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Inventory

Inventory. Chapter 8. Objective 1. Describe inventory and discuss the related internal controls. Inventory. Goods that a business owns and has available to sell to customers as part of normal operations

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Inventory

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  1. Inventory Chapter 8

  2. Objective 1 Describe inventory and discuss the related internal controls

  3. Inventory • Goods that a business owns and has available to sell to customers as part of normal operations • Current asset – usually listed after accounts receivable

  4. Internal Controls • Separation of access to assets from access to record • Secure inventory items • Physical count at least once a year • Maintain perpetual records of inventory transactions • Document purchases and sales

  5. OBJECTIVE 2 Compute inventory costs using first-in, first-out (FIFO), last-in, first-out (LIFO), and average cost methods and journalize inventory transactions

  6. Inventory Costing Methods • Specific Unit Cost • FIFO • LIFO • Average Cost

  7. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  8. FIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg. 20 60 $1,200

  9. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  10. FIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory1,950 Accounts Payable 1,950 30 units X $65 = $1,950

  11. FIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 We have 50 units on hand Because the purchase price of $65 is different than the cost of the previous unit on hand, the inventory balance of 30 units is accounted for separately.

  12. Cost of Goods Sold Ending Inventory First-In, First-Out (FIFO) Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

  13. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  14. FIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 Because the purchase price of $65 is different than the cost of the previous unit on hand, the inventory balance of 30 units is accounted for separately. CAREFUL IN READING!: We have 50 units on hand with a value of $3,150 ($1,200 + $1,950)

  15. FIFO Perpetual Inventory Account Item Crate of Toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg. 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 20 $65 $1,300 10 $65 $650 Point, we use up the oldest inventory first. The balance in inventory is always shown between the red lines.

  16. FIFO Perpetual Inventory Accounting Date Description Debit Credit Accounts Receivable 4,000 Sales 4,000 Cost of Goods Sold 2,500 Inventory 2,500

  17. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  18. FIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory4,900 Accounts Payable 4,900

  19. FIFO Perpetual Inventory Account Item Crate of Toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg. 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 20 $65 $1,300 10 $65 $650 70 $70 $4,900 10 $65 $650 70 $70 $4,900 Point! Inventory balance is between red lines. We have 80 items in inventory at a cost of $5,550

  20. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  21. Cost of Goods Sold Ending Inventory First-In, First-Out (FIFO) Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

  22. FIFO Perpetual Inventory Account Item Crate of Toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg. 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 20 $65 $1,300 10 $65 $650 70 $70 $4,900 10 $65 $650 70 $70 $4,900

  23. FIFO Perpetual Inventory Account Item Crate of Toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg. 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 20 $65 $1,300 10 $65 $650 70 $70 $4,900 10 $65 $650 70 $70 $4,900 10 $65 $650 65 $70 $4,550 5 $70 $350

  24. FIFO Perpetual Inventory Accounting Date Description Debit Credit Accounts Receivable 8,250 Sales 8,250 Cost of Goods Sold 5,200 Inventory 5,200

  25. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  26. FIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory375 Accounts Payable 375

  27. FIFO Perpetual Inventory Account Item Crate of Toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg. 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 20 $65 $1,300 10 $65 $650 70 $70 $4,900 10 $65 $650 70 $70 $4,900 10 $65 $650 65 $70 $4,550 5 $70 $350 5 $75 $375 5 $70 $350 5 $75 $375

  28. Inventory Shrinkage • Loss of inventory • Compare physical count with balance in books • Sources • Breakage • Theft • Obsolescence

  29. Inventory Shrinkage • Took a physical count of the Crates of Toys and determined that 8 crates were in condition to sale. (i.e. 2 crates were damaged beyond repair). • Record the adjusting entry for inventory shrinkage.

  30. Shrinkage Cost of Goods Sold Ending Inventory First-In, First-Out (FIFO) Valued based on the earlier cost of purchases. Valued based on the most recent costs of purchases

  31. FIFO Perpetual Inventory Account Item Crate of Toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg. 20 $60 $ 1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 20 $65 $1,300 10 $65 $650 70 $70 $4,900 10 $65 $650 70 $70 $4,900 10 $65 $650 65 $70 $4,550 5 $70 $350 5 $75 $375 5 $70 $350 5 $75 $375

  32. Inventory Shrinkage Point: We assume earliest inventory was damaged! Inventory value of 8 unit Remaining 5 at $75 = $375 3 at $70 = $210 (earliest purchase) $585 (725-585 = $140)

  33. FIFO Inventory Shrinkage Date Description Debit Credit Cost of Goods Sold 140 Inventory 140 Point! Shrinkage is considered “Cost of Good Sold”

  34. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  35. LIFO Perpetual Inventory Account Item Create of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg. 20 60 $1,200

  36. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  37. LIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory1,950 Accounts Payable 1,950

  38. LIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 Because the purchase price of $65 is different than the cost of the previous unit on hand, the inventory balance of 30 units is accounted for separately.

  39. Cost of Goods Sold Ending Inventory Last-In, First-Out (LIFO) Valued based on the most recent costs of purchases Valued based on the earlier costs of purchases

  40. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  41. LIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 Because the purchase price of $65 is different than the cost of the previous unit on hand, the inventory balance of 30 units is accounted for separately. CAREFUL IN READING!: We have 50 units on hand with a value of $3,150 ($1,200 + $1,950) (Same as in fifo)

  42. LIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 30 $65 $1,950 10 $60 $600 10 $60 $600

  43. L IFO Perpetual Inventory Accounting Date Description Debit Credit Accounts Receivable 4,000 Sales 4,000 Cost of Goods Sold 2,550 Inventory 2,550

  44. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  45. LIFO Perpetual Inventory Accounting Date Description Debit Credit Inventory4,900 Accounts Payable 4,900

  46. LIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 30 $65 $1,950 10 $60 $600 10 $60 $600 70 $70 $4,900 10 $60 $600 70 $70 $4,900

  47. Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems KayBee Units Cost Price Inventory 20 $60 1 Purchase 30 $65 1 Sale 40 $100 2 Purchase 70 $70 2 Sale 75 $110 3 Purchase 5 $75 Cost of Mdse. Sold Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit.

  48. Cost of Goods Sold Ending Inventory Last-In, First-Out (LIFO) Valued based on the most recent costs of purchases Valued based on the earlier costs of purchases

  49. LIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 30 $65 $1,950 10 $60 $600 10 $60 $600 70 $70 $4,900 10 $60 $600 70 $70 $4,900

  50. LIFO Perpetual Inventory Account Item Crate of toys Purchases Cost of Goods Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Beg 20 $60 $1,200 30 $65 $1,950 20 $60 $1,200 30 $65 $1,950 30 $65 $1,950 10 $60 $600 10 $60 $600 70 $70 $4,900 10 $60 $600 70 $70 $4,900 70 $70 $4,900 5 $60 $300 5 $60 $300

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