Acct 230 1st Edition Lecture 18Outline of Last Lecture I. Notes ReceivableOutline of Current Lecture II. Inventory and Cost of Goods Solda. Understanding Inventory and Cost of Goods Sold Current LectureIII. Understanding Inventory and Cost of Goods Sold a. Trace the flow of inventory costs from manufacturing companies to merchandising companiesi. Many companies, earn revenues by selling inventory rather than a service. These companies are either manufacturing or merchandising companies. ii. Merchandising Companies:1. Merchandising companies purchase inventories that are primarily in finished form for resale to customers. 2. 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.iii. Manufacturing Companies1. These companies manufacture the inventories they sell, ratherthan buying them in finished form from suppliers.2. Manufacturers classify inventory into three categories:3. Raw materials inventory: Includes the cost of components thatwill become part of the finished product but have not yet beenused in production. 4. Work-in-process inventory: Refers to the products that have started the production process but are not yet complete at theend of the period.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.5. Finished goods inventory: It includes the cost of the units that have been completed by the end of the period but not yet sold. iv. Inventory Paths1. Inventory’s journey begins when manufacturing companies purchase raw materials, hire workers, and incur manufacturingoverhead 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. 2. Some companies provide both services and inventories to customers. 3. 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 don’t attempt to address all theunique problems of accumulating the direct costs of raw materials and labor and allocating manufacturing overhead. We leave those details for managerial and cost accounting courses. Instead, we focus on the financial reporting implications of inventory cost flows.b. Calculate cost of goods soldi. Inventory represents the cost of inventory not sold, while cost of goods sold represents the cost of inventory sold.ii. Also referred to as cost of sales, cost of merchandise sold, or cost of products sold.iii. The costs of beginning inventory plus additional purchases make up the cost of goods (or inventory) available for sale.iv. The costs of beginning inventory plus the additional purchases during the year make up the cost of inventory (cost of goods) available for sale.v. 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.c. Determine the cost of goods sold and ending inventory using different inventory cost methodsi. 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. First-In, first-Out (FIFO) a. We assume that all units from beginning inventory (100units) and the April 25 purchase (300 units) were sold. For the final 400 units sold, we split the October 19 purchase of 600 units into two groups—400 units assumed sold and 200 units assumed not sold. We calculate cost of goods sold as the units of inventory assumed sold times their respective unit costs. [That is:(100 × $7) + (300 × $9) + (400 × $11) in our example.] Similarly, ending inventory equals the units assumed not sold times their respective unit costs (200 × $11 in our example).b. The amount of cost of goods sold Mario reports in the income statement will be $7,800 . The amount of ending inventory in the balance sheet will be $2,200.c. You may have realized that we don’t actually need to directly calculate both cost of goods sold and inventory. Once we calculate one, the other is apparent. Because the two amounts always add up to the cost of goods available for sale ($10,000 in our example), knowing either amount allows us to subtractto find the other:d. Realize, too, that the amounts reported for ending inventory and cost of goods sold do not represent the actual cost of inventory sold and not sold. e. Companies are allowed to report inventory costs by assuming which units of inventory are sold and not sold, even if this does not match the actual flow.2. Last-In, first-Out (LIFO) a. Using the last-in, first-out (LIFO) method , we assume that the last units purchased (the last in) are the first ones sold (the first out).b. If Mario sold 800 units, we assume all the 600 units purchased on October 19 (the last purchase) were sold,along with 200 units from the April 25 purchase. That leaves 100 of the units from the April 25 purchase andall 100 units from beginning inventory assumed to remain in ending inventory (not sold).c. Our calculations of cost of goods sold and ending inventory for the LIFO method are shown in the slide.3. Weighted-average cost.a. Both cost of goods sold and ending inventory consist ofa random mixture of all the goods available for sale. b. Each unit of inventory has a cost equal to the weighted-average cost of all inventory items. 4. Specific Identification a. 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