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TAMU ACCT 209 - Inventories Continued
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ACCT 209 1nd Edition Lecture 7 Outline of Last Lecture I. The Accounting CycleII. Closing EntriesIII. Financial StatementsIV. Using the Financial StatementsV. Types of companiesVI. Inventory systemsVII. Purchasing Inventorya. ExampleVIII. Calculating Costs of goods solda. ExampleIX. Inventory Cost Flow methodsOutline of Current Lecture a. Example of Inventory Cost Flowb. Comparing inventory Cost Flow MethodsX. Other Inventory Issuesa. Example of Inventory ErrorsXI. Estimating ending inventory Current LectureExample: Inventory cost flow (valuation) methodsUnits Purchase price Total purchase per unit Beginning inventory 10 $ 5 $ 50Purchases:Oct 2 8 6 48Oct 5 5 9 45Oct 21 7 10 70GAFS 30These 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.$213Ending inventory (12)18Determine the dollar amount that will be assigned to the ending inventory and cost ofgoods sold using:a. weighted average methodWeighted average cost/unit:Total $ Goods Available for Sale (GAFS)/ Total # GAFS = 213/30 = 7.1Cost of goods sold (COGS) = Average cost/unit * (GAFS – Ending Inventory units) = 7.1 * 18 = $127.8Ending Inventory = Average Cost/Unit * Ending Inventory Units= 7.1 * 12 = $85.20b. FIFOCOGS:Units * Purchase price per unit = Total PriceBeginning : 10 * 5 = 50Oct 2 : 8 * 6 = 48Must add to: 18 98Ending Inventory:Units * Purchase price per unit = Total PriceOct 21 : 7 * 10 = 70Oct 5 : 5 * 9 = 45Must add to: 12 115Note both of these added will be equal to Total Purchase (115 + 98 = 213) c. LIFOCOGS:Units * Purchase price per unit = Total PriceOct 21: 7 * 10 = 70Oct 5 : 5 * 9 = 45Part of Oct. 2: 6 * 6 = 36Must add to: 18 151Ending Inventory: (EI)Units * Purchase price per unit = Total PriceRest of Oct. 2 : 2 * 6 = 12Beginning : 10 * 5 = 50Must add to: 12 62Note both of these added will be equal to Total Purchase (151 + 62 = 213)Consistency Principle: Once a Company picks a method, they need to stay with the same method.FIFO – Always expenses oldest costs; Most recent costs left in EILIFO – Always expenses most recent costs; Oldest costs left in EIThis means when costs are going up, COGS is going to be lower than EI in FIFO. The opposite is true when costs are going down.Comparing inventory cost flows methodsFIFO – Does a good job of reporting current cost on balance sheet (Most recent costs assigned to inventory). But older costs matched against revenue.LIFO – Does a good job of matching current cost against revenue on income statement. Potentially VERY outdated costs are reported on balance sheet for inventory; LIFO liquidationOther inventory issues (a) Errors – Usually in physical count- Consignment: another party owns it; you are merely selling it for them (Don’t count this in your inventory because you don’t own it)- If COGS is wrong then EI is wrong tooEffect of inventory errors on financial statements:- Year of event: Both EI and COGS wrong- Next year : Since Beginning inventory is wrong, COGS wrongExample Inventory ErrorsAggie Company’s accountant prepared the following partial income statement for the year ended December 31, 2011: Original: (Given) Corrected:Sales revenue $ 600 600Cost of goods sold:Beginning inventory $ 42 42+ Net purchases and freight 266 266Less ending inventory (62) (38)Cost of goods sold 246 270Gross profit $ 354 330However, the company’s accountant later learned that ending inventory was accidentally overstated by $24. (1) What is the correct amount for cost of goods sold and gross profit?COGS = $270Gross Profit = $330(2) How would the error described above affect Aggie Company’s cost of goods sold and gross profit for 2012, if the error is not discovered and corrected?Beginning Inventory This Year Next YearNet Purchases $Goods Available for SaleEnding Inventory $Cost of Goods SoldCOGS is understated while gross profit is over stated(b) Lost/stolen items and inventory shrinkage- Periodic System: Physical count determines # of units left - > # Sodl; All units not on handare assumes to have been sold- Perpetual System: More control; Can compare inventory record with physical count; “Normal” is included in COGS, Abnormally high then there was “Inventory loss”(c) Lower of cost or market- Conservative principle: Report the lower cost betweenCost = What we paid for the inventoryMarket = Current replacement costsWrite down inventory, inventory loss- Periodic and perpetual should have annual inventory countNote: Do not worry about retail method (Can omit on homework)(d) Estimating ending inventory May be necessary fora. interim accounting periods, when cost of taking physical inventory is too highb. cases of inventory loss, due to factors such as theft, fire, or other casualtyExample: Gross profit method of estimating ending inventoryDoyal Banana Company owns a warehouse in Houston, Texas. The warehouse is located near railroad tracks to allow for easy access to shipping. Recently, a traveling circus was traveling by train to their winter home in Florida when the train derailed. Fortunately there were no fatalities, but the car that housed the circus’s monkeys was damaged and all of the monkeys escaped. They then broke into the Doyal’s Warehouse and ate the entire contents.Doyal has the following information available:Beginning inventory $ 400Purchases 900Sales to date $1,600 Last year, Doyal reported sales of $7,000 and gross profit of $2,100. Estimate the dollar value ofthe inventory destroyed by the monkeys.GP % = GP/ Sales = 2100/ 7000 = 30%Estimate GP = .30 * 1600 = 480Sales 1600- COGS XGP 480Solve for x; x = 1120 (Estimate)Beginning Inventory 400Net Purchases 900Goods Available for Sale 1300Ending Inventory XCost of Goods Sold 1120Solve for x; x = 180Using inventory information – Measures of efficiency and effectiveness in inventory managementInventory turnoverCOGS / Average Inv = COGS / [(Beginning Inv + End Inv)/2]Days’ sales in inventoryAvg Inv /


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