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Chapter 6

Chapter 6. Determining Inventory. Terms. Consigned Goods Consistency Principle Days in Inventory Finished Goods FIFO FOB Destination FOB Shipping Point Inventory Turnover JIT Inventory LIFO LCM Raw Materials Specific Identification Weighted Average Unit Cost Work in Process.

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Chapter 6

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  1. Chapter 6 Determining Inventory

  2. Terms • Consigned Goods • Consistency Principle • Days in Inventory • Finished Goods • FIFO • FOB Destination • FOB Shipping Point • Inventory Turnover • JIT Inventory • LIFO • LCM • Raw Materials • Specific Identification • Weighted Average Unit Cost • Work in Process

  3. Inventory • Determining Inventory • Physical Count • Who Owns It

  4. Physical Count • Even with a system of recording purchases and sales at the point of the event, companies do a physical count at the end of their accounting period. • Stores close or take inventory at night • Companies often hire temporary workers to take inventory. • Think about how many items in Target or Meijer, each has to be counted or weighed

  5. Who Owns It ?Goods in Transit • FOB Shipping Point • Ownership passes to buyer when it gets on the delivery vehicle, car, truck, bus, airplane, etc. • FOB Destination • Ownership passes to buyer when delivered and accepted by the buyer.

  6. Consignment • Goods that an owner sells through a dealer • Ownership belongs to the seller

  7. Inventory Costing • Four GAAP methods of costing inventory • Specific Identification • FIFO (First In First Out) • LIFO (Last In Last Out) • Average Cost

  8. Three Areas of Concentration • What is available for sale • Beg inventory + Purchases • What was sold? • What is the cost of the goods sold using the one of the 4 inventory methods. • What is the value of the ending inventory? • Beg + Purchases – sold items.

  9. Problem • ATA Warehouse • Jan 2 purchased 100 TV’s @$450 45,000 • Feb 2 purchased 100 TV’s @$475 47,500 • Mar 1 purchased 50 TV’s @$480 24,000 • Jun 5 purchased 75 TV’s @$495 37,125 Total Available: (325) 153, 625 • June 30 prepared semi-annual financial statements. They sold 250 TV’s. What is their ending inventory and what are the C of G?

  10. Specific Identification We can track that 100 TV’s came from Jan 2 50 came from Feb 2 and 50 came from Mar 1 and 50 came from Jun 5 So Cost of Goods are: 100 @ 450 45,000 50 @ 475 23,750 50 @ 480 24,000 50 @ 495 24,750 Total C of G 117,500 Ending Inventory (153,625-117,500) = $36,125

  11. FIFOFIRST IN-FIRST OUT • Jan 1, 100 @ 450 $45,000 • Feb 2, 100 @475 47,500 • Mar 2, 50 @ 480 24,000 • COST OF GOODS SOLD $116,500 • ENDING INVENTORY (153,625-116,500) $37,125

  12. LIFOLAST IN- LAST OUT • Jun 5, 75 @ $495 $37,125 • Mar 1, 50 @480 24,000 • Feb 2, 100 @475 47,500 • Jan 2, 25 @450 11,250 • COST OF GOODS SOLD $119,875 • ENDING INVENTORY (153,62 -119,875) $ 33,750

  13. AVERAGE • $153,625/325 = $472.69 EACH • C OF G.S. 250 @472.69 = $118,172.50 • ENDING INVENTORY 153625-118,172.50=$35,452.50* • *NEED TO ROUND TO MAKE AMOUNT EVEN

  14. COMPAREWHICH SHOULD ATA PICK?

  15. ANOTHER METHODLCM • For goods that have high fluctuations in price, IRS allows the Lower of Cost or Market to determine inventory costs: • Example: Our flat screen TV’s have dropped in price over the last three 3 months therefore we can take lower of cost of market • Our Cost was $153,625 • The Market price has dropped 10%

  16. Financial AnalysisInventory Turnover • Stakeholders want to know how much inventory is left in the warehouse which may mean the company is either purchasing two much or their sales are down. • Formula is: • Cost of Goods Sold/Beg Inventory+End Inv (2)

  17. Your Problem • Walmart reported in its 2008 annual report a beginning inventory of $33,685 million, and ending inventory of $35,180 million, and cost of goods sold for the year ended January 31 of $286,515 million. What is their inventory turnover ratio?

  18. Assignments • E6-5 • E6-6 • Problem 6-2A • Problem 6-3A

  19. Test Review • Know 6 definitions • Know LIFO, FIFO, WA • Know how to determine inventory using the above methods • Know how to determine C of GS • Know why companies use different methods

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