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Chapter 5: Inventory

Chapter 5: Inventory. Dallas Company had the following inventory transactions at the end of 2008. Indicate whether Dallas should show the inventory in its financials as of 12/31/08 . 1. On 12/28, purchased inventory, FOB Destination. Shipped 12/28, did not arrive until Jan. 2.

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Chapter 5: Inventory

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  1. Chapter 5: Inventory

  2. Dallas Company had the following inventory transactions at the end of 2008. Indicate whether Dallas should show the inventory in its financials as of 12/31/08. 1. On 12/28, purchased inventory, FOB Destination. Shipped 12/28, did not arrive until Jan. 2. Not part of Dallas inventory 2. On Dec. 29, purchased inventory, FOB Shipping Point. Shipped 12/29, did not arrive until Jan. 2 Part of Dallas inventory 3. On 12/28, sold inventory to Houston Company, FOB Destination. Shipped 12/28; Houston received on Jan. 2. Part of Dallas inventory Class Problem

  3. Dallas Company had the following inventory transactions at the end of 2008. Indicate whether Dallas should show the inventory in its financials as of 12/31/08. 4. On 12/28, sold inventory to Amarillo Company, FOB Shipping Point. Shipped 12/28; Amarillo received on Jan. 2. Not part of Dallas inventory. 5. On 12/28, sold inventory to Amarillo Company, FOB Shipping Point. Shipped 12/28; Amarillo received on Dec. 29. Not part of Dallas inventory. Class Problem

  4. Given the following activity for January: Cost Total Units per Unit Cost Begin Inventory 20 $ 9.00 $180 Purchase 1/10 40 10.00 400 Purchase 1/22 30 11.00 330 Total available 90 units $910 Sales -55 units Ending inventory? Class Problem - Cost Flows 35 units

  5. FIFO for COGS (top down) 55 units 20 @ $9 = $180 35 @ $10 = $350 Total = $530 LISH for EI (bottom up) 35 units 30 @ $11 = $330 5 @ $10 = $ 50 Total $380 FIFO(LISH)

  6. LIFO for COGS (bottom up) 55 units 30 @ $11 = $330 25 @ $10 = $250 Total = $580 FISH for EI (top down) 35 units 20 @ $ 9 = $180 15 @ $10 = $150 Total = $330 LIFO(FISH)

  7. First calculate average: Goods available cost = $910 Goods available units = 90 units Avg. = $10.11 per unit Now COGS: 55 units x $10.11 per unit = $ 556 Now EI: 35 units x $10.11 per unit = $354 Average

  8. In times of rising prices: highest COGS: lowest COGS highest EI lowest EI highest Net Income lowest Net Income Comparison of FIFO, LIFO, and Average LIFO FIFO FIFO LIFO FIFO LIFO

  9. 5. Journal Entries - Periodic System Part 1: What is the value of Cost of Goods Sold? BI + P (net) + TI = EI + COGS 2,600 + [12,000 -900 -1,400] + 500= 1,900 + COGS 10,900 = COGS Part 2, AJE: Cost of Goods Sold 10,900 Inventory - Ending 1,900 Purchase Discounts 900 Purchase Rt. & Allow. 1,400 Purchases 12,000 Transportation-in 500 Inventory - Beginning 2,600 9

  10. Assume that the ending inventory of 2007 was undervalued by $9,000. If the error goes undetected in 2008, what effect would the error have on the balance sheet and income statement accounts for 2007 and 2008. Analyze using the following relationships: BI + P - EI = COGS NI A = L + SE Note that the asset account in inventory error analysis is ending inventory, and the equity effect is retained earnings, specifically the effect on net income. Class Problem-Inventory Error

  11. Analysis (O = overstated, U = understated): BI + P - EI = COGS NI A = L + SE Class Problem 07: 9u 9o 9u 9u 9u 08: 9u 9u 9o X X Why no effect on 2008 ending SE? NI 2007 understated by $9,000 NI 2008 overstated by $9,000 Both closed to RE, so no net effect at end.

  12. Exercise 5-6 Note: terms 1/10, n/30 7/3: Purchases 3,500 A/P-Wildcat 3,500 7/6: Purchases 7,000 A/P-Cyclone 7,000 7/12:Cash paid? $3,500 x .99 = $3,465 A/P-Wildcat 3,500 Cash 3,465 Purchase discounts 35

  13. Exercise 5-6 8/5: A/P-Cyclone 7,000 Cash 7,000

  14. Exercise 5-7 3/3: Purchases 2,500 A/P-Spartan 2,500 Transportation-In 250 Cash 250 3/7: Purchases 1,400 A/P-Boilermaker 1,400 3/12: A/P –Spartan 2,500 Cash 2,450 Purchase Disc. 50 3/15: A/P-Boilermaker 500 Purchase Ret. & Allow. 500

  15. Exercise 5-7 3/18: Purchases 1,600 A/P-Gopher 1,600 3/22:A/P-Gopher 400 Purchase Ret. & Allow. 400 (For Returns & Allowances, remember to reduce A/P for these items before calculating amount due or discount.) 4/6: Owe 1,400 – 500 = 900 A/P-Boilermaker 900 Cash 900 4/18:Owe 1,600–400=1200 (no discount) A/P-Gopher 1,200 Cash 1,200

  16. Exercise 5-11 Part 1 in class: First: Calculate dollar amount of Goods Available for Sale (GAS): BI 65 @ $20 = $1,300 P 50 @ $22 = 1,100 P 60 @ $23 = 1,380 P 45 @ $24 = 1,080 Tot.220 units $4,860 Sold 140 units So EI = 220 – 140 = 80 units

  17. Exercise 5-11 Part 1 in class: This is Specific Identification: 55@ $20 = $1,100 35@ $22 = $ 770 45@ $23 = $1,035 5@ $24 = $ 120 Total $3,025 COGS EI = GAS – COGS EI = $4,860 - $3,025 = $1,835 (You do Average, FIFO, LIFO .)

  18. Problem 5-10 LIFO in class: Note, you do not need individual sales for periodic system - just total sales: In units: 500 + 700 + 800 =2,000 units Sales in dollars (only for Part 3): (1,200@ $10) + (800 @ $11) = $20,800 Now cost layers for all techniques: BI 600 @ $5.00 = $3,000 P 800 @ $5.40 = 4,320 P 700 @ $5.76 = 4,032 P 800 @ $5.90 = 4,720 GAS 2,900 units $16,072 Sold 2,000 units So EI=900 units

  19. Problem 5-10 LIFO EI (900 units)= FISH (first) BI 600 @ $5.00 = $3,000 10/8 300 @ $5.40 = $1,620 Total $4,620 LIFO COGS (2000 units) = LIFO (last) 10/29 800 @ $5.90 = $ 4,720 10/18 700 @ $5.76 = $ 4,032 10/8 500 @ $5.40 = $ 2,700 Total $11,452 Or COGS = GAS – EI = 16,072 – 4,620 = 11,452

  20. Problem 5-10 Income Statement Sales $ 20,800 COGS 11,452 Gross Margin $ 9,348 Operating Expenses 3,000 Income before Taxes $ 6,348 Income Tax Expense 1,904 Net Income $ 4,444

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