Intermediate accounting 17e stice skousen cengage chapter 09

Stice | Stice | Skousen Intermediate Accounting,17E Inventory and Cost of Goods Sold PowerPoint presented by: Douglas Cloud Professor Emeritus of Accounting, Pepperdine University © 2010 Cengage Learning What Is Inventory? • Inventory designates goods held for sale in the normal course of business or, for a manufacturer, also includes goods in production • For a manufacturing firm, a broad array of production costs is included as part of the cost of inventory • The terms raw materials, work in process, and finished goods refer to the inventories of a manufacturing enterprise 9-2 Work in Process • Work in Process (WIP) consists of materials partly processed and requiring further work before they can be sold • Work in Process includes three cost elements Direct materials Direct labor Manufacturing overhead 9-3 Work in Process Direct materials refers the cost of materials directly identified with goods in production Direct labor refers to the cost of labor directly identified with goods in production Manufacturing overhead refers to the portion of factory overhead assignable to goods in production 9-4 Finished Goods Finished goods are the manufactured products awaiting sale 9-5 Inventory Systems Two types of inventory systems that keep track of how much inventory has been sold and at what price are: • Periodic system—requires a physical count of the inventory periodically, and at the point of sale only records the sale price • Perpetual system—at point of sale records selling price and type of item sold Example: a bar code scanning system 9-6 Differences in Recording The following transactions occurred during the period for CyBorg, Inc Beginning inventory @ $10 Purchases during the period @ $10 Sales during the period @ $15 Ending inventory (physical) @ $10 50 units $ 500 300 units 3,000 275 units 4,125 70 units 700 9-7 Differences in Recording Periodic PeriodicInventory Inventory System System To record purchases during the period: Purchases Accounts Payable 3,000 3,000 Accounts Receivable Sales 4,125 4,125 To record sales during the period: 9-8 Differences in Recording Perpetual PerpetualInventory InventorySystem System To record purchases during the period: Inventory Accounts Payable 3,000 To record sales during the period: 3,000 Accounts Receivable Sales 4,125 Cost of Goods Sold Inventory 275 units @ $10 2,750 4,125 2,750 9-9 Differences in Recording The cost of goods sold in the CyBorg example is computed as follows: 9-10 Dollar-Value LIFO To determine if a new LIFO layer was added, we need to find out what the value of the beginning inventory would be at ending prices 9-76 Dollar-Value LIFO After adjusting for price increases during the year, we can see that the dollar value of inventory increased 9-77 Dollar-Value LIFO Finally, dollar-value LIFO ending inventory is computed as follows: 9-78 Dollar-Value LIFO Retail Method The following is the LIFO retail layer data for Miracle Max Department Store as of December 31 9-79 Dollar-Value LIFO Retail Method Assume that the 2011 year-end price index is 1.08 9-80 Dollar-Value LIFO Retail Method 9-81 Purchase Commitments • Extreme fluctuations in the price of inventory purchases can expose a company to excessive risk • Of the different ways to manage this risk, the simplest is a purchase commitment that locks in the inventory purchase price in advance 9-82 Purchase Commitments Rollins Oat Company entered into a purchase commitment on November 1, 2010, for 100,000 bushes of wheat at $3.40 per bushel to be delivered on March 2011 At the end of 2010, the market price for wheat had dropped to $3.20 per bushel 9-83 Purchase Commitments 2010 Dec 31Loss on Purchase Commitments Estimated Loss on Purchase Commitments 20,000 20,000 2011 (100,000 bushels × $0.20 per bushel) Mar 31 Estimated Loss on Purchase Commitments Purchases Accounts Payable 340,000 20,000 320,000 9-84 Foreign Currency Inventory Transactions On November 1, 2010, Washington Company purchased inventory from Swiss Company and the invoice was denominated in Swiss francs with a purchase price of 50,000 francs At the time, the spot rate was francs per U.S dollar 9-85 Foreign Currency Inventory Transactions Washington Company would make the following journal entry to record the purchase 2010 Nov Inventory Accounts Payable (fc) 10,000 10,000 (50,000 francs/5 = $10,000) 9-86 Foreign Currency Inventory Transactions Assume the spot rate is 4.7 francs per U.S dollar on February 1, 2011 2011 Feb Accounts Payable (fc) Exchange Loss Cash 10,638 10,000 638 $50,000/4.7 9-87 Foreign Currency Inventory Transactions Assume the spot rate is 5.1 francs per U.S dollar on February 1, 2011 2011 Feb Accounts Payable (fc) Exchange Gain 196 Cash 9,804 10,000 $50,000/5.1 9-88 Foreign Currency Inventory Transactions If the spot rate on December 31, 2010 is 4.8 francs per dollar, the following adjusting entry is needed: 2010 Dec 31 Exchange Loss Accounts Payable (fc) 417 417 ($50,000/4.8) − $10,000 9-89 Foreign Currency Inventory Transactions On February 1, 2011, the spot rte is 4.7 francs per dollar 2011 Feb Accounts Payable (fc) Exchange Loss Cash 10,638 10,417 221 $50,000/4.7 9-90