Ch.

7 Synchronotes for

Fundamentals of Financial Accounting, 3e

by Phillips/Libby/Libby

Chapter 7 Reporting and Interpreting Inventories and Cost of Goods Sold Inventory Management Decisions: he pri!ary goals of inventory !anagers are to" 1. #aintain a s$fficient %$antity to !eet c$sto!ers& needs '. (ns$re %$ality !eets c$sto!ers& e)pectations and co!pany standards *. #ini!i+e the costs of ac%$iring and carrying the inventory Types of Inventory Merchandisers 6$y finished goods Sell finished goods #erchandise Inventory Manufacturers 6$y ra. !aterials Prod$ce and sell finished goods Ra. #aterials 7or8 in Process 9inished Goods eporting 7aiting to be processed Partially co!plete ,.aiting sale

Balance Sheet and Income Statement

!ost of "oods Sold #$uation: BI % & ' !"S ( #I ,!erican (agle -$tfitters& beginning inventory .as /01233. 4$ring the period1 the co!pany p$rchased inventory for /131'33. he cost of goods sold for the period is /51333. Co!p$te the ending inventory.
Cost of Goods #o!d Ca!cu!ation Beginning Inventory $ 4,800 Purchases 10,200 Cost of Goods vai!a"!e for #a!e 1$,000 Cost of Goods so!d &,000 'nding Inventory $ (,000

Ch. 7 - p. 1

+ = % =

Inventory !osting Methods 1. Specific Identification '. 9irst-in1 first-o$t *. Last-in1 first-o$t 0. 7eighted average

Ch. 7 - p. 10

Consider the follo.ing infor!ation"

)ay )ay )ay )ay * $ ( 8 Purchased 1 unit for $+0 Purchased 1 ,ore unit for $+$ Purchased 1 ,ore unit for $&$ #o!d 2 units for $12$ each

Specific Identification: his !ethod individ$ally identifies and records the cost of each ite! sold as part of cost of goods sold. If the ite!s sold .ere identified as the ones that cost /73 and /5:1 the total cost of those ite!s ;/73 < 5: = /1>:? .o$ld be reported as Cost of Goods Sold. he cost of the re!aining ite! ;/7:? .o$ld be reported as Inventory on the balance sheet at the end of the period.

Summary
.I./ /!dest cost 3e4est cost 0I./ 3e4est cost /!dest cost -eighted verage verage cost verage cost

Cost of Goods so!d 1Inco,e #tate,ent2 Inventory 1Ba!ance sheet2

Inventory !ost Flo) !omputations

Ch. 7 - p. 10

Financial Statement #ffects

-eighted 'ffects on the Inco,e #tate,ent .I./ 0I./ verage #a!es $ $2$ $ $2$ $ $2$ Cost of Goods #o!d 2+0 *00 28+ Gross Profit 2$$ 22$ 2*8 /5erating '65enses 12$ 12$ 12$ Inco,e fro, /5erations 1*0 100 11* /ther 7evenue 1'65enses2 20 20 20 Inco,e "efore Inco,e 8a6 '65ense 1$0 120 1** Inco,e 8a6 '65ense 1*092 4$ *( 40 3et Inco,e $ 10$ $ 84 $ &* 'ffects on the Ba!ance #heet Inventory
'ffects of Increasing Costs on the .inancia! #tate,ents .I./ :igher 0o4er 0I./ 0o4er :igher

Inventory 1Ba!ance sheet2 Cost of Goods #o!d 1Inco,e #tate,ent2

'ffects of ;ecreasing Costs on the .inancia! #tate,ents .I./ 0o4er :igher 0I./ :igher 0o4er

Inventory 1Ba!ance sheet2 Cost of Goods #o!d 1Inco,e #tate,ent2

140 $

110 $

12*

Advantages of Methods 7eighted ,verage - S!oothes o$t price changes. 9irst-In1 9irst--$t - (nding inventory appro)i!ates c$rrent replace!ent cost. Last-In1 9irst--$t - 6etter !atches c$rrent costs in cost of goods sold .ith reven$es. Ta* Implications and !ash Flo) #ffects Ch. 7 - p. 10

'ffects on the Inco,e #tate,ent #a!es Cost of Goods #o!d Gross Profit /5erating '65enses Inco,e fro, /5erations /ther 7evenue 1'65ense s2 Inco,e "efore Inco,e 8a6 '6 5ense Inco,e 8a6 '65ense 1*092 3et Inco,e 'ffects on the Ba!ance #heet Inventory

.I./ $ $2$ 2+0 2$$ 12$ 1*0 20 1$0 4$ $ 10$

0I./ $ $2$ *00 22$ 12$ 100 20 120 *( $ 84

-eighted verage $ $2$ 28+ 2*8 12$ 11* 20 1** 40 $ &*

140

110

12*

+o)er of !ost or Mar,et he val$e of inventory can fall belo. its recorded cost for t.o reasons" 1. it&s easily replaced by identical goods at a lo.er cost1 or '. it&s beco!e o$tdated or da!aged. 7hen the val$e of inventory falls belo. its recorded cost1 the a!o$nt recorded for inventory is .ritten do.n to its lo.er !ar8et val$e. his is 8no.n as the lo.er of cost or !ar8et ;LC#? r$le.

ssets Inventory '1$,000

0ia"i!ities

#toc<ho!ders= '>uity Cost of Goods so!d 1+'2 '1$,000

Inventory &urchases ,!erican (agle -$tfitters p$rchases /131:33 of vintage @eans on credit.

Transportation !ost ,!erican (agle pays /033 cash to a tr$c8er .ho delivers the /131:33 of vintage @eans to one of its stores.

Ch. 7 - p. 10

&urchase eturns and Allo)ances ,!erican (agle ret$rned so!e of the vintage @eans to the s$pplier and received a /:33 red$ction in the balance o.ed.

&urchase Discounts ,!erican (agle&s vintage @eans p$rchase for /131:33 had ter!s of '/131 n/*3. Recall that ,!erican (agle ret$rned inventory costing /:33 and received a /:33 red$ction in its ,cco$nts Payable. ,!erican (agle paid .ithin the disco$nt period.

Summary of Inventory Transactions

Inventory Turnover Analysis

Ch. 7 - p. 10

!omparison to Benchmar,s

&erpetual Inventory System his is the sa!e infor!ation that .e $sed earlier in the chapter to ill$strate a periodic inventory syste!. he only difference is that .e have ass$!ed the sales occ$rred on -ctober 01 prior to the final inventory p$rchase.
;ate /ct 1 /ct * /ct 4 /ct $ ;escri5tion Beginning Inventory Purchase #a!es Purchase 'nding Inventory ? of @nits 10 *0 1*$2 10 1$ Cost 5er @nit + 8 8o ca!cu!ate 10 8o ca!cu!ate $ 8ota! Cost +0 240 8o ca!cu!ate 100 8o ca!cu!ate

FIF- .First/in, First/-ut0

+IF- .+ast/in, First/-ut0

Ch. 7 - p. 10

1eighted Average !ost

Financial Statement #ffects S$!!ary of Perpet$al Inventory Syste! Cost 9lo. ,ss$!ptions on 9inancial State!ents

The #ffects of #rrors in #nding Inventory ,ss$!e that (nding Inventory .as overstated in '335 by /131333 d$e to an error that .as not discovered $ntil '313.
200& Beginning Inventory ccurate + Purchases ccurate /verstated $10,000 ' 'nding Inventory = effects Cost of Goods @nderstated $10,000 the of the#o!d '335 (nding Inventory (rror
2010

Ao. let&s e)a!ine

on '313.

Ch. 7 - p. 10

Beginning Inventory + Purchases ' 'nding Inventory = Cost of Goods #o!d

/verstated $10,000 ccurate ccurate /verstated $10,000

ecording Inventory Transactions in a &eriodic System , local cell phone dealer stoc8s and sells one ite!1 the #- -R,BR phone. events occ$rred in the past year"
AanB 1 5rB 14 3ovB *0 ;ecB *1

he follo.ing

Beginning inventoryC 80 units at a cost of $(0B Purchased 1+0 additiona! units on account at a cost of $(0B #o!d 1$0 units on account at a unit sa!es 5rice of $80B Counted 100 units at a unit cost of $(0B

7e .ill record these events ass$!ing the co!pany $ses a periodic inventory syste! and then co!pare the periodic inventory syste! to a perpet$al inventory syste!.

(nd-of-year ad@$st!ent entries are not re%$ired $sing a perpet$al inventory syste!.

Ch. 7 - p. 10

#*ercises M2/3 !alculating !ost of "oods Availa4le for Sale, #nding Inventory, Sales, !ost of "oods Sold, and "ross &rofit under &eriodic FIF-, +IF-, and 1eighted Average !ost Given the follo.ing infor!ation1 calc$late cost of goods available for sale and ending inventory1 then sales1 cost of goods sold1 and gross profit1 $nder ;a? 9I9-1 ;b? LI9-1 and ;c? .eighted average. ,ss$!e a periodic inventory syste! is $sed.

Ch. 7 - p. 10

M2/2 !alculating !ost of "oods Availa4le for Sale, !ost of "oods Sold and #nding Inventory under FIF-, +IF-, and 1eighted Average !ost .&eriodic Inventory0 Given the follo.ing infor!ation1 calc$late the cost of goods available for sale1 ending inventory1 and cost of goods sold1 ass$!ing a periodic inventory syste! is $sed in co!bination .ith ;a? 9I9-1 ;b? LI9-1 and ;c? 7eighted ,verage Cost.

Ch. 7 - p. 10

#2/3 Inferring Missing Amounts Based on Income Statement elationships S$pply the !issing dollar a!o$nts for the '313 inco!e state!ent of Le.is Retailers for each of the follo.ing independent cases.
#a!es Case 7evenue $ 800 B &00 C ; 800 Cost of Inco,e Beginning 8ota! fro, # nding Goods Gross /5erating Inventory Purchases vai!a"!e Inventory #o!d Profit '65enses /5erations $ 100 $ +00 $ $00 $ 200 200 +00 1$0 0 1$0 2$0 200 400 100 (00 2$0 2$0 100

Ch. 7 - p. 10

#2/5 !alculating !ost of #nding Inventory and !ost of "oods Sold under &eriodic FIF-, +IF-, and 1eighted Average ,ss$!e -ah$ Ci8i&s $ses a periodic inventory syste!1 .hich sho.s the follo.ing for the !onth of Dan$ary. Sales totaled '03 $nits.

e$uired" 1. Calc$late the n$!ber and cost of goods available for sale. '. Calc$late the n$!ber of $nits in ending inventory. *. Calc$late the cost of ending inventory and cost of goods sold $sing the ;a) 9I9-1 (b) LI9-1 and ;c) .eighted average cost !ethods.

Ch. 7 - p. 10

#2/67 eporting Inventory at +o)er of !ost or Mar,et Peterson 9$rnit$re 4esigns is preparing the ann$al financial state!ents dated 4ece!ber *11 '335. (nding inventory infor!ation abo$t the five !a@or ite!s stoc8ed for reg$lar sale follo.s"
'nding Inventory, 200& Duantity @nit Cost -hen 7e5!ace,ent Cost 0C) Ite, on :and c>uired 1.I./2 1)ar<et2 at EearF'nd Per Ite, !!igator r,oires $0 $ 1$ $ 12 Bear Bureaus +$ 40 40 Cougar Beds 10 $0 $2 ;ingo Cri"s *0 *0 *0 '!e5hant ;ressers 400 10 ( 8ota! 0C)

e$uired: 1. Co!plete the final t.o col$!ns of the table and then co!p$te the a!o$nt that sho$ld be reported for the '335 ending inventory $sing the LC# r$le applied to each ite! '. Prepare the @o$rnal entry that Peterson 9$rnit$re 4esigns .o$ld record on 4ece!ber *11 '335. *. If the !ar8et val$es recovered by D$ne *31 '3131 to greater than original cost1 .o$ld the @o$rnal entry in re%$ire!ent ' be reversed $nder G,,PE Fnder I9RSE

Ch. 7 - p. 10

#2/62 Analy8ing and Interpreting the Inventory Turnover atio Polaris Ind$stries Inc. is the biggest sno.!obile !an$fact$rer in the .orld. It reported the follo.ing a!o$nts in its financial state!ents ;in !illions?"

e$uired: 1. Calc$late to one deci!al place the inventory t$rnover ratio and average days to sell inventory for '3321 '3371 and '33>. '. Co!!ent on any trends1 and co!pare the effectiveness of inventory !anagers at Polaris to inventory !anagers at its !ain co!petitor1 ,rctic Cat1 .here inventory t$rns over 0.: ti!es per year ;21.1 days to sell?. 6oth co!panies $se the sa!e inventory costing !ethod ;9I9-?.

Ch. 7 - p. 10