Class 12 Chapter 7 Inventories and cost of goods soldFeedbackExpectationsReporting and Interpreting Cost of Goods Sold and InventoryInventory flows-merchandiserInventory flows - MerchandiserInventory and Cost of Goods SoldInventory Flows - ManufacturerInventories: The issuesThe issues: ExampleTwo Approaches to Inventory Record KeepingPerpetual & Periodic Inventory SystemsSimplifying AssumptionsSlide 14Measuring Cost of PurchasesSlide 16Slide 17Specific identificationSpecific IdentificationInventory Cost Flow AssumptionsInventory Costing MethodsWeighted-AverageSlide 23Slide 24FIFO: First-In, First-OutPowerPoint PresentationSlide 27Slide 28Slide 29Slide 30Slide 31Slide 32LIFO: Last-In, First-OutSlide 34Slide 35Slide 36Slide 37Slide 38SummarySummary - Cost Flow AssumptionsSlide 41Slide 42Impact of LIFO/FIFO ChoicePractice Problem 1Practice Problem 1, cont.PP2Slide 47Next Class1Class 12Chapter 7 Inventories and cost of goods soldAccounting 2610Xiumin Martin2/21/2013 & 2/26/2013FeedbackTelling us what is most relevant for exams and quizzes.Explaining applications of principles in problems.If you ask if we have any questions, please wait 5-10 seconds.2ExpectationsKnow how to use periodic inventory system to calculate cost of goods sold and ending inventoryKnow how to account for purchasesKnow how to use the three costing methods based on periodic inventory system to calculate cost of goods sold and ending inventory34Reporting and Interpreting Cost of Goods Sold and InventoryInventoryStock of goods held by a firm to be sold or further processed and then sold in the ordinary course of businessInventory and cost of goods soldTypes of InventoryMerchandiser vs. manufacturer5Inventory flows-merchandiser6Inventory flows - MerchandiserBeginningInventoryBeginningInventoryPurchasesfor the PeriodPurchasesfor the PeriodEnding Inventory(Balance Sheet)Ending Inventory(Balance Sheet)Goods availablefor SaleGoods availablefor SaleGoods Sold(Income Statement)Goods Sold(Income Statement)2500 lb sugar5500 lb sugar8000 lb sugar2000 lb sugar6000 lb sugar7Inventory and Cost of Goods SoldBeginningInventoryBeginningInventoryPurchasesfor the PeriodPurchasesfor the PeriodEnding Inventory(Balance Sheet)Ending Inventory(Balance Sheet)Goods availablefor SaleGoods availablefor SaleCost of Goods Sold(Income Statement)Cost of Goods Sold(Income Statement)Beginning inventory + Purchases – Ending inventory = cost goods soldBeginning inventory + Purchases – Ending inventory = cost goods soldBeginning inventory + Purchases – cost of goods sold = Ending inventory Beginning inventory + Purchases – cost of goods sold = Ending inventory Accountants convert the quantities into Dollar amounts and then allocate theDollar amounts between ending inventory and cost of goods sold Accountants convert the quantities into Dollar amounts and then allocate theDollar amounts between ending inventory and cost of goods sold 2500 lb sugar = $ ??5500 lb sugar = $ ??8000 lb sugar= $ ??2000 lb sugar = $ ??6000 lb sugar = $ ??8Inventory Flows - ManufacturerCost of goods soldInventory on the balance sheetExpense on the income statementWork in process inventoryRaw materials inventoryDirect labor incurredFactory overhead incurredRaw materials purchasesFinished goods inventoryPurchasing and production activities9Inventories: The issuesProblem 1Keeping track of inventories (quantities and $ amounts)Problem 2Measuring the costs of purchasesProblem 3Measuring costs of goods sold and ending inventory10The issues: ExampleA company buys and then sells identical TV’s. During the year the following transactions took place:Problem 1: Keep trackProblem 2: Measure purchasesProblem 3: EI and COGS11Two Approaches to Inventory Record KeepingPerpetual SystemKeeps a running (“perpetual”) balance of inventoriesTracks inventories and cost of goods sold on a day-to-day basisDebit COGS expense each time a sale is madePeriodic SystemDoes not keep a running balance of inventoriesCost of goods sold and inventory updated when a physical inventory count is takenDebit COGS expense at the end of the period12Perpetual & Periodic Inventory SystemsPeriodic systemBeginning inventory + Purchases – Ending inventory = cost goods sold (known) (known) (counted & costed) (solved for)Periodic systemBeginning inventory + Purchases – Ending inventory = cost goods sold (known) (known) (counted & costed) (solved for)Perpetual systemBeginning inventory + Purchases – Withdrawls = Ending Inventory (known) (known) (recorded) (solved for)Perpetual systemBeginning inventory + Purchases – Withdrawls = Ending Inventory (known) (known) (recorded) (solved for)13Simplifying AssumptionsIn these example:Focus on merchandisersFocus on periodic inventory systemsBeginning Inventory $10,000Plus: Purchases 12,000Goods Available for Sale 22,000Less: Ending Inventory 11,500Cost of Goods Sold $10,500What gets includedin cost?How is the $ amountof ending inventorycomputed?14Inventories: The issuesProblem 1Keeping track of inventories (quantities and $ amounts)Problem 2Measuring the costs of purchasesProblem 3Measuring costs of good sold and ending inventory15Measuring Cost of PurchasesGuided by the historical cost principle: The initial cost of inventory is what we paid for it. We also include any costs (either direct or indirect) incurred in bringing an article to salable condition and location:TransportationSetup (inspection, preparation costs)subtractDiscounts16Inventories: The issuesProblem 1Keeping track of quantitiesProblem 2Measuring the costs of purchasesProblem 3Measuring costs of good sold and ending inventoryCost flow assumptions needed17The issues: ExampleA company buys and then sells identical TV’s. During the year the following transactions took place:Problem 1: track quantitiesProblem 2: Measure purchasesProblem 3: EI and COGS18Specific identificationSuppose that we could specifically identify which TV was sold (because they are different models):TV sold was from purchase 119Specific IdentificationAdvantages“Perfect” match of expenses to related revenuesOften used when unit costs high, volumes low and products easily differentiatedDisadvantagesCostly to administer when volume is
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