Slide 1Slide 2Slide 3Slide 4Slide 5Slide 6Determining Cost Of Goods On HandSlide 8Slide 9Slide 10Slide 11Slide 12Two Inventory Accounting SystemsBasis of Accounting for Inventories Periodic Cost Flow MethodsSlide 15Cost Of Goods SoldDetermining Cost Of PurchasesSlide 18The cost of goods available for sale is allocated betweenSlide 20Slide 21Slide 22Specific IdentificationSlide 24Slide 25Slide 26First-In, First-Out (FIFO)Slide 28Slide 29Slide 30Last-In, First-Out (LIFO)Slide 32Slide 33Slide 34Slide 35Slide 36Weighted AverageSlide 38Slide 39A company had the following inventory information for the month of May:Answer!Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Slide 50Slide 51Homework!Accounting 211Accounting 211Chapter 6Chapter 6InventoriesCHAPTER 6 INVENTORIESIn this chapter, we will learn to:1 Describe steps in determining inventory quantities2 Explain the basis of accounting for inventories and describe the inventory cost flow methods3 Explain the financial statements and the tax effects of each inventory cost flow method4 Explain the lower of cost or market basis of accounting for inventories5 Indicate the effects of inventory errors on the financial statements6 Compute and interpret inventory turnover•In the balance sheet of merchandising and manufacturing companies– inventory is a significant current asset•In the income statement–inventory is vital in determining results•Gross profit is determined by inventory– (Net sales less cost of goods sold) •watched by management, owners, and othersEFFECTS OF INVENTORYMerchandise inventory is: 1 Owned by the company 2 In a form ready for saleCHARACTERISTICS OF MERCHANDISE INVENTORY•Manufacturing inventories– may not yet be ready for sale•Classified into three categories:1 Finished goods ready for sale2 Work in processvarious stages of production(not completed)3 Raw materials components on hand waiting to be usedClassifying Inventory In A Manufacturing EnvironmentTo prepare financial statements, we must determine 1. the number of units in inventory by taking a physical inventory of goods on hand physical inventory by counting, weighing or measuring2. Who owns the goods (the owner or a consignee)Determining Inventory QuantitiesDetermining Cost Of Goods On Hand3. applying unit costs to the total units on hand for each item4. total the cost of each item of inventory to determine total cost of goods on handTaking A Physical InventoryInternal control principles for inventory: 1 Segregation of dutiescounting by employees who don’t have the custodial responsibility for the inventory2 Establishment of responsibilityeach counter should establish the authenticity of each inventory itemTaking A Physical Inventory3 Independent internal verificationsecond count by another employee4 Documentation procedurespre-numbered inventory tags 5 Independent internal verification designated supervisor checks all inventory items tags, no items have more than one tag•Goods in transit:included in the inventory of the party that has legal title to the goods•FOB (Free on Board) shipping point: ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller•FOB destination point:legal title to the goods remains with the seller until the goods reach the buyerOwnership Of Goods In TransitTerms Of SaleRemember…Consignment: the holder of the goods (the consignee) does not own the goods •ownership remains with the consignor of the goods until the goods are sold •consigned goods should be included in the consignor’s inventory not the consignee’s inventoryConsignee CompanyConsigned GoodsDo not include this item in inventoryTwo Inventory Accounting Systems1 Perpetualdetailed records cost of each item maintained cost of each item sold is determined when sale occurs2 Periodiccost of goods sold is determined at the end of accounting periodBasis of Accounting for InventoriesPeriodic Cost Flow Methods•Revenues from the sale of merchandise are recorded when sales are made in the same way as in a perpetual system but…•No calculation of cost of goods sold is made at the time of sale of the merchandise.•Physical inventories are taken at end of period to determine:–the cost of merchandise on hand–the cost of the goods sold during the periodAllocating Inventoriable Costs• Inventory costs in a periodic inventory system are:– allocated between ending inventory and cost of goods sold– allocation is made at the end of the accounting period1 the costs assignable to the ending inventory are determined2 the cost of the ending inventory is subtracted from the cost of goods available for sale to determine the cost of goods sold3 cost of goods sold is then deducted from sales revenues in accordance with the matching principle to get gross profitCost Of Goods SoldReviewPeriodic inventory systemThree steps are required:1. record purchases of merchandise2. determine the cost of goods purchased 3. determine the cost of goods on hand at the beginning and end of the accounting periodTo determine Cost of Goods Purchased:1 subtract contra purchase accounts of Purchases Discounts and Purchases Returns and Allowances from Purchases to get Net Purchases2 add Freight-in to Net PurchasesDetermining Cost Of PurchasesAllocation (Matching) Of Pool Of Costs $15,000 $105,000 $ 120,000The cost of goods available for sale is allocated between•a. beginning inventory and ending inventory•b. beginning inventory and cost of goods on hand.•c. ending inventory and cost of goods sold•d. beginning inventory and cost of goods purchased.The cost of goods available for sale is allocated between•a. beginning inventory and ending inventory.•b. beginning inventory and cost of goods on hand.•c. ending inventory and cost of goods sold•d. beginning inventory and cost of goods purchased.Using Actual Physical Flow Costing•Costing of the inventory is complicated because specific items of inventory on hand may have been purchased at different prices.•The specific identification method tracks the actual physical flow of the goods.•Each item of inventory is marked, tagged, or coded with its specific unit cost.•Items still in inventory at the end of the year are specifically costed to arrive at the total cost of the ending