Presentation Transcript

1. BSAD 221Introductory Financial AccountingDonna Gunn, CA
2. Service revenue $ XXX Expenses Operating and administrative expense X Depreciation expense X Income tax expense X Net income $ X Revenue $ 703.2 Cost of goods sold 419.8 Gross profit 283.4 Operating expenses: Operating and administrative expense X Depreciation expense X Income tax expense $ X Net income $ 56.9 Service Company Royal LePage Real Estate Income Statement Year Ended December 31, 2012 Merchandising Company Leon’s Furniture Ltd. Income Statement Year Ended December 31, 2012 Income Statements
3. Current assets: Cash $ X Short-term investments X Accounts receivable, net X Prepaid expenses X Current assets: Cash $ X Short-term investments X Accounts receivable, netX Inventory 84 Prepaid expenses X Service Company Royal Lepage Real Estate Balance Sheet December 31, 2012 Merchandising Company Leon’s Furniture Ltd. Balance Sheet December 31, 2012 Balance Sheets
4. BalanceSheet Cost of inventory on hand = Inventory (Asset on balance sheet) Accounting for Inventory Inventory = Number of units on hand × unit cost
5. Income Statement Cost of Inventory that’s been sold = Cost of Goods Sold (Expense on income statement) Accounting for Inventory Cost of goods sold = Number of units sold × unit cost
6. Costs Included in Inventory Purchases The cost principle requires that inventory be recorded at the price paid or the consideration given. Include all costs incurred to bring the asset to useable or saleable condition. Invoice Price Freight Inspection Costs Preparation Costs
7. Flow of Inventory Costs Merchandiser MerchandisePurchases MerchandiseInventory Cost ofGoods Sold Manufacturer RawMaterials Raw MaterialsInventory Work in ProcessInventory Finished GoodsInventory DirectLabor Cost ofGoods Sold FactoryOverhead
8. Merchandisers . . . Buy finished goods. Sell finished goods. Manufacturers . . . Buy raw materials. Produce and sell finished goods. Comparing Merchandising and Manufacturing Activities
9. Nature of Cost of Goods Sold BeginningInventory Purchasesfor the Period Goods availablefor Sale Ending Inventory(Balance Sheet) Cost of Goods Sold(Income Statement) Beginning inventory + Purchases = Goods Available for Sale Goods Available for Sale – Ending inventory = Cost of goods sold
10. Perpetual andPeriodic Inventory Systems Provides up-to-date inventory records. Perpetual System Provides up-to-date cost of sales records. In a periodic inventory system, ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical count.
11. Dr. Cash or Accounts Receivable Cr. Sales Revenue To record sales revenue Dr. Cost of Goods Sold Cr. Inventory To record COGS Recording Transactionsin the Perpetual System
12. Purchase price of the inventory $570,000 + Freight-in 4,000 – Purchase discounts – 14,000 = Net purchases of inventory $560,000 Recording Transactionsin the Perpetual System
13. Accounts Payable Inventory Beg. 100,000 560,000 560,000 Recording Transactions Inventory 560,000 Accounts Payable 560,000 Purchased inventory on account
14. Recording Transactionsand the T-Accounts Sale on account $900,000 (cost $540,000): Accounts Receivable 900,000 Sales Revenue 900,000 Cost of Goods Sold 540,000 Inventory 540,000
15. Cost of Goods Sold 540,000 Recording Transactions Cost of Goods Sold 540,000 Inventory 540,000 Inventory Beg. 100,000 560,000 120,000 540,000
16. Ending Balance Sheet (partial) Current assets: Cash $ XXX Short-term investments XXX Accounts receivable, net XXX Inventory 120,000 Reporting in theFinancial Statements Income Statement (partial) Sales revenue $900,000 Cost of goodssold 540,000 Gross margin $360,000
17. Specific Identification Weighted Average FIFO Inventory Costing Methods
18. When units are sold, the specific cost of the unit sold is added to cost of goods sold. Specific Identification
19. First-In, First-Out Method Cost of Goods Sold Oldest Costs Ending Inventory Recent Costs
20. When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Weighted-Average Cost Method Weighted-average cost (WAC) per unit: Cost of goods available for sale Number of units available for sale Ending Inventory = Ending Units x WAC per Unit Cost of Good Sold = Units Sold x WAC per Unit
21. Inventory Beginning bal. (10 units @ $10) $100 Purchases: No. 1 (25 units @ $14) $350 No. 2 (25 units @ $18) 450 Ending bal. (20 units @ $?) Cost of goods sold: (40 units @ $?) ? Illustration of Costing Leon’s began the period with 10 lamps costing $10 each; During the period, Leon’s bought 50 more lamps sold 40 lamps, and ended the period with 20 lamps.
22. Illustration of Costing The big accounting questions are: What is the cost of goods sold for the income statement? What is the cost of the ending inventory for the balance sheet?
23. Illustration of Costing Total Dollar Amount of Goods Available for Sale Inventory Costing Method Ending Inventory Cost of Goods Sold
24. Weighted-Average $900 total cost ÷ 60 units = $15/unit Cost of goods sold = 40 × $15 = $600 Ending inventory = 20 × $15 = $300
25. First-In, First-Out Beginning (10 units @ $10) $100 Purchase No. 1 (25 units @ $14) 350 Purchase No. 2 (25 units @ $18) 450 40 units sold and 20 still on hand Ending inventory cost = 20 units × $18 per unit =$360 Assume inventory on hand are from most recent purchase at $18 per unit
26. First-In, First-Out Beginning (10 units @ $10) $100 Purchase No. 1 (25 units @ $14) 350 Purchase No. 2 (25 units @ $18) 450 40 units sold and 20 still on hand Cost of Goods Sold = 10 units x $10 +25 units x $14 + 5 units x $8 =$540 Assume inventory sold was the inventory purchased first
27. Changing Costs When inventory costs are increasing: Weighted Average cost of goods sold is highest because it is based on the average of the costs for the period, so includes the new higher costs. FIFO cost of goods sold is lowest because it is based on the oldest costs and ignores the most recent costs.
28. Smoothes out price changes. Ending inventory approximates current replacement cost. Financial Statement Effects of Costing Methods Advantages of Methods First-In, First-Out Weighted Average
29. Comparability (including consistency) Disclosure Accounting Standards and Inventories
30. Accounting Principles and Inventory Comparability states that businesses should use the same accounting methods and procedures from period to period. Disclosure Principleholds that a company’s financial statements should report enough information for outsiders to make informed decisions about the company.
31. Lower of Cost or Net Realizable Value Ending inventory is reported at the lower of cost or net realizable value (LCNRV). Net Realizable Value = The expected sales price less selling costs
32. Beginning inventory + Purchases = Goods available for sale – Ending inventory = Cost of goods sold Estimating Inventory The gross marginmethodof estimating ending inventory is based on the COGS model.
33. Beginning inventory + Purchases = Goods available for sale – Cost of goods sold = Ending inventory Estimating Inventory Rearranging ending inventory and cost of goods sold makes the model useful for estimating ending inventory.
34. Estimating Inventory Beginning inventory $18,000 Purchases 72,000 Cost of goods available for sale 90,000 Cost of goods sold: Net sales revenue $100,000 Less estimated gross margin of 40.3% – 40,300 Estimated cost of goods sold 59,700 Estimated cost of ending inventory $30,300 6 -
35. Effects of Inventory Errors An error in the ending inventory creates errors for cost of goods sold and gross margin. The current year’s ending inventory is next year’s beginning inventory.
36. Effects of Inventory Errors Period 1 Ending Inventory Overstated by $5,000 Period 1 Beginning Inventory Overstated by $5,000 Period 1 Correct $100,000 $15,000 50,000 $65,000 (10,000) 55,000 45,000 Sales revenue Cost of goods sold: Beg. inventory Purchases Cost of goods available for sale Ending inventory Cost of goods sold Gross margin $100,000 $10,000 50,000 $60,000 (15,000) 45,000 $ 55,000 $100,000 $10,000 50,000 $60,000 (10,000) 50,000 $ 50,000
37. Ethical Considerations Managers of companies whose profits do not meet shareholder expectations are sometimes tempted to “cook the books” to increase reported income. What are some possibilities? 1. Overstating ending inventory 2. Creating fictitious sales revenue