Kế toán, kiểm toán - Chapter 5: Merchandise inventory

International Financial Accounting Chapter 5: Merchandise Inventory MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com 1 MA. Nguyen Quoc Nhat Chapter 5: Merchandise Inventory Learning Objectives  Define accounting principles related to inventory  Define inventory costing methods  Account for perpetual inventory using the three most common costing methods  Compare the effects of the three most common inventory costing methods  Apply the lower-of-cost-or-market rule to inventory  Measure the effects of inventory errors  Estimate ending inventory by the gross profit method 5.1 Accounting Principles and Inventories  Consistency Principle  Disclosure Principle  Materiality Concept  Accounting Conservatism 5.1 Accounting Principles and Inventories  Consistency Principle Businesses should use the same accounting methods from period to period. Consistency helps investors compare a company’s financial statements from one period to the next. 5.1 Accounting Principles and Inventories  Disclosure Principle Company should report enough information for outsiders to make wise decisions about the company. In short, the company should report relevant, reliable, and comparable information about itself. All major accounting decisions are described in the footnotes to the financial statements 5.1 Accounting Principles and Inventories  Materiality Concept A company must perform strictly proper accounting only for significant items. Information is significant—or, in accounting terms, material—when it would cause someone to change a decision. International Financial Accounting Chapter 5: Merchandise Inventory MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com 2 5.1 Accounting Principles and Inventories  Accounting Conservatism means exercising caution in reporting items in the financial statements. 5.2 Inventory Costing Methods  Ending inventory = Number of units on hand x Unit cost  Cost of goods sold = Number of units sold x Unit cost  Cost per unit = Purchase price – Purchase discounts – Purchase returns + Freight in 5.2 Inventory Costing Methods GAAP allows are as follows 1. Specific unit cost 2. First-in, first-out (FIFO) cost 3. Last-in, first-out (LIFO) cost 4. Average cost 5.2 Inventory Costing Methods 1. Specific unit cost The company knows exactly which item was sold and exactly what the item cost.  Suitable for businesses that sell unique, easily identified inventory items, such as automobiles (identified by the vehicle identification number [VIN]), jewels (a specific diamond ring), and real estate (identified by address) 5.2 Inventory Costing Methods 2. First-in, first-out (FIFO) cost  The cost of goods sold is based on the oldest purchases.  Often reflects the actual physical flow of merchandise.  Under FIFO, companies sell their oldest inventory first. FIFO method assumes earliest goods purchased are the first to be sold International Financial Accounting Chapter 5: Merchandise Inventory MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com 3 5.2 Inventory Costing Methods 3. Last-in, first-out (LIFO) cost  The cost of goods sold is based on the most recent purchases (new costs)  Under the LIFO method, companies sell their newest inventory first. LIFO method assumes latest goods purchased are the first to be sold 5.2 Inventory Costing Methods 4. Average cost The business computes a new average cost per unit after each purchase. Ending inventory and cost of goods sold are then based on the same average cost per unit. An average price is calculated and applied to all goods MA. Nguyen Quoc Nhat Allocation of the cost of goods available for sale in average cost method is made on the basis of the weighted average unit cost Average cost method assumes that goods available for sale are homogeneous 5.2 Inventory Costing Methods International Financial Accounting Chapter 5: Merchandise Inventory MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com 4 5.3 Inventory Accounting in a Perpetual System First-In, First-Out (FIFO) Method 5.3 Inventory Accounting in a Perpetual System Journal Entries Under FIFO  Jul 5 Inventory (6 x$45) 270 Accounts payable 270 Purchased inventory on account  Jul 15 Accounts receivable (4 $80) 320 Sales revenue 320 Sale on account  Jul 15 Cost of goods sold 170 Inventory 170 Cost of goods sold. 5.3 Inventory Accounting in a Perpetual System Journal Entries Under FIFO  July 26 Inventory (9 x$47) 423 Accounts payable 423 Purchased inventory on account.  Jul 31 Accounts receivable 800 Sales revenue 800 Sale on account.  Jul 31 Cost of goods sold 462 Inventory 462 Cost of goods sold. 5.3 Inventory Accounting in a Perpetual System Last-In, First-Out (LIFO) Method . 5.3 Inventory Accounting in a Perpetual System Journal Entries Under LIFO  Jul 5 Inventory (6 x$45) 270 Accounts payable 270 Purchased inventory on account  Jul 15 Accounts receivable (4 $80) 320 Sales revenue 320 Sale on account  Jul 15 Cost of goods sold 180 Inventory 180 Cost of goods sold. 5.3 Inventory Accounting in a Perpetual System Journal Entries Under LIFO  July 26 Inventory (9 x$47) 423 Accounts payable 423 Purchased inventory on account.  Jul 31 Accounts receivable 800 Sales revenue 800 Sale on account.  Jul 31 Cost of goods sold 468 Inventory 468 Cost of goods sold. International Financial Accounting Chapter 5: Merchandise Inventory MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com 5 5.3 Inventory Accounting in a Perpetual System Average-Cost Method . 5.3 Inventory Accounting in a Perpetual System Journal Entries Under AVCO  Jul 5 Inventory (6 x$45) 270 Accounts payable 270 Purchased inventory on account  Jul 15 Accounts receivable (4 $80) 320 Sales revenue 320 Sale on account  Jul 15 Cost of goods sold 175 Inventory 175 Cost of goods sold. 5.3 Inventory Accounting in a Perpetual System Journal Entries Under AVCO  July 26 Inventory (9 x$47) 423 Accounts payable 423 Purchased inventory on account.  Jul 31 Accounts receivable 800 Sales revenue 800 Sale on account.  Jul 31 Cost of goods sold 460 Inventory 460 Cost of goods sold. 5.3 Comparing FIFO, LIFO, and Average Cost . 5.3 Comparing FIFO, LIFO, and Average Cost Fossil specializes in designer watches and leather goods. Assume Fossil began June holding 10 wristwatches that cost $50 each. During June, Fossil bought and sold inventory as follows: Jun 3 Sold 8 units for $100 each 16 Purchased 10 units @ $56 each 23 Sold 8 units for $100 each 5.3 Comparing FIFO, LIFO, and Average Cost Requirements 1. Prepare a perpetual inventory record for Fossil using FIFO, LIFO, and Average cost. 2. Journalize all of Fossil ’s inventory transactions for June under all three costing methods. 3. Show the computation of gross profit for each method. 4. Which method maximizes net income? Which method minimizes income taxes? International Financial Accounting Chapter 5: Merchandise Inventory MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com 6 5.3 Comparing FIFO, LIFO, and Average Cost . 5.3 Comparing FIFO, LIFO, and Average Cost . 5.3 Comparing FIFO, LIFO, and Average Cost . 5.3 Comparing FIFO, LIFO, and Average Cost . 5.3 Comparing FIFO, LIFO, and Average Cost . www.themegallery.com Company Logo 5.3 Comparing - Example Date Quantity Purchased Cost of goods Sold Quantity Unit cost Total cost Quantity Unit cost Total cost Jul -1 4 48 5 6 50 8 5 ? 15 7 48 26 6 ? 31 9 52 1) Prepare a perpetual inventory record for Fossil using FIFO, LIFO, and Average cost. 2) Journalize all of Fossil’s inventory transactions for June under all three costing methods. 3) Show the computation of gross profit for each method. 4) 4. Which method maximizes net income? Which method minimizes income taxes? International Financial Accounting Chapter 5: Merchandise Inventory MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com 7 5.4 Lower-of cost-or-market rule Lower of cost or market rule (LCM). LCM shows accounting conservatism in action and requires that inventory be reported in the financial statements at whichever is lower: ● the historical cost of the inventory, or ● the market value of the inventory. 5.4 Lower-of cost-or-market rule Market is defined as replacement cost or net realizable value. + If the replacement cost of inventory is less than its historical cost, the business must adjust the inventory value. + If the inventory market is greater than cost, then we don’t adjust the inventory account because of the conservatism principle. 5.4 Lower-of cost-or-market rule Suppose Smart Touch paid $3,000 for its CD01 inventory. By July 31, the inventory can now be replaced for $2,200, and the decline in value appears permanent. 5.3 Estimating Ending Inventory . 5.3 Estimating Ending Inventory . International Financial Accounting Chapter 5: Merchandise Inventory MA. Nguyen Quoc Nhat- nhatnq.faa@gmail.com 8 5.3 Estimating Ending Inventory Suppose Smart Touch suffers a natural catastrophe and all its inventory is destroyed. Gross Profit Method of Estimating Inventory (amounts assumed) MA. Nguyen Quoc Nhat Thank you!