue those expenses helped to generate during any fiscal period. One of those expenses of course is the cost of inventory sold during the period.
Matching Concept -match expenses with the revenue those expenses helped to generate during any fiscal period. One of those expenses of course is the cost of inventory sold during the period.
O14.2
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Which cost?
Prices paid for identical inventory items change often.
Prices paid for identical inventory items change often.
Which cost should be expensed when an item is sold?
Which cost should be expensed when an item is sold?
O14.2
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Methods used to determine which cost to expense include:
•Specific Identification
•Weighted Average
•Last in First Out –LIFO
•First in First Out –FIFO
Methods used to determine which cost to expense include:
•Specific Identification
•Weighted Average
•Last in First Out –LIFO
•First in First Out –FIFO
Which cost?
O14.2
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Specific Identification expense as Cost of Goods Sold the costs incurred to purchase the exact inventory item sold
Specific Identification expense as Cost of Goods Sold the costs incurred to purchase the exact inventory item sold
Which cost?
This may be impractical if inventory includes a large number of items which are difficult to match to the actual cost paid without considerable effort.
This may be impractical if inventory includes a large number of items which are difficult to match to the actual cost paid without considerable effort.
O14.2
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•LIFO –Last in First Out
•FIFO –First in First Out
•Weighted Average
•LIFO –Last in First Out
•FIFO –First in First Out
•Weighted Average
Which cost?
If identifying the specific cost paid for an item of inventory is excessive,
these methods may be used:
If identifying the specific cost paid for an item of inventory is excessive,
these methods may be used:
O14.2
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Which cost?LIFO method expenses the most
recent inventory costs firstLIFO method expenses the most
recent inventory costs first
FIFO method expenses the oldest inventory costs first
FIFO method expenses the oldest inventory costs first
Weighted average method expenses the average of all
inventory costs incurred for the category
Weighted average method expenses the average of all
inventory costs incurred for the category
O14.2
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$10.00$10.00
$10.25$10.25
$10.40$10.40
$10.50$10.50
$10.60$10.60Note the need to record purchase
information when accounting
for inventory
The price paid and the date purchased is recorded for each item of inventory.
The price paid and the date purchased is recorded for each item of inventory.LIFO
O14.2
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$10.00$10.00
$10.25$10.25
$10.40$10.40
$10.50$10.50
$10.60$10.60
Regardless of which item was sold, What cost
should be expensed with LIFO method?
One blue hockey puck is sold. Which cost should be expensed?
One blue hockey puck is sold. Which cost should be expensed?LIFO
?
O14.2
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$10.00$10.00
$10.25$10.25
$10.40$10.40
$10.50$10.50
$10.60$10.60$10.60$10.60
Using LIFO method, take
the most recent purchase cost out to match with a sale.
Cost expensedCost expensedLIFO
O14.2
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$10.00$10.00
$10.25$10.25
$10.40$10.40
$10.50$10.50
$10.60$10.60
$10.00$10.00
Using FIFO method, take
the oldest purchase cost out to match with a sale.
Cost expensedCost expensed
FIFO
O14.2
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$10.00$10.00
$10.25$10.25
$10.40$10.40
$10.50$10.50
$10.60$10.60
$10.35$10.35
Using weighted average method,
a moving average cost is
expensed.
Cost expensedCost expensed
Weighted Average
$51.75/5 = $10.35O14.2
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$10.00$10.00
$10.25$10.25
$10.40$10.40
$10.50$10.50
$10.60$10.60
$10.40$10.40
Using the Specific ID method, the
physical item sold is matched with
its cost
Cost expensedCost expensed
Specific Identification
I want that green one.
O14.2
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DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
LIFO -example
Karin’s Gifts sells a special punch bowl which is purchased regularly as required.
Using the LIFO method, record the purchase of 10Units of inventory at $23 per unit on April 3.
O14.2
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DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
LIFO
Next record the sale of 2 units on April 8
O14.2
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DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
LIFO
Next record the sale of 20 units on April 12
O14.2
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DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
LIFO
Next record the purchase of 20 units @ $24 on April 15
O14.2
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DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
LIFO
Next record the sale of 23 units on April 20
O14.2
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DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
LIFO
Finally record the purchase of 25 units @ $25 on April 25
O14.2
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DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 23$ 46 20 22$ 4408 23$ 184
Bal.4/12 8 23$ 184 8 22$ 176
12 22$ 264 Bal.4/15 20 24$ 480 8 22$ 176
20 24$ 480Bal.
4/20 20 24$ 480 5 22$ 1103 22$ 66 Bal.
4/25 25 25$ 625 5 22$ 11025 25$ 625
1,040 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
735
624
176
656
110
Balance Forward
LIFO
O14.2
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34
FIFO -exampleDate
Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
Karin’s Gifts sells a special punch bowl which is purchased regularly as required.
Using the FIFO method, record the purchase of 10Units of inventory at $23 per unit on April 3.
O14.2
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FIFODate
Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
Next record the sale of 2 units on April 8
O14.2
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36
FIFODate
Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
Next record the sale of 20 units on April 12
O14.2
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37
FIFODate
Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
Next record the purchase of 20 units @ $24 on April 15
O14.2
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38
FIFODate
Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
Next record the sale of 23 units on April 20
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FIFODate
Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
Record the purchase of 25 units for $25 on April 25O14.2
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FIFODate
Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.4/12 18 22$ 396 8 23$ 184
2 23$ 46 Bal.4/15 20 24$ 480 8 23$ 184
20 24$ 480Bal.
4/20 8 23$ 184 5 24$ 12015 24$ 360 Bal.
4/25 25 25$ 625 5 24$ 12025 25$ 625
1,030 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
745
626
184
664
120
Balance Forward
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Weighted Average -example
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
Karin’s Gifts sells a special punch bowl which is purchased regularly as required.
Using the weighted average method, record the purchase of 10 units of inventory at $23 per unit on April 3.
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Weighted Average
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
($230 + $440 = $670/30 = $22.33)
Next record the sale of 2 units on April 8
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Weighted Average
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
Next record the sale of 20 units on April 12
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Weighted Average
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
Next record the purchase of 20 units@ $24 on April 15
O14.2
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Weighted Average
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
Next record the sale of 23 units on April 20
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Weighted Average
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
Finally record the purchase of 25 units @ $25 on April 25
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Weighted Average
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230
30 22.33$ 670Bal.
4/8 2 22.33$ 44.6728 22.33$ 625.33
Bal.4/12 20 22.33$ 446.67 8 22.33$ 178.67
Bal.4/15 20 24$ 480
28 23.52$ 658.67Bal.
4/20 23 23.52$ 541.05 5 23.52$ 117.62Bal.
4/25 25 25$ 62530 24.75$ 742.62
1,032.38 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
742.62
625.33
178.67
658.67
117.62
Balance Forward
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Specific Identification
For Specific Identification:
Date Specific Units Sold4/8 2 @ $224/12 12 @ $22
8 @ $23
4/20 3 @ $2220 @ $24
For Specific Identification:
Date Specific Units Sold4/8 2 @ $224/12 12 @ $22
8 @ $23
4/20 3 @ $2220 @ $24
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Specific IdentificationDate
Units $/Unit Total Units $/Unit Total Units $/Unit Total4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.12 22$ 264 6 22$ 132
4/12 8 23$ 184 2 23$ 46Bal.
4/15 20 24$ 480 6 22$ 1322 23$ 4620 24$ 480
Bal.4/20 3 22$ 66 3 22$ 66
20 24$ 480 2 23$ 46Bal.
4/25 25 25$ 625 3 22$ 662 23$ 4625 25$ 625
1,038 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
737
626
178
658
112
Balance Forward
DateUnits $/Unit Total Units $/Unit Total Units $/Unit Total
4/1 20 22$ 4404/3 10 23$ 230 20 22$ 440
10 23$ 230Bal.
4/8 2 22$ 44 18 22$ 39610 23$ 230
Bal.12 22$ 264 6 22$ 132
4/12 8 23$ 184 2 23$ 46Bal.
4/15 20 24$ 480 6 22$ 1322 23$ 4620 24$ 480
Bal.4/20 3 22$ 66 3 22$ 66
20 24$ 480 2 23$ 46Bal.
4/25 25 25$ 625 3 22$ 662 23$ 4625 25$ 625
1,038 Bal.Total COGS
Inventory BalancePurchases Cost of Goods Sold
670
737
626
178
658
112
Balance Forward
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ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
14.3
Objective 14.3: Compare periodic with perpetual
inventory systems
Perpetual –the inventory account is updated with each purchase, sale and return that affects inventory.
Perpetual –the inventory account is updated with each purchase, sale and return that affects inventory.
Periodic –the inventory account is updated only at the end of the fiscal period
Periodic –the inventory account is updated only at the end of the fiscal period
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Perpetual
•Inventory account updated with each transaction
•Cost of Goods Sold account is used
•Inventory account is used to record inventory purchases
Periodic
•Inventory account updated at the end of the fiscal period
•Cost of Goods Sold is not used, COGS is calculated
• Purchases account used to record inventory purchases
Perpetual vs Periodic
14.3
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Why Periodic?
Before the technology advances of
computerization, the periodic method was a reliable and
simple method of calculating Cost of Goods Sold using the
following formula:
14.3
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Beginning Inventory
Beginning Inventory
Net PurchasesNet Purchases
Ending InventoryEnding
Inventory
Cost of GoodsSold
Cost of GoodsSold
Goods Available For sale
Goods Available For sale
+
+
Goods Available For sale
Goods Available For sale
Periodic formula
14.3
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•Note the beginning inventory total
• Record purchases of inventory during the period
•Count the inventory remaining at the end of the period
Using Periodic formula
14.3
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Beginning inventory + net purchases – ending inventory
= Cost of Goods Sold
Using Periodic formula
This allows the firm to simplify the tracking of inventory
changes during the period and rely on the ending count to
establish Cost of Goods Sold.14.3
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Disadvantages of Periodic
•During the fiscal period, Cost of Goods Sold must be estimated
•Inventory management efforts may have limited day to day sales information
ProfitDebit Credit or
Loss
Expenses
BALANCE SHEET INCOME STATEMENT
Assets Liabilities Revenue
Equity
14.3
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Beginning Inventory
EndingInventory
Periodic Inventory System
Goods Available for Sale
Purchases
PIPELINE
Cost o
f
Goods
Sold
This amount must be
physically counted.
Periodic Inventory System
14.3
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Angelo's Florist's SupplyIncome StatementFor the year ending 12/31/07
Sales $ 245,600 Less: Sales Discounts -1,950
Sales Returns and Allowances -3,140 Net Sales 240,510
Cost of Goods Sold:Beginning Inventory 1/1/07 84,320Purchases 76,860 Less: Purchase Discounts -1,104
Purchase Returns and Allowances -935 Net Purchases 74,821
Goods Available for Sale 159,141 Less: Ending Inventory -68,420Cost of Goods Sold 90,721
Gross Profit $ 149,789
Angelo's Florist's SupplyIncome StatementFor the year ending 12/31/07
Sales $ 245,600 Less: Sales Discounts -1,950
Sales Returns and Allowances -3,140 Net Sales 240,510
Cost of Goods Sold:Beginning Inventory 1/1/07 84,320Purchases 76,860 Less: Purchase Discounts -1,104
Purchase Returns and Allowances -935 Net Purchases 74,821
Goods Available for Sale 159,141 Less: Ending Inventory -68,420Cost of Goods Sold 90,721
Gross Profit $ 149,789
Using a Periodic Inventory System, the Cost of Goods Sold
is not an separate expense account, it is an amount that must be computed using the
COGS formula.
Income Statement –
Periodic System
14.3
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14.4
The following methods can be used to estimate ending inventory:
•Gross Profit Method
•Retail Inventory Method
The following methods can be used to estimate ending inventory:
•Gross Profit Method
•Retail Inventory Method
Objective 14.4: Estimate ending inventory
These provide
estimates, not actual
ending inventory
totals
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Gross Profit MethodThis method uses the firm’s historic gross profit percentage to estimate Cost of Goods Sold
This method uses the firm’s historic gross profit percentage to estimate Cost of Goods Sold
With Cost of Goods Sold (estimated), ending Inventory can also be estimated using the Periodic formula:
Ending Inventory = Beg Inv. + Purchases - COGS
With Cost of Goods Sold (estimated), ending Inventory can also be estimated using the Periodic formula:
Ending Inventory = Beg Inv. + Purchases - COGS
14.4
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Lin's Hydraulic SupplyIncome StatementFor the month ending 3/31/07
%Sales 234,500 100%
Beginning Inventory 578,500Add: Net Purchases 145,000 Subtotal: Goods Avail for Sale 723,500Ending Inventory (est.) 559,350
Cost of Goods Sold (est.) 164,150 70%
Gross Profit 70,350 30%
Lin's Hydraulic SupplyIncome StatementFor the month ending 3/31/07
%Sales 234,500 100%
Beginning Inventory 578,500Add: Net Purchases 145,000 Subtotal: Goods Avail for Sale 723,500Ending Inventory (est.) 559,350
Cost of Goods Sold (est.) 164,150 70%
Gross Profit 70,350 30%This is our guess at what
the Gross Profit actually was:
.3 x$234,500 = $70,350.
Sales = COGS +
Gross Profit
We know what Beg. Inv. and Net
Purchases are.
Gross Profit
Method -
example
Historically, Lin’s Supply has experienced a Gross Profit percentage of 30%.
Historically, Lin’s Supply has experienced a Gross Profit percentage of 30%.
(est.) Ending Inventory = Goods Available for Sale
– (est.) Cost of Goods Sold or 723,500 - 164,150 = 559,35014.4
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Retail Inventory MethodWith this method, Inventory is
recorded at expected retail sales price.
With this method, Inventory is recorded at expected retail sales
price.
Using the percentage gross profit used to “mark up” the inventory to retail,
Cost of Goods Sold can be estimated:
Cost of Goods Sold =
Sales x (1- % [expected]Gross Profit)
Using the percentage gross profit used to “mark up” the inventory to retail,
Cost of Goods Sold can be estimated:
Cost of Goods Sold =
Sales x (1- % [expected]Gross Profit)14.4
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Retail Inventory Method1- % [expected]Gross Profit
Can be described as the Cost to Retail ratio.
1- % [expected]Gross Profit
Can be described as the Cost to Retail ratio.
If inventory records are maintained at the marked up retail price, we can divide the historic cost of the inventory by the retail values and arrive at the Cost to Retail ratio.
If inventory records are maintained at the marked up retail price, we can divide the historic cost of the inventory by the retail values and arrive at the Cost to Retail ratio.
14.4
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%COST TO RETAIL
RATIO
$ COST OF PURCHASED INVENTORY
$STATED RETAIL VALUE OF INVENTORY
What we paid for it
For inventory sold when marked at retail, this
becomes the estimate of % Cost of
Goods Sold at retail.
14.4
Cost to Retail ratio
What we hope to sell
it for
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Homer's Tool SupplyIncome StatementFor the month ending 7/31/07
Sales 956,700
At Cost At RetailBeginning Inventory 1,123,400 1,497,867Add: Net Purchases 621,500 887,857 Subtotal: Goods Avail for Sale 1,744,900 2,385,724Deduct: Sold Inventory at Retail 956,700Ending Inventory 1,429,024
Cost to Retail Ratio 73.1%(1,744,900 / 2,385,724)
Cost of Goods Sold (73.1% X Sales of $956,700) 699,723
Gross Profit 256,977
1045177
Homer's Tool SupplyIncome StatementFor the month ending 7/31/07
Sales 956,700
At Cost At RetailBeginning Inventory 1,123,400 1,497,867Add: Net Purchases 621,500 887,857 Subtotal: Goods Avail for Sale 1,744,900 2,385,724Deduct: Sold Inventory at Retail 956,700Ending Inventory 1,429,024
Cost to Retail Ratio 73.1%(1,744,900 / 2,385,724)
Cost of Goods Sold (73.1% X Sales of $956,700) 699,723
Gross Profit 256,977
1045177
We can simply convert Ending Inventory at Retail
to Ending Inventory at Cost by applying the Cost
to Retail ratio:73.1% x 1,429,024 =
1,045,177
Retail Method
-exampl
e
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Retail Inventory MethodAlthough this is an effective method for internal use, it is not acceptable
under GAAP
Although this is an effective method for internal use, it is not acceptable
under GAAP
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Objective 14.5: Calculate & explain inventory turnover and days sales in inventory
O14.5
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Inventory turnover answers the following question:How many times did the firm sell their average inventory during the year?
Inventory Turnover
COGS
Average Inventor
yInventory Turnover
O14.5
Remember to use the Average
Inventory
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Days Sales in Inventory answers the following question:How many days sales of inventory remain in the present balance of inventory?
Days Sales in Inventory
COGS
Ending Inventor
y
Days Sales in
Inventory
O14.5
Remember to use the ending Inventory
X 365
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Assets 2007 2008 Liabilities 2007 2008 Cash 9,000 10,000 Accounts Payable 45,000 41,500 Accounts receivable 75,000 81,000 Inv. Loan 18,000 14,400 Alllowance for Uncol. Accounts (2,500) (2,600) Total liabilities 63,000 55,900
Inventory 151,000 164,000 Equity Total assets 232,500 252,400 Owner, Capital 169,500 196,500
Sales 654,000
Cost of Goods Sold 490,500 Average Inventory 157,500Wages expense 61,000 (Inventory for years 2007 +2008) / 2Uncollectible account Inventory turnover 3.1 expense 2,000 (COGS / Avg. Inv.)Miscellaneous expense 73,500 Days' Sales In Inventory 122.0
Net Profit 27,000 (365 x Inv. / COGS)
Income StatementFor the year ended 12/31/08
days
X
Balance Sheet -April's GiftsAs of 12/31 2007 and 2008
Example –Inventory ratios
O14.5
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End Unit 14