Slide 1Slide 2CHAPTER OUTLINESlide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Slide 35Slide 36Slide 37Slide 38Slide 39Slide 40Slide 416-16-2Reporting and Analyzing InventoryKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition66-3CHAPTER OUTLINEDiscuss how to classify and determineinventory.1Apply inventory cost flow methods and discuss their financial effects.2LEARNING OBJECTIVESExplain the statement presentation and analysis of inventory.36-4One Classification:Merchandise InventoryThree Classifications:Raw MaterialsWork in ProcessFinished GoodsMerchandising CompanyManufacturing Company▼ HELPFUL HINT Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.LEARNING OBJECTIVEDiscuss how to classify and determine inventory.1LO 16-5Physical Inventory taken for two reasons:Perpetual System1. Check accuracy of inventory records.2. Determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft.Periodic System3. Determine the inventory on hand.4. Determine the cost of goods sold for the period.DETERMINING INVENTORY QUANTITIESLO 16-6Involves counting, weighing, or measuring each kind of inventory on hand.Taken,when the business is closed or business is slow.at the end of the accounting period.Taking a Physical InventoryLO 16-7GOODS IN TRANSITPurchased goods not yet received.Sold goods not yet delivered.Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of sale.Determining Ownership of GoodsLO 16-8Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.Ownership of the goods remains with the seller until the goods reach the buyer.Freight costs incurred by the seller are an operating expense.Determining Ownership of GoodsILLUSTRATION 6-2Terms of saleLO 16-9Consigned GoodsTo hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of the goods.Many car, boat, and antique dealers sell goods on consignment. Why? Determining Ownership of GoodsLO 16-10Inventory is accounted for at cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale.Unit costs are applied to quantities to determine the total cost of the inventory and the cost of goods sold using the following costing methods:►Specific identification►First-in, first-out (FIFO)►Last-in, first-out (LIFO)►Average-costCost Flow AssumptionsLEARNING OBJECTIVEApply inventory cost flow methods and discuss their financial effects.2LO 26-11Illustration: Crivitz TV Company purchases three identical 50-inch TVs on different dates at costs of $700, $750, and $800. During the year Crivitz sold two sets at $1,200 each. These facts are summarized below.SPECIFIC IDENTIFICATIONILLUSTRATION 6-3Data for inventory costing exampleLO 26-12If Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold is $1,500 ($700 + $800), and its ending inventory is $750.SPECIFIC IDENTIFICATIONILLUSTRATION 6-4Specific identification methodLO 26-13Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.Practice is relatively rare.Most companies make assumptions (cost flow assumptions) about which units were sold.SPECIFIC IDENTIFICATIONLO 26-14Illustration 6-12Use of cost flow methods in major U.S. companiesCost flow assumption does not need to be consistent with the physical movement of goodsCOST FLOW ASSUMPTIONSLO 26-15Illustration: Data for Houston Electronics’ Astro condensers.(Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods SoldCOST FLOW ASSUMPTIONSILLUSTRATION 6-5Data for Houston ElectronicsLO 26-16Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold.Often parallels actual physical flow of merchandise.Companies determine the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed.First-In, First-Out (FIFO)LO 26-17First-In, First-Out (FIFO)ILLUSTRATION 6-6Allocation of costs—FIFO methodLO 26-18▼ HELPFUL HINT Another way of thinking about the calculation of FIFO ending inventory is the LISH assumption—last in still here.First-In, First-Out (FIFO)LO 26-19Costs of the latest goods purchased are the first to be recognized in determining cost of goods sold.Seldom coincides with actual physical flow of merchandise.Exceptions include goods stored in piles, such as coal or hay.Last-In, First-Out (LIFO)LO 26-20Last-In, First-Out (LIFO)ILLUSTRATION 6-8Allocation of costs—LIFO methodLO 26-21▼ HELPFUL HINTAnother way of thinking about the calculation of LIFO ending inventory is the FISH assumption—first in still here.Last-In, First-Out (LIFO)ILLUSTRATION 6-8Allocation of costs—LIFO methodLO 26-22Allocates cost of goods available for sale on the basis of weighted-average unit cost incurred.Applies weighted-average unit cost to the units on hand to determine cost of the ending inventory.Average-CostLO 26-23Average-CostILLUSTRATION 6-11Allocation of costs—average-cost methodLO 26-24Average-CostILLUSTRATION 6-11Allocation of costs—average-cost methodLO 26-25FINANCIAL STATEMENT AND TAX EFFECTSILLUSTRATION 6-13Comparative effects of cost flow methodsLO 26-26In periods of changing prices, the cost flow assumption can have significant impacts both on income and on evaluations of income, such as the following.1. In a period of inflation, FIFO produces a higher net income because lower unit costs of the first units purchased are matched against revenue.2. In a period of inflation, LIFO produces a lower net income because higher unit costs of the last goods purchased are matched against revenue. 3. If prices are falling, the results from the use of FIFO and LIFO are reversed. FIFO will report the lowest net income and LIFO the highest. 4. Regardless of whether prices are rising or falling, average-cost produces net income between FIFO and LIFO.Income Statement EffectsLO 26-27Method should be used consistently,