Chapter 6 Inventory Costs of Goods Sold Cash Cash Accounts payable Accounts Receivable Inventory Accounts Receivable Sales Revenue 6 1 Show to account for inventory Gross profit is the excess of sales revenue over costs of goods sold Sales discounts show as deductions for sales on financial statements Inventory is an asset JE Cash purchase of inventory Sales on account Cost of goods sold Cost of goods sold Inventory For Collections Perpetual Inventory System JE Purchase of inventory Inventory Sale Inventory purchase cost x percent sold costs of goods sold Cost of goods sold Collection on accounts receivable Accounts Receivable x percentage BS Current assets Inventory cost of goods sold IS Sales Revenue Costs of goods sold Gross profit Inventory at end Inventory cost of goods sold merchandise inventory Inventory becomes an expense when is delivered to customer 6 2 Apply and compare various inventory cost methods FIFO Inventory system Unit x unit cost total cost Accounts Receivable Sales Revenue Cost of goods sold Inventory Accounts Receivable Cash Inventory Beg sales LIFO Inventory system 2nd transaction 1st transaction to get that take final sales 2nd units Beg Inv pur COGS ending inventory Add all total cost COGS available The average cost method Unit x cost for all except sales Add units Add cost Total cost Total units cost per unit Total units Sales ending inventory units Ending inventory x cost per unit Average cost of ending inventory Average cost method Beg Inv Pur Qty Units Beg Inv Pur TC Costs of goods available Total units units of end inv on hand units sold Cost of goods available Totals units Average cost Average cost x units of end inv3 on hand end inv Cost of goods available end inv cost of goods sold FIFO Method Cost Units cost per unit Pur Cost per unit x units in end inv on hand ending inventory Total cost ending inventory COGS LIFO Method Beg Inv Cost per unit x units ending inv ending inventory Total cost ending inventory COGS IS Average Cost of goods sold Sales Revenue Cost of goods sold Gross profit Operating expenses Net Income Units sold x price per unit Sales Revenue Inventory Number of units x Cost per unit Subtotal cost Beg Pur Cost of goods available Number of units available Average cost per unit Units sold x Cost per unit Avg Cost COGS IS Sales Revenue COGS Gross profit Operating Expenses Net Income Total cost Total units Total units Total cost FIFO IS FIFO Method Beg Beg Pur Units Sales Revenue COGS Gross profit Operating Expenses Net Income Units sold x LIFO cost per unit pur price LIFO COGS Sales Revenue COGS Gross profit Operating Expenses Net Income Net income before taxes Average cost x tax rate taxes FIFO x tax rate taxes LIFO x tax rate taxes Inventory is recorded on the balance sheet Cost of goods sold is recorded on the income statement Get ACOGS Inventory at cost Inventory in market adjustment COGS Adjustment ACOGS LIFO generally associated with saving income taxes Specific unit cost is used to account for automobiles jewelry and art objects FIFO results in a cost of ending inventory that is close to the current cost of replacing the inventory FIFO maximizes reported income LIFO enables a company to buy high cost inventory at year end and thereby decrease reported income and income tax LIFO results in an odd measure of the cost of ending inventory Average cost provides a middle ground measure of ending inventory and cost of goods sold LIFO enables a company to keep reported income from dropping lower by liquidating older layers of inventory Applies to all four inventory methods writes inventory down when replacement cost drops below historical cost LIFO matches the most current cost of goods sold against sales revenue JE Inventory Accounts Receivable Sales of inv x on account Cash Sales of inv x cash Sales Revenue Cost of goods sold Inventory Accounts Payable Inventory BS Current assets IS Sales Revenue Cost of goods sold Gross profit Beg units Pur Units sold add sales End units FIFO Method for Inv and COGS Pur Unit x unit cost 2 transactions Balance sales x unit cost Add totals to get FIFO ending inv Cost of goods sold ending inventory Goods Available Goods Available ending inventory Cost of goods sold LIFO Method for Inv and COGS Purchase 1st sale earliest unit Earliest unit x balance unit cost ending inv balance Goods available ending inv bal COGS IS Sales revenue Costs of goods sold Gross profit Operating expenses Income before income tax Income tax expense Net Income Units Sold x Sales prices 2 transactions Add Sales Revenues IS Sales Revenue Cost of goods sold Gross Profit Operating expenses Income before income tax Income before income tax x income tax rate Income tax expense IS Sales Revenue Costs of goods sold Gross profit Operating expenses Income before income tax Income tax expense Net Income In a period of rising prices gross profit under FIFO will be higher than under LIFO 6 3 Explain and apply underlying GAAP for inventory When applying the lower of cost or market rule to inventory market generally means replacement cost During a period of rising prices the inventory method that will yield the highest net income and asset value is FIFO Application of the lower of cost or market rule often results in a lower inventory value Cost of goods available Ending inventory COGS Ending inventory COGS Beginning inventory Purchases Purchases Purchase returns and allowances freight in Net Purchases Beginning inventory Net Purchases ending inventory COGS 6 6 Analyze effects of inventory errors An overstatement of ending inventory in one period results in an understatement of net income of the next period Ending Inventory Overstated Original balance Amount of error Corrected balance COGS Overstated Original balance Amount of error Corrected balance Gross Profit Sales Revenue Corrected CGS Corrected Gross Profit
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