ACCT 2113 1st Edition Lecture 6 Outline of Last Lecture II Recognition of Accounts Receivable A Credit sales B Receivables C Calculating Net revenues using discounts returns and allowances D Examples III Valuation of Accounts Receivable A Uncollectible accounts B Allowance Method C Bad Debt Expense D Accounts written of E Net Accounts Receivable F Aging Method IV Notes Receivable A Interest calculation B Collection of notes receivable C Uncollectible Accounts D Accrued Interest E Receivables Turnover Ratio F Percentage of credit sales method Outline of Current Lecture II Understanding Inventory and Cost of Goods Sold A Inventory B Merchandising company C Manufacturing company D Calculating Cost of goods E Inventory Cost Methods F Example III Recording Inventory Transactions A Perpetual vs Periodic Inventory Systems B Examples C Freight charges D Purchase discounts E Purchase returns These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute F Multiple step income statement IV Other Inventory Reporting Issues A Lower of cost or market Method LCM B Calculating the lower of cost or market C Inventory turnover ratio D Gross profit ratio E Examples F Period end adjustment G Inventory errors H Inventory amounts Current Lecture Chapter 6 Inventory and Cost of Goods Sold Inventory Includes items a company intends for sale to customers For example clothes at The Limited shoes at Payless ShoeSource building supplies at Home Depot and so on Also includes items that are not yet finished products For instance lumber at a cabinet manufacturer and rubber at a tire manufacturer is part of inventory because the firm will use them to make a finished product for sale to customers We report inventory as a current asset in the balance sheet an asset because it represents a valuable resource the company owns and current because the company expects to convert it to cash in the near term At the end of the period the amount the company reports for inventory is the cost of inventory not yet sold Part A Understanding Inventory and Cost of Goods Sold Many companies though earn revenues by selling inventory rather than a service Cost of the inventory that was sold during the period is known as Cost of goods sold Many companies earn revenues by selling inventory rather than a service These companies are either manufacturing or merchandising companies Inventory merchandise company Wholesaler AND Retailer Inventory Manufacturing company Raw material AND Work in progress AND Finished goods Merchandising Companies purchase inventories that are primarily in finished form for resale to customers These companies may assemble sort repackage redistribute store refrigerate deliver or install the inventory but they don t manufacture it They simply serve as intermediaries in the process of moving inventory from the manufacturer the company that actually makes the inventory to the end user Wholesalers resell inventory to retail companies or to professional users Retailers purchase inventory from manufacturers or wholesalers and then sell this inventory to end users Manufacturing Companies manufacture the inventories they sell rather than buying them in finished form from suppliers Manufacturers classify inventory into three categories 1 Raw materials inventory Includes the cost of components that will become part of the finished product but have not yet been used in production 2 Work in process inventory Refers to the products that have started the production process but are not yet complete at the end of the period 3 Finished goods inventory It includes the cost of the units that have been completed by the end of the period but not yet sold Types of Companies and Flow of Inventory Costs Inventory s journey begins when manufacturing companies purchase raw materials hire workers and incur manufacturing overhead during production Once the products are finished manufacturers normally pass inventories to merchandising companies whether wholesalers or retailers Merchandising companies then sell inventories to you the end user In some cases manufacturers may sell directly to end users Some companies provide both services and inventories to customers In this chapter we focus on merchandising companies both wholesalers and retailers Still most of the accounting principles and procedures discussed here also apply to manufacturing companies We focus on the financial reporting implications of inventory cost flows Calculating Cost of goods soldInventory represents the cost of inventory not sold while cost of goods sold represents the cost of inventory sold Also referred to as cost of sales cost of merchandise sold or cost of products sold The costs of beginning inventory plus additional purchases make up the cost of goods or inventory available for sale Relationship Between Inventory and Cost of Goods Sold The costs of beginning inventory plus the additional purchases during the year make up the cost of inventory cost of goods available for sale Remember that inventory represents the cost of inventory not sold while cost of goods sold represents the cost of inventory sold Thus we can see that the amount reported for inventory turns into the amount reported for cost of goods sold once the inventory is sold To this point we ve discussed the cost of inventory without considering how we determine that cost We do that now by considering four methods for inventory costing 1 Specific Identification 2 First In first Out FIFO 3 Last In first Out LIFO 4 Weighted average cost The specific identification method is the method you might think of as the most logical It matches or identifies each unit of inventory with its actual cost As you might imagine though the specific identification method is practicable only for companies selling unique expensive products For example an automobile has a unique serial number that we can match to an invoice identifying the actual purchase price Fine jewelry and pieces of art are other possibilities Specific identification works well in such cases However the specific identification method is practicable only for companies selling unique expensive products Specific identification would be very difficult for such merchandisers Although bar codes and RFID tags now make it possible to identify and track each unit of inventory the costs of doing so outweigh the benefits for multiple small inventory items For that reason