Financial accounting 12th warren duchac chapter 07

Inventories Chapter Student Version These Theseslides slidesshould shouldbe beviewed viewedusing usingthe thepresentation presentation mode mode(click (clickthe the icon icontotostart startpresentation) presentation) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Prepared by: C Douglas Cloud Professor Emeritus of Accounting Pepperdine University Learning Objective 1 Describe the importance of control over inventory © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Control of Inventory  Two primary objectives of control over inventory are: Safeguarding the inventory from damage or theft Reporting inventory in the financial statements © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Safeguarding Inventory  The purchase order authorizes the purchase of the inventory from an approved vendor  The receiving report establishes an initial record of the receipt of the  inventory Recording inventory using a perpetual inventory system is also an effective means of control The amount of inventory is always available in the subsidiary inventory ledger © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Safeguarding Inventory  Controls for safeguarding inventory should include security measures to prevent damage and customer or employee theft Some examples of security measures include the following:  Storing inventory in areas that are restricted to only authorized employees  Locking high-priced inventory in cabinets  Using two-way mirrors, cameras, security tags, and guards © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Reporting Inventory  A physical inventory or count of inventory should be taken near yearend to make sure that the quantity of inventory reported in the financial statements is accurate © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Objective  Describe the importance of control over inventories  Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Cost Flow Assumptions © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Cost Flow Assumptions Assume that one unit is sold on May 30 for $20 Depending upon which unit was sold, the gross profit varies from $11 to $6 as shown below: © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Cost Flow Assumptions  Under the specific identification inventory cost flow method, the unit sold is identified with a specific purchase © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Reporting Merchandise Inventory  Cost is the primary basis for valuing and reporting inventories in the financial statements However, inventory may be valued at other than cost in the following cases:  The cost of replacing items in inventory is below the recorded cost  The inventory cannot be sold at normal prices due to imperfections, style changes, or other causes © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Valuation at Lower of Cost or Market  Market, as used in lower-of-cost-ormarket method, is the cost to replace the merchandise on the inventory  date Cost and replacement cost can be determined for the following:  Each item in the inventory  Each major class or category of inventory  Total inventory as a whole © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Valuation at Net Realizable Value  Merchandise that is out of date, spoiled, or damaged should be written down to its net realizable value This is the estimated selling price less any direct costs of disposal, such as sales commissions or special advertising © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Valuation at Net Realizable Value  Assume the following data about an item of damaged merchandise: Original cost Estimated selling price Selling expenses $1,000 800 150  The merchandise should be valued at its net realizable value of $650 ($800 – $150) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Merchandise Inventory on the Balance Sheet  Merchandise inventory is usually presented in the Current Assets section of the balance sheet, following receivables © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Merchandise Inventory on the Balance Sheet  The method of determining the cost of the inventory (FIFO, LIFO, or weighted average) and the method of valuing the inventory (cost or the lower of cost or market) should be shown © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Errors  Some reasons that inventory errors may occur include the following:  Physical inventory on hand was miscounted  Costs were incorrectly assigned to inventory  Inventory in transit was incorrectly included or excluded from inventory  Consigned inventory was incorrectly included or excluded from inventory © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Errors  Inventory errors often arise from consigned inventory Manufacturers sometimes ship merchandise to retailers who act as the manufacturer’s agent © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Errors  The manufacturer, called the consignor, retains title until the goods are sold Such merchandise is said to be shipped on consignment to the retailer, called the consignee © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Objective Compare and contrast the use of the three inventory costing method Describe and illustrate the reporting of merchandise inventory in the financial statements Describe and illustrate the inventory turnover and the number of days’ sales in inventory in analyzing the efficiency and effectiveness of inventory management © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Turnover  Inventory turnover measures the relationship between cost of merchandise sold and the amount of inventory carried during the period It is calculated as follows: Cost of Merchandise Sold Inventory Turnover = Average Inventory © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Turnover  Inventory turnover for Best Buy is shown below (in millions) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Turnover  The number of days’ sales in inventory measures the length of time it takes to acquire, sell, and replace the inventory It is computed as follows: Average Inventory Number of Days’ = Sales in Inventory Average Daily Cost of Merchandise Sold © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Turnover  The number of days’ sales in inventory for Best Buy is computed below (in millions) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Inventories The End Student Version Prepared by: C Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ... over inventory are: Safeguarding the inventory from damage or theft Reporting inventory in the financial statements © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or... inventory should be taken near yearend to make sure that the quantity of inventory reported in the financial statements is accurate © 2011 Cengage Learning All Rights Reserved May not be copied,... is considered the first batch of merchandise sold The physical flow does not have to match the accounting method chosen This time we will be examining the periodic inventory system © 2011 Cengage