Ch06 inventories lecture notes ca student

CHAPTER - INVENTORIES LECTURE NOTES truongthihanhdung@uel.edu.vn 096.672.4386 OVERVIEW OF CHAPTER Input of Inventory (Accounting treatment when purchasing Inv) • Indentify Inventory items for different companies • Calculate the cost for Inventory ( u should understand this is: INPUT COST) Output of Inv (accounting treatment when selling Inv) • Identify the output cost by Costing methods (or Cost flow assumptions) • You should clearly understand: Output cost ≠ Selling price • Physical flows ≠ Cost flows (skipped with CA class) At the end of the period (accounting treatment for Inv left on hand) • Lower of cost or NRV • Inventory adjustments (additional) • Estimating Inventories (skipped with CA class) 06-C1: Determining Inventory Items 6-3 Classifying and Determining Inventory Learning Objective Discuss how to classify and determine inventory Classifying Inventory Manufacturing Company Merchandising Company One Classification:  Inventory • HELPFUL HINT Regardless of the classification, companies report all inventories under Current Assets on the statement of financial position 6-4 Three Classifications:  Raw Materials  Work in Process  Finished Goods LO 6-5 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 on Consignment Goods Damaged or Obsolete C1 6-5 6-6 Goods in Transit FOB Shipping Point Public Carrier Seller Buyer Ownership passes to the buyer here Public Carrier Seller FOB Destination Point Buyer C1 6-6 6-7 Goods on Consignment To hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods Merchandise is included in the inventory of the consignor – the owner of the inventory, not the consignee – the holder of the inventory C1 6-7 6-8 Goods Damaged or Obsolete Damaged or obsolete goods are not counted in inventory if they cannot be sold Cost should be reduced to net realizable value if they can be sold C1 6-8 06-C2: Determining Inventory Costs (input cost) 6-9 - 10 Determining Inventory Costs Include all expenditures necessary to bring an item to a salable condition and location Minus Discounts and Allowances Plus Import Duties Invoice Cost Plus Freight Plus Insurance Plus Storage C2 6-10 Lower-of-Cost-or-Net Realizable Value Illustration: Assume that Gao TV has the following lines of merchandise with costs and market values as indicated 6-36 LO END OF PERIOD ADJUSTMENTS Reconcile the physical amounts and recorded amounts of inventories for the situation below: END OF PERIOD ADJUSTMENTS GUIDING SOLUTION GUIDING SOLUTION PRACTICE END-OF-PERIOD ADJUSTMENTS FOR INVENTORY  Reconcile inventory for the following situation: Periodic system Purchasing and selling entries (Chap 5)  Prob 5.8A – p265, prob 5.6A Periodic inventory – cost flows/costing method/ output price  Specific identification  FIFO  Weighted average (ending average) - Moving average applied for Perpetual inventory system Moving average: each time purchases, calculate Average cost per unit Ending average: until end of period, calculate ACPU Inventory Costing Illustration – PERIODIC SYSTEM  Here is information about the mountain bike inventory of Trekking for the month of August Calculate COGS, ending inventory under different costing methods: FIFO/Weighted average/Specific indentification for August under periodic inventory systems Prepare part of Income statement till the gross profit Additional information:  Trekking’s internal documents reveal the following specific unit sales:  August 14 Sold bikes costing $91 each and 12 bikes costing $106 each  August 31 Sold bikes costing $91 each, bikes costing $106 each, 15 bikes costing $115 each, and bikes 45 costing $119 each Periodic inventory – cost flows PERIODIC SYSTEM  Calculation of Cost of Goods Sold: Beginning inventory Add: Purchases, net Goods available for sale Less: Ending inventory Cost of goods sold € 100,000 800,000 900,000 125,000 € 775,000 LO Periodic inventory – specific identification Periodic inventory – FIFO Periodic inventory – ending weighted average ... Classification:  Inventory • HELPFUL HINT Regardless of the classification, companies report all inventories under Current Assets on the statement of financial position 6-4 Three Classifications:... cost For recording prime entries in journals For calculating COGS and Ending Inventory Selling price For calculating Sales revenue 14 - 15 NOTES Physical flows Storekeeper controls /manages Cost... 6-11 - 12 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