Intermediate Accounting - Chap008 doc

Learning ObjectiveDifferentiate between the specific identification, FIFO, LIFO, and average cost methods used to determine the cost of ending inventory and cost of goods sold... The p

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Inventories:

Measurement

8

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Those assets that a company:

2 Has in production (work in process)

for future sale.

2 Has in production (work in process)

for future sale.

1 Intends to sell in the normal

course of business

1 Intends to sell in the normal

course of business

3 Uses currently in the production

of goods to be sold (raw materials).

3 Uses currently in the production

of goods to be sold (raw materials).

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Manufacturing Inventory

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Inventory Cost Flows

Raw Materials

(1) $XX $XX (4)

Work in Process

Finished Goods

Cost of Good Sold

Direct Labor

Manufacturing

Overhead

$XX (2) $XX $XX (5)

(1) Raw materials purchased (2) Direct labor incurred

(3) Manufacturing overhead incurred (4) Raw materials used

(5) Direct labor applied (6) Manufacturing overhead applied (7) Work in process transferred to finished goods (8) Finished goods sold

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at the end of a reporting cycle.

The inventory account is adjusted

at the end of a reporting cycle.

Two accounting systems are used to record

transactions involving inventory:

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Perpetual Inventory System

Matrix, Inc purchases on account $600,000

of merchandise for resale to customers.

Returns of inventory are credited to the inventory account.

Discounts on inventory purchases can be recorded using the

gross or net method.

Returns of inventory are credited to the inventory account.

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Perpetual Inventory System

Matrix, Inc sold, on account, inventory with a

retail price of $820,000 and a cost basis

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Periodic Cost of Goods Sold Equation

Beginning Inventory + Net Purchases

Cost of Goods Available for Sale

= Cost of Goods Sold

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Periodic Inventory System

Matrix, Inc purchases on account $600,000

of merchandise for resale to customers.

Returns of inventory are credited to the Purchase Returns and

Allowances account.

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Matrix, Inc sold on account, inventory with a

retail price of $820,000 and a cost basis

No entry is made to record Cost of Good Sold Assuming Beginning

Inventory of $120,000 A physical count of Ending Inventory shows

a balance of $180,000 Let’s calculate Cost of Goods Sold at

the end of the accounting period.

No entry is made to record Cost of Good Sold Assuming Beginning

Inventory of $120,000 A physical count of Ending Inventory shows

a balance of $180,000 Let’s calculate Cost of Goods Sold at

the end of the accounting period.

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Adjusting entry to determine Cost of Goods Sold

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Comparison of Inventory Systems

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Learning Objective

Explain which physical quantities of goods

should be included in inventory.

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What is Included in Inventory?

General Rule

All goods owned by the company on the inventory

date, regardless of their location.

General Rule

All goods owned by the company on the inventory

date, regardless of their location.

Consignment

Goods on Consignment

Depends on FOB

shipping terms.

Depends on FOB

shipping terms.

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Learning Objective

Determine the expenditures that should

be included in the cost of inventory.

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Expenditures Included in Inventory

Invoice Price

Invoice

Price

Freight-in

on Purchases

Freight-in

on Purchases

+

Purchase Returns

Purchase Discounts Purchase Discounts

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Purchase Discounts

Discount terms are 2/10, n/30.

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Net Method Using Perpetual and Periodic

Matrix, Inc purchased on account $6,000 of merchandise for resale to customers The merchandise was purchased subject to a cash discount of 2/10, n/30

The company incurred $160 in freight-in on the

merchandise Upon inspection, the company found that

$200 of merchandise was damaged and the seller

agreed to accept the merchandise return and credit the account of the company The inventory was sold for

$8,300 on account Let’s look at the journal entries

under both the perpetual and periodic accounting

system assuming Matrix uses the net method to record

merchandise purchases.

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Net Method Using Perpetual and Periodic

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Learning Objective

Differentiate between the specific identification, FIFO, LIFO, and average cost methods used

to determine the cost of ending inventory and

cost of goods sold.

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Inventory Cost Flow Methods

 Specific cost identification

 Average cost

 First-in, first-out (FIFO)

 Last-in, first-out (LIFO)

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 The specific cost of each inventory item must be known.

 By selecting specific items from inventory

at the time of sale, income can be

manipulated.

 The specific cost of each inventory item must be known.

 By selecting specific items from inventory

at the time of sale, income can be

manipulated.

Specific Cost Identification

 Items are added to

inventory at cost when

they are purchased.

 COGS for each sale is

based on the specific

cost of the item sold.

they are purchased.

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Average Cost Method

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Weighted-Average Periodic System

The following schedule shows the frame

inventory for Yore Frame, Inc for September.

The physical inventory count at September 30

shows 600 frames in ending inventory

Use the

Use the periodic weighted-average method to

determine:

(1) Ending inventory cost.

(2) Cost of goods sold.

Use the periodic weighted-average method to

determine:

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Yore Frame, Inc.

Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

9/3 300 24.00 7,200.00 9/15 250 25.00 6,250.00 9/21 200 27.00 5,400.00 9/29 400 28.00 11,200.00 Goods Available for

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Now, we have to assign costs to ending

inventory and cost of goods sold.

Available for Sale (1,950 units)

Ending Inventory (600 units)

Goods Sold (1,350)

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Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

Ending Inventory 600 24.4359 14,661.54

Cost of Goods Sold 1,350 24.4359 $ 32,988.46

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Moving-Average Perpetual System

The following schedule shows the Frame

Use the

determine:

The following schedule shows the Frame

Use the perpetual weighted-average method to

determine:

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Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

Ending Inventory 600

Cost of Goods Sold 1,350

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$11,600.00 ÷ (800-600+300) = $23.200

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$27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181

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First-In, First-Out

 The cost of the oldest inventory items are

charged to COGS when goods are sold

 The cost of the newest inventory items remain in ending inventory.

 The cost of the oldest inventory items are

charged to COGS when goods are sold

 The cost of the newest inventory items remain in ending inventory.

order of their

acquisition.

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First-In, First-Out

Even though the periodic

and the perpetual

approaches differ in the timing of adjustments to

Even though the periodic

and the perpetual

approaches differ in the timing of adjustments to

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FIFO - Periodic System

Use the

Use the periodic FIFO method to determine:

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Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

These are the 600 most recently acquired units.

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Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

Ending Inventory 600 16,600.00

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Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

These are the first

1,350 units acquired.

These are the first

1,350 units acquired.

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Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

Cost of Goods Sold 1,350 $ 31,050.00

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FIFO - Perpetual System

Use the

Use the perpetual FIFO method to determine:

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Frame Inventory

Beg Inventory 800 $ 22.00 $ 17,600.00

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200

The ending inventory on 9/1 consists of:

200 units from beginning inventory @ $22.00

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200

300 units from the 9/3 purchase @ $24.00

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200

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200

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200

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200

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400 units from the 9/29 purchase @ $28.00.

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Note that this is the same COGS

computed using the Periodic

approach.

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Last-In, First-Out

Any questions before we run into

LIFO?

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Last-In, First-Out

 The cost of the newest inventory items are charged to COGS when goods are sold

 The cost of the oldest inventory items

remain in inventory.

 The cost of the newest inventory items are charged to COGS when goods are sold

 The cost of the oldest inventory items

items are sold

first, leaving the

older units in

inventory.

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Last-In, First-Out

Unlike FIFO, using

the LIFO method may result in COGS

and Ending Inventory Cost that

differ under the periodic and perpetual approaches

Unlike FIFO, using

may result in COGS

and Ending Inventory Cost that

differ under the periodic and perpetual approaches

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