Kế toán, kiểm toán - Chapter 8: Inventories: measurement

Inventories:Measurement8 InventoryThose assets that a company:2. Has in production (work in process) for future sale.1. Intends to sell in the normalcourse of business. 3. Uses currently in the productionof goods to be sold (raw materials).Types of InventoriesMerchandise InventoryGoods acquired for resaleManufacturing InventoryRaw MaterialsWork-in-ProcessFinished GoodsTypes of InventoryInventory Cost FlowsRawMaterials(1) $XX$XX (4)Work inProcessFinishedGoodsCost of GoodSoldDirectLaborManufacturingOverhead$XX$XX (7)$XX$XX (8)$XX(2) $XX$XX (5)(3) $XX$XX (6)Raw materials purchasedDirect labor incurredManufacturing overhead incurredRaw materials usedDirect labor appliedManufacturing overhead appliedWork in process transferred to finished goodsFinished goods soldLearning ObjectiveExplain the difference between aperpetual inventory system and aperiodic inventory system.LO1Inventory MethodsPerpetual Inventory SystemThe inventory account is continuously updated as purchases and sales are made.Periodic Inventory SystemThe inventory account is adjusted at the end of a reporting cycle.Two accounting systems are used to record transactions involving inventory:Perpetual Inventory SystemMatrix, Inc. purchases on account $600,000 of merchandise for resale to customers.GENERAL JOURNALDateDescriptionDebitCreditInventory600,000 Accounts Payable 600,0002006Returns of inventory are credited to the inventory account.Discounts on inventory purchases can be recorded using the gross or net method.Perpetual Inventory SystemMatrix, Inc. sold, on account, inventory with aretail price of $820,000 and a cost basisof $540,000, to a customer. GENERAL JOURNALDateDescriptionDebitCreditAccounts Receivable820,000Sales Cost of Goods Sold540,000Inventory820,000540,0002006Periodic Cost of Goods Sold EquationPeriodic Inventory SystemMatrix, Inc. purchases on account $600,000 of merchandise for resale to customers.GENERAL JOURNALDateDescriptionDebitCreditPurchases600,000 Accounts Payable 600,0002006Returns of inventory are credited to the Purchase Returns and Allowances account.Discounts on inventory purchases can be recorded using the gross or net method.Periodic Inventory SystemMatrix, Inc. sold on account, inventory with aretail price of $820,000 and a cost basisof $540,000, to a customer. GENERAL JOURNALDateDescriptionDebitCreditAccounts Receivable820,000Sales 820,0002006No entry is made to record Cost of Good Sold. Assuming BeginningInventory of $120,000. A physical count of Ending Inventory showsa balance of $180,000. Let’s calculate Cost of Goods Sold atthe end of the accounting period.Periodic Inventory SystemAdjusting entry to determine Cost of Goods SoldComparison of Inventory SystemsLearning ObjectiveExplain which physical quantities of goods should be included in inventory.LO2What is Included in Inventory?General RuleAll goods owned by the company on the inventory date, regardless of their location.Goods in TransitGoods on ConsignmentDepends on FOB shipping terms.Learning ObjectiveDetermine the expenditures that shouldbe included in the cost of inventory.LO3Expenditures Included in InventoryInvoice PriceFreight-in on Purchases+Purchase ReturnsPurchase DiscountsPurchase DiscountsDiscount terms are 2/10, n/30.$14,000x 0.02$ 280Partial payment not made within the discount periodNet Method Using Perpetual and PeriodicMatrix, Inc. purchased on account $6,000 of merchandise for resale to customers. The merchandise was purchased subject to a cash discount of 2/10, n/30. The company incurred $160 in freight-in on the merchandise. Upon inspection, the company found that $200 of merchandise was damaged and the seller agreed to accept the merchandise return and credit the account of the company. The inventory was sold for $8,300 on account. Let’s look at the journal entries under both the perpetual and periodic accounting system assuming Matrix uses the net method to record merchandise purchases.Net Method Using Perpetual and PeriodicLearning ObjectiveDifferentiate between the specific identification, FIFO, LIFO, and average cost methods used to determine the cost of ending inventory and cost of goods sold.LO4Inventory Cost Flow MethodsSpecific cost identificationAverage costFirst-in, first-out (FIFO)Last-in, first-out (LIFO)The specific cost of each inventory item must be known.By selecting specific items from inventory at the time of sale, income can be manipulated.Specific Cost IdentificationItems are added to inventory at cost when they are purchased.COGS for each sale is based on the specific cost of the item sold.Average Cost MethodWeighted-Average Periodic SystemThe following schedule shows the frame inventory for Yore Frame, Inc. for September.The physical inventory count at September 30 shows 600 frames in ending inventory. Use the periodic weighted-average method to determine: (1) Ending inventory cost. (2) Cost of goods sold.Weighted-Average Periodic SystemWeighted-Average Periodic SystemNow, we have to assign costs to ending inventory and cost of goods sold.Beginning Inventory (800 units)Purchases (1,150 units)Available for Sale(1,950 units)Ending Inventory(600 units)Goods Sold(1,350)$47,650 ÷ 1,950 = $24.4359 weighted-average per unit costWeighted-Average Periodic SystemMoving-Average Perpetual SystemThe following schedule shows the Frame inventory for Yore Frame, Inc. for September.The physical inventory count at September 30 shows 600 frames in ending inventory. Use the perpetual weighted-average method to determine: (1) Ending inventory cost. (2) Cost of goods sold.Moving-Average Perpetual SystemMoving-Average Perpetual SystemMoving-Average Perpetual System$11,600.00 ÷ (800-600+300) = $23.200Moving-Average Perpetual System$27,490.00 ÷ (800-600+300-300+250+200+400) = $26.181Moving-Average Perpetual SystemSumFirst-In, First-OutThe cost of the oldest inventory items are charged to COGS when goods are sold. The cost of the newest inventory items remain in ending inventory.The FIFO method assumes that items are sold in the chronological order of their acquisition.First-In, First-OutEven though the periodic and the perpetual approaches differ in the timing of adjustments to inventory . . .. . . COGS and Ending Inventory Cost are the same under both approaches.FIFO - Periodic SystemThe following schedule shows the frame inventory for Yore Frame, Inc. for September.The physical inventory count at September 30 shows 600 frames in ending inventory. Use the periodic FIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.FIFO - Periodic SystemThese are the 600 most recently acquired units.FIFO - Periodic SystemFIFO - Periodic SystemThese are the first 1,350 units acquired.FIFO - Periodic SystemFIFO - Perpetual SystemThe following schedule shows the frame inventory for Yore Frame, Inc. for September.The physical inventory count at September 30 shows 600 frames in ending inventory. Use the perpetual FIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.FIFO - Perpetual SystemFIFO - Perpetual System200The ending inventory on 9/1 consists of: 200 units from beginning inventory @ $22.00FIFO - Perpetual System200The ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00300 units from the 9/3 purchase @ $24.00FIFO - Perpetual System200The ending inventory on 9/10 consists of:200 units from the 9/3 purchase @ $24.00FIFO - Perpetual SystemThe ending inventory on 9/15 consists of:200 units from the 9/3 purchase @ $24.00250 units from the 9/15 purchase @ $25.00200FIFO - Perpetual SystemThe ending inventory on 9/21 consists of:200 units from the 9/3 purchase @ $24.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200FIFO - Perpetual SystemThe ending inventory on 9/29 consists of:200 units from the 9/3 purchase @ $24.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00400 units from the 9/29 purchase @ $28.00200FIFO - Perpetual SystemThe ending inventory on 9/30 consists of: 200 units from the 9/21 purchase @ $27.00400 units from the 9/29 purchase @ $28.00. FIFO - Perpetual SystemNote that this is the same COGS computed using the Periodic approach.Last-In, First-OutAny questions before we run into LIFO?Last-In, First-OutThe cost of the newest inventory items are charged to COGS when goods are sold. The cost of the oldest inventory items remain in inventory.The LIFO method assumes that the newest items are sold first, leaving the older units in inventory.Last-In, First-OutUnlike FIFO, using the LIFO method may result in COGS and Ending Inventory Cost that differ under the periodic and perpetual approaches. The following schedule shows the frame inventory for Yore Frame, Inc. for September.The physical inventory count at September 30 shows 600 frames in ending inventory. Use the periodic LIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.LIFO - Periodic SystemLIFO - Periodic SystemThese are the 600 oldest units in inventory.LIFO - Periodic System200 600 x $22.00LIFO - Periodic System 600 x $22.00These are the most recently acquired 1,350 units.200LIFO - Periodic System$4,400 + $30,050200 x $22.00200LIFO - Perpetual SystemThe following schedule shows the frame inventory for Yore Frame, Inc. for September.The physical inventory count at September 30 shows 600 frames in ending inventory. Use the perpetual LIFO method to determine: (1) Ending inventory cost. (2) Cost of goods sold.LIFO - Perpetual SystemLIFO - Perpetual SystemIn LIFO, we assume that we sell the newest units in inventory first. In this case, the 600 “newest” units come from beginning inventory, leaving 200 units in the beginning inventory layer.200LIFO - Perpetual SystemThe ending inventory on 9/3 consists of: 200 units from beginning inventory @ $22.00300 units from the 9/3 purchase @ $24.00200LIFO - Perpetual SystemFor the 9/10 sale, we must identify the 300 newest units. They all come from the September 3 purchase. Note that all of the 9/3 units have been “sold” and only 200 of the beginning inventory units remain.200LIFO - Perpetual SystemThe ending inventory on 9/15 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00200LIFO - Perpetual SystemThe ending inventory on 9/21 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00200LIFO - Perpetual SystemThe ending inventory on 9/29 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00200 units from the 9/21 purchase @ $27.00400 units from the 9/29 purchase @ $28.00. 200LIFO - Perpetual System150For the 9/30 sale, we must identify the 450 newest units. 400 of them come from the 9/29 purchase. The other 50 come from the 9/21 purchase. 200LIFO - Perpetual System150200The ending inventory on 9/30 consists of: 200 units from beginning inventory @ $22.00250 units from the 9/15 purchase @ $25.00150 units from the 9/21 purchase @ $27.00. When Prices Are Rising . . . LIFOMatches high (newer) costs with current (higher) sales.Inventory is valued based on low (older) cost basis.Results in lower taxable income.Is not officially endorsed by the IASC. FIFOMatches low (older) costs with current (higher) sales.Inventory is valued at approximate replacement cost.Results in higher taxable income.Comparison of Cost Flow MethodsComparison of Cost Flow MethodsInventory Method Used by Major Companies20031973Learning ObjectiveDiscuss the factors affecting a company’s choice of inventory method.LO5Decision Makers’ PerspectiveWhat factors motivate companies to select one inventory method over another?How accurate is the timing of reported incomeand income taxes?How closely do reportedcosts reflect actualflow of inventory?How well are costs matched againstrelated revenues?Learning ObjectiveUnderstand supplemental LIFO disclosures and the effect of LIFO liquidations on net income.LO6LIFO LiquidationLIFO inventory costs on the balance sheet are “out of date” because they reflect old purchase transactions.When prices rise . . .If inventory declines, these “out of date” costs may be charged to current earnings.This LIFOliquidation results in “paper profits.”LIFO ReservesMany companies use LIFO for external reporting and income tax purposes but maintain internal records using FIFO or average cost.The conversion from FIFO or average cost to LIFO takes place at the end of the period. The conversion may look like this:Learning ObjectiveCalculate the key ratios used by analysts to monitor a company’s investment in inventories.LO7Gross Profit RatioGross profitratio Gross profit Net sales=This measure indicates how muchof each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit.Inventory Turnover Ratio Cost of goods sold Average inventoryInventoryturnover ratio=This ratio measures how many times a company’s inventory has been sold and replaced during the year.If a company’s inventory turnover Is less than its industry average, it either has excessive inventory or the wrong sorts of inventory.Earnings QualityMany believe that manipulating income reduces earnings quality because it can mask permanent earnings. Inventory write-downs and changes in inventory method are two additional inventory-related techniques a company could use to manipulate earnings.Learning ObjectiveDetermine ending inventory using thedollar-value LIFO inventory method.LO8LIFO Inventory PoolsInventory Pools consist of inventory units grouped according to similarities.For example, all similar units purchased at the same time can be “pooled” and assigned an average unit cost.Using Inventory Pools with LIFO simplifies record keeping.ExampleThe replacement inventory differs from the old inventory on hand. We just create a new layer.Dollar-Value LIFO (DVL)DVL inventory pools are viewed as layers of value, rather than layers of similar units.DVL simplifies LIFO record-keeping.DVL minimizes the probability of layer liquidation.At the end of the period, we determine if a new inventory layer was added by comparing ending inventory to beginning inventory.Dollar-Value LIFO (DVL)We need to determine if the increase in ending inventory over beginning inventory was due to a price increase or an increase in inventory.1a. Compute a Cost Index for the year.Dollar-Value LIFO (DVL)1b. Deflate the ending inventory value using the cost index.1c. Compare ending inventory (at base year cost) to beginning inventory.Dollar-Value LIFO (DVL)Next, identify the layers in ending inventory and the years they were created.Sum all the layers to arrive at Ending Inventory at DVL cost.Convert each layer’s base year cost to layer year cost by multiplying times the cost index.End of Chapter 8