Kế toán, kiểm toán - Chapter 6: Inventories and cost of sales

Chapter 6INVENTORIES AND COST OF SALESMcGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.DETERMINING INVENTORY ITEMSMerchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include:Goods in TransitGoods Damaged or ObsoleteGoods on ConsignmentC1FOB Destination PointPublic CarrierSellerBuyerGOODS IN TRANSITPublic CarrierSellerBuyerFOB Shipping PointOwnership passes to the buyer here.C1GOODS ON CONSIGNMENTMerchandise is included in the inventory of the consignor, the owner of the inventory.ConsignorConsigneeThanks for selling my inventory in your store.C1GOODS DAMAGED OR OBSOLETEDamaged or obsolete goods are not counted in inventory if they cannot be sold.Cost should be reduced to net realizable value if they can be sold.Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.C1DETERMINING INVENTORY COSTSInvoice CostInclude all expenditures necessary to bring an item to a salable condition and location.Minus Discounts and AllowancesPlus Import DutiesPlus FreightPlus StoragePlus InsuranceC2Most companies take a physical count of inventory at least once each year.INTERNAL CONTROLS AND TAKING A PHYSICAL COUNTWhen the physical count does not match the Merchandise Inventory account, an adjustment must be made.Good internal controls over count include:Pre-numbered inventory tickets.Counters have no inventory responsibility.Counts confirm existence, amount, andquality of inventory item.Second count is taken.Manager confirms all items counted.C2INVENTORY COSTING UNDER A PERPETUAL SYSTEMInventory affects . . . The matching principle requires matching costs with sales.Balance SheetIncome StatementC2INVENTORY COST FLOW ASSUMPTIONSC2Management decisions in accounting for inventory involve the following:Items included in inventory and their costs.Costing method (specific identification, FIFO, LIFO,or weighted average).Inventory system (perpetual or periodic).Use of market values or other estimates.INVENTORY COST FLOW ASSUMPTIONSFirst-In, First-Out(FIFO)Assumes costs flow in the order incurred.Last-In, First-Out(LIFO)Assumes costs flow in the reverse order incurred.Weighted AverageAssumes costs flow at an average of the costs available. P1INVENTORY COSTING ILLUSTRATIONHere is information about the mountain bike inventory of Trekking for the month of August.P1SPECIFIC IDENTIFICATIONP1SPECIFIC IDENTIFICATIONP1Balance Sheet InventoryIncome Statement Cost of Goods SoldSPECIFIC IDENTIFICATIONHere are the entries to record the purchases and sales. The numbers in red are determined by the cost flow assumption used.All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150P1FIRST-IN, FIRST-OUT (FIFO)Cost of Goods SoldEnding InventoryOldest CostsRecent CostsP1FIRST-IN, FIRST-OUT (FIFO) P1FIRST-IN, FIRST-OUT (FIFO) P1FIRST-IN, FIRST-OUT (FIFO) Here are the entries to record the purchases and sales entries. The numbers in red are determined by the cost flow assumption used.All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150P1LAST-IN, FIRST-OUT (LIFO)Cost of Goods SoldRecent CostsOldest CostsP1LAST-IN, FIRST-OUT (LIFO) P1LAST-IN, FIRST-OUT (LIFO) P1LAST-IN, FIRST-OUT (LIFO) Here are the entries to record the purchases and sales entries. The numbers in red are determined by the cost flow assumption used.All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150P1WEIGHTED AVERAGE When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Goods Available for SaleUnits on hand on the date of sale÷P1WEIGHTED AVERAGEP1WEIGHTED AVERAGEP1WEIGHTED AVERAGEP1WEIGHTED AVERAGEHere are the entries to record the purchases and sales entries for Trekking. The numbers in red are determined by the cost flow assumption used.All purchases and sales are made on credit.The selling price of inventory was as follows: 8/14 $130 8/31 150P1FINANCIAL STATEMENT EFFECTSOF COSTING METHODSBecause prices change, inventory methods nearly always assign different cost amounts.A1FINANCIAL STATEMENT EFFECTSOF COSTING METHODSAdvantages of MethodsSmoothes out price changes.Better matches current costs in cost of goods sold with revenues.Ending inventory approximates current replacement cost.First-In, First-OutWeighted AverageLast-In, First-OutA1CONSISTENCY IN USING COSTING METHODSThe consistency principle requires a company to use the same accounting methods period after period so that financial statements are comparable across periods.A1LOWER OF COST AND NET REALIZABLE VALUEInventory must be reported at NRV when NRV is lower than cost.Can be applied two ways:(1) separately to each individual item. to major categories of assets.P2LOWER OF COST AND NRVA motor sports retailer has the following items in inventory:P2LOWER OF COST AND NRVHere is how to compute lower of cost and NRV for individual inventory items.P2FINANCIAL STATEMENT EFFECTS OF INVENTORY ERRORSIncome Statement EffectsA2FINANCIAL STATEMENT EFFECTS OF INVENTORY ERRORSBalance Sheet EffectsA2INVENTORY TURNOVERInventory Turnover =Cost of goods sold Avg. inventoryShows how many times a company turns over its inventory during a period. Indicator of how well management is controlling the amount of inventory available.Average Inventory= (Beg. Inv. + End Inv.) ÷ 2 A3DAYS’ SALES IN INVENTORYReveals how much inventory is available in terms of the number of days’ sales.A3APPENDIX 6A: INVENTORY COSTING UNDER A PERIODIC SYSTEMP3LIFO computation of COGS and ending inventory under a periodic system. APPENDIX 6B: INVENTORY ESTIMATION METHODSP4Inventory sometimes requires estimation for interim statements or if some casualty such as fire or flood makes taking a physical count impossible. Retail Inventory MethodGross Profit MethodEND OF CHAPTER 6