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5. Reporting and Analyzing Inventories. Balance Sheet. Income Statement. Assigning Costs to Inventory. Inventory affects. The matching principle requires matching cost of sales with sales. Costing Method. FIFO, LIFO, Weighted Average, Specific ID Inventory System. Perpetual or Periodic - PowerPoint PPT Presentation
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© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-1
55 Reporting and Analyzing Inventories
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-2
Assigning Costs to InventoryInventory Inventory
affects . . . affects . . .
The matching The matching principle requires principle requires matching cost of matching cost of sales with sales.sales with sales.
Balance Balance SheetSheet
Balance Balance SheetSheet
Income Income StatementStatement
Income Income StatementStatement
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-3
Assigning Costs to Inventory
Accounting for inventory
requires several decisions . . .
Costing Method.Costing Method. FIFO, LIFO, Weighted Average, FIFO, LIFO, Weighted Average,
Specific IDSpecific ID
Inventory System.Inventory System. Perpetual or PeriodicPerpetual or Periodic
Items included in costs.Items included in costs.
Use of market or other estimates.Use of market or other estimates.
Costing Method.Costing Method. FIFO, LIFO, Weighted Average, FIFO, LIFO, Weighted Average,
Specific IDSpecific ID
Inventory System.Inventory System. Perpetual or PeriodicPerpetual or Periodic
Items included in costs.Items included in costs.
Use of market or other estimates.Use of market or other estimates.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-4
Assigning Costs to Inventory
Use of Inventory Methods in PracticeUse of Inventory Methods in Practice
Exh. 5.1
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-5
Example Inventory Information
Exh. 5.2,3
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-6
Perpetual Inventory
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-7
Specific Identification
When units are When units are sold, the sold, the
specific costspecific cost of of the unit sold is the unit sold is
added to added to cost of cost of goods soldgoods sold..
When units are When units are sold, the sold, the
specific costspecific cost of of the unit sold is the unit sold is
added to added to cost of cost of goods soldgoods sold..
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-8
Specific Identification
The above purchases were made by The above purchases were made by Trekking in August. On August 14, Trekking in August. On August 14,
Trekking sold 8 bikes originally costing $91 Trekking sold 8 bikes originally costing $91 and 12 bikes originally costing $106.and 12 bikes originally costing $106.
The above purchases were made by The above purchases were made by Trekking in August. On August 14, Trekking in August. On August 14,
Trekking sold 8 bikes originally costing $91 Trekking sold 8 bikes originally costing $91 and 12 bikes originally costing $106.and 12 bikes originally costing $106.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-9
The Cost of Goods Sold for the The Cost of Goods Sold for the August 14 sale is $2,000, leaving August 14 sale is $2,000, leaving
$500 and 5 units in inventory. $500 and 5 units in inventory.
The Cost of Goods Sold for the The Cost of Goods Sold for the August 14 sale is $2,000, leaving August 14 sale is $2,000, leaving
$500 and 5 units in inventory. $500 and 5 units in inventory.
Specific Identification
Exh. 5.4
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-10
Additional purchases were made on August 17 and 28. Additional purchases were made on August 17 and 28.
Cost of sales on August 31 were as follows: Cost of sales on August 31 were as follows:
2 @ $91, 3 @ $106, 15 @ $115, & 3 @ $119.2 @ $91, 3 @ $106, 15 @ $115, & 3 @ $119.
Additional purchases were made on August 17 and 28. Additional purchases were made on August 17 and 28.
Cost of sales on August 31 were as follows: Cost of sales on August 31 were as follows:
2 @ $91, 3 @ $106, 15 @ $115, & 3 @ $119.2 @ $91, 3 @ $106, 15 @ $115, & 3 @ $119.
Specific Identification
Exh. 5.4
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-11
Specific Identification
Cost of Goods Sold for August 31 = $2,582
Cost of Goods Sold for August 31 = $2,582
Exh. 5.4
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-12
Specific Identification
Balance Sheet Balance Sheet Inventory = $1,408Inventory = $1,408
Balance Sheet Balance Sheet Inventory = $1,408Inventory = $1,408
Income Statement Income Statement COGS = $4,582COGS = $4,582
Income Statement Income Statement COGS = $4,582COGS = $4,582
Exh. 5.4
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-13
First-In, First-Out (FIFO)
Cost of Cost of Goods SoldGoods Sold
Cost of Cost of Goods SoldGoods Sold
Ending Ending InventoryInventoryEnding Ending
InventoryInventory
Oldest Oldest CostsCosts
Oldest Oldest CostsCosts
Recent Recent CostsCosts
Recent Recent CostsCosts
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-14
First-In, First-Out (FIFO)
The above purchases were made by Trekking in The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes. August. On August 14, Trekking sold 20 bikes. The above purchases were made by Trekking in The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes. August. On August 14, Trekking sold 20 bikes.
Exh. 5.5
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-15
First-In, First-Out (FIFO)
The Cost of Goods Sold for the August 14 sale is The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory. $1,970, leaving $530 and 5 units in inventory.
The Cost of Goods Sold for the August 14 sale is The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory. $1,970, leaving $530 and 5 units in inventory.
Exh. 5.5
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-16
Additional purchases were made on August 17 Additional purchases were made on August 17 and August 28. On August 31, an additional 23 and August 28. On August 31, an additional 23
units were sold.units were sold.
Additional purchases were made on August 17 Additional purchases were made on August 17 and August 28. On August 31, an additional 23 and August 28. On August 31, an additional 23
units were sold.units were sold.
First-In, First-Out (FIFO)
Exh. 5.5
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-17
First-In, First-Out (FIFO)
Cost of Goods Sold for August 31 = Cost of Goods Sold for August 31 = ($530 + $2,070) = $2,600($530 + $2,070) = $2,600
Cost of Goods Sold for August 31 = Cost of Goods Sold for August 31 = ($530 + $2,070) = $2,600($530 + $2,070) = $2,600
Exh. 5.5
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-18
First-In, First-Out (FIFO)
Balance Sheet Balance Sheet Inventory = $1,420Inventory = $1,420
Balance Sheet Balance Sheet Inventory = $1,420Inventory = $1,420
Income StatementCOGS = $4,570
Income StatementCOGS = $4,570
Exh. 5.5
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-19
Last-In, First-Out (LIFO)
Recent Recent CostsCosts
Recent Recent CostsCosts
Cost of Goods Cost of Goods SoldSold
Cost of Goods Cost of Goods SoldSold
Oldest Oldest CostsCosts
Oldest Oldest CostsCosts
Ending Ending InventoryInventoryEnding Ending
InventoryInventory
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-20
The above purchases were made by Trekking in The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes. August. On August 14, Trekking sold 20 bikes. The above purchases were made by Trekking in The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes. August. On August 14, Trekking sold 20 bikes.
Last-In, First-Out (LIFO)
Exh. 5.6
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-21
Last-In, First-Out (LIFO)
The Cost of Goods Sold for the August 14 The Cost of Goods Sold for the August 14 sale is ($1,590 + $455) $2,045, leaving sale is ($1,590 + $455) $2,045, leaving
$455 and 5 units in inventory. $455 and 5 units in inventory.
The Cost of Goods Sold for the August 14 The Cost of Goods Sold for the August 14 sale is ($1,590 + $455) $2,045, leaving sale is ($1,590 + $455) $2,045, leaving
$455 and 5 units in inventory. $455 and 5 units in inventory.
Exh. 5.6
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-22
Additional purchases were made on Additional purchases were made on August 17 and August 28. On August 31, August 17 and August 28. On August 31,
an additional 23 units were sold.an additional 23 units were sold.
Additional purchases were made on Additional purchases were made on August 17 and August 28. On August 31, August 17 and August 28. On August 31,
an additional 23 units were sold.an additional 23 units were sold.
Last-In, First-Out (LIFO)
Exh. 5.6
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-23
Last-In, First-Out (LIFO)
Cost of Goods Sold for August 31 = Cost of Goods Sold for August 31 = ($1,190 + $1,495) = $2,685($1,190 + $1,495) = $2,685
Cost of Goods Sold for August 31 = Cost of Goods Sold for August 31 = ($1,190 + $1,495) = $2,685($1,190 + $1,495) = $2,685
Exh. 5.6
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-24
Last-In, First-Out (LIFO)
Balance Sheet Balance Sheet Inventory = $1,260Inventory = $1,260
Balance Sheet Balance Sheet Inventory = $1,260Inventory = $1,260
Income Statement Income Statement COGS = $4,730COGS = $4,730
Income Statement Income Statement COGS = $4,730COGS = $4,730
Exh. 5.6
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-25
Weighted Average
When a unit is sold, the When a unit is sold, the average cost of each unitaverage cost of each unit in in inventory is assigned to cost inventory is assigned to cost
of goods sold. of goods sold.
When a unit is sold, the When a unit is sold, the average cost of each unitaverage cost of each unit in in inventory is assigned to cost inventory is assigned to cost
of goods sold. of goods sold.
Cost of Goods Cost of Goods Available for Available for
SaleSale
Units on hand Units on hand on the date of on the date of
salesale÷÷
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-26
The above purchases were made by Trekking in The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes. August. On August 14, Trekking sold 20 bikes. The above purchases were made by Trekking in The above purchases were made by Trekking in August. On August 14, Trekking sold 20 bikes. August. On August 14, Trekking sold 20 bikes.
Weighted Average
Exh. 5.7
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-27
The weighted average cost per unit is The weighted average cost per unit is computed prior to each sale.computed prior to each sale.
The weighted average cost per unit is The weighted average cost per unit is computed prior to each sale.computed prior to each sale.
Weighted Average
Cost of goods available for sale 2,500$ Total units in inventory 25 Weighted average cost per unit 100$
Cost of goods available for sale 2,500$ Total units in inventory 25 Weighted average cost per unit 100$
÷
Exh. 5.7
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-28
Additional purchases were made on Additional purchases were made on August 17 and August 28. On August 31, August 17 and August 28. On August 31,
an additional 23 units were sold.an additional 23 units were sold.
Additional purchases were made on Additional purchases were made on August 17 and August 28. On August 31, August 17 and August 28. On August 31,
an additional 23 units were sold.an additional 23 units were sold.
Weighted Average
Exh. 5.7
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-29
Weighted Average
Cost of goods available for sale 3,990$ Total units in inventory 35 Weighted average cost per unit 114$
Cost of goods available for sale 3,990$ Total units in inventory 35 Weighted average cost per unit 114$
÷
Purchase 8/1 10 Purchase 8/3 15 Sale 8/14 (20) Purchase 8/17 10 Purchase 8/28 20 Units available for sale 35
Purchase 8/1 10 Purchase 8/3 15 Sale 8/14 (20) Purchase 8/17 10 Purchase 8/28 20 Units available for sale 35
Exh. 5.7
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-30
Weighted Average
Balance Sheet Balance Sheet Inventory = $1,368Inventory = $1,368
Balance Sheet Balance Sheet Inventory = $1,368Inventory = $1,368
Income Statement Income Statement COGS = $4,622COGS = $4,622
Income Statement Income Statement COGS = $4,622COGS = $4,622
Exh. 5.7
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-31
Cost of Merchandise Inventory
Include all expenditures necessary to bring an Include all expenditures necessary to bring an item to a salable condition and location.item to a salable condition and location.
Include all expenditures necessary to bring an Include all expenditures necessary to bring an item to a salable condition and location.item to a salable condition and location.
Invoice PriceInvoice PriceInvoice PriceInvoice Price
Import DutiesImport DutiesImport DutiesImport Duties
Freight-inFreight-inFreight-inFreight-in
StorageStorageStorageStorage
InsuranceInsuranceInsuranceInsurance
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-32
Financial ReportingBecause prices change, the choice of an Because prices change, the choice of an
inventory method is important.inventory method is important.Because prices change, the choice of an Because prices change, the choice of an
inventory method is important.inventory method is important.
Exh. 5.8
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-33
Financial Reporting
Advantages of Each MethodAdvantages of Each MethodAdvantages of Each MethodAdvantages of Each Method
Smooths out Smooths out price changes.price changes.Smooths out Smooths out
price changes.price changes.
Better matches Better matches current costs in cost current costs in cost of goods sold with of goods sold with
revenues.revenues.
Better matches Better matches current costs in cost current costs in cost of goods sold with of goods sold with
revenues.revenues.
Ending inventory Ending inventory approximates approximates
current current replacement cost.replacement cost.
Ending inventory Ending inventory approximates approximates
current current replacement cost.replacement cost.
First-In, First-In, First-OutFirst-OutFirst-In, First-In, First-OutFirst-Out
Weighted Weighted AverageAverage
Weighted Weighted AverageAverage
Last-In, Last-In, First-OutFirst-OutLast-In, Last-In,
First-OutFirst-Out
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-34
Tax Reporting
The Internal Revenue Service (IRS) identifies The Internal Revenue Service (IRS) identifies several acceptable methods for inventory several acceptable methods for inventory
costing for financial reporting and reporting costing for financial reporting and reporting taxable income.taxable income.
If LIFO is used for If LIFO is used for tax purposestax purposes, the IRS , the IRS requires it be used in financial statements.requires it be used in financial statements.
The Internal Revenue Service (IRS) identifies The Internal Revenue Service (IRS) identifies several acceptable methods for inventory several acceptable methods for inventory
costing for financial reporting and reporting costing for financial reporting and reporting taxable income.taxable income.
If LIFO is used for If LIFO is used for tax purposestax purposes, the IRS , the IRS requires it be used in financial statements.requires it be used in financial statements.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-35
Consistency in Reporting
The consistency principle requires a company The consistency principle requires a company to use the same accounting methods period to use the same accounting methods period after period so that financial statements are after period so that financial statements are
comparable across periods.comparable across periods.
The consistency principle requires a company The consistency principle requires a company to use the same accounting methods period to use the same accounting methods period after period so that financial statements are after period so that financial statements are
comparable across periods.comparable across periods.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-36
Errors in Reporting InventoryIncome Statement EffectsIncome Statement Effects
Exh. 5.10
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-37
Errors in Reporting Inventory
Exh. 5.12
Balance Sheet EffectsBalance Sheet Effects
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-38
FOB Destination Point
Public Carrier
Seller Buyer
Items in Merchandise Inventory
Public Carrier
Seller Buyer
FOB Shipping Point
Ownership passes to the buyer here.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-39
Items in Merchandise Inventory
Goods on ConsignmentGoods on Consignment Goods shipped by the owner (consignor) to another Goods shipped by the owner (consignor) to another
party (consignee).party (consignee). Merchandise is included in the inventory of the Merchandise is included in the inventory of the
consignor.consignor.
Goods Damaged or ObsoleteGoods Damaged or Obsolete Damaged or obsolete goods are not counted in Damaged or obsolete goods are not counted in
inventory.inventory. Cost should be reduced to Cost should be reduced to net realizable valuenet realizable value..
Goods on ConsignmentGoods on Consignment Goods shipped by the owner (consignor) to another Goods shipped by the owner (consignor) to another
party (consignee).party (consignee). Merchandise is included in the inventory of the Merchandise is included in the inventory of the
consignor.consignor.
Goods Damaged or ObsoleteGoods Damaged or Obsolete Damaged or obsolete goods are not counted in Damaged or obsolete goods are not counted in
inventory.inventory. Cost should be reduced to Cost should be reduced to net realizable valuenet realizable value..
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-40
Physical Count of Merchandise Inventory Most companies take a Most companies take a
physical countphysical count of of inventory at least once inventory at least once each year.each year.
When the When the physical physical count count does not match does not match the Merchandise the Merchandise Inventory account, an Inventory account, an adjustment must be adjustment must be made.made.
Most companies take a Most companies take a physical countphysical count of of inventory at least once inventory at least once each year.each year.
When the When the physical physical count count does not match does not match the Merchandise the Merchandise Inventory account, an Inventory account, an adjustment must be adjustment must be made.made.
Quantity ___
InventoryCount TagCountedby _______
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-41
Lower of Cost or Market
Inventory must be reported at market value Inventory must be reported at market value when when marketmarket is is lowerlower than cost.than cost.
Inventory must be reported at market value Inventory must be reported at market value when when marketmarket is is lowerlower than cost.than cost.
Can be applied Can be applied threethree ways: ways:(1)(1) separately to each separately to each
individual item.individual item.(2)(2) to major categories of to major categories of
assets.assets.(3)(3) to the whole inventory.to the whole inventory.
Can be applied Can be applied threethree ways: ways:(1)(1) separately to each separately to each
individual item.individual item.(2)(2) to major categories of to major categories of
assets.assets.(3)(3) to the whole inventory.to the whole inventory.
Defined as current Defined as current replacement costreplacement cost (not sales price).(not sales price).Consistent withConsistent with
the conservatismthe conservatismprinciple.principle.
Defined as current Defined as current replacement costreplacement cost (not sales price).(not sales price).Consistent withConsistent with
the conservatismthe conservatismprinciple.principle.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-42
A motorsports retailer has the following items in inventory:A motorsports retailer has the following items in inventory:A motorsports retailer has the following items in inventory:A motorsports retailer has the following items in inventory:
Lower of Cost or Market
Exh. 5.14
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-43
Here is how to compute lower of cost or market for Here is how to compute lower of cost or market for individual inventory itemsindividual inventory items..
Here is how to compute lower of cost or market for Here is how to compute lower of cost or market for individual inventory itemsindividual inventory items..
Lower of Cost or Market
Exh. 5.14
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-44
Lower of Cost or Market
Here is how to compute lower of cost or market for Here is how to compute lower of cost or market for the two groups of inventory itemsthe two groups of inventory items..
Here is how to compute lower of cost or market for Here is how to compute lower of cost or market for the two groups of inventory itemsthe two groups of inventory items..
Exh. 5.14
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-45
Lower of Cost or Market
Here is how to compute lower of cost or market for Here is how to compute lower of cost or market for the entire inventorythe entire inventory..
Here is how to compute lower of cost or market for Here is how to compute lower of cost or market for the entire inventorythe entire inventory..
Exh. 5.14
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-46
Retail Inventory MethodOften used to estimate inventory for interim period reporting. Often used to estimate inventory for interim period reporting.
Needed Information includes:Needed Information includes:
Often used to estimate inventory for interim period reporting. Often used to estimate inventory for interim period reporting.
Needed Information includes:Needed Information includes:
Net purchases at Net purchases at cost and retailcost and retail
Net purchases at Net purchases at cost and retailcost and retail
Beginning Beginning inventory at cost inventory at cost
and retailand retail
Beginning Beginning inventory at cost inventory at cost
and retailand retailNet salesNet salesNet salesNet sales
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-47
Retail Inventory Method
Step 3Step 3 Cost to retail Cost to retail ratioratio
Cost to retail Cost to retail ratioratio
Ending Ending inventory at inventory at
retailretail
Ending Ending inventory at inventory at
retailretail
Estimated Estimated ending ending
inventory at inventory at costcost
Estimated Estimated ending ending
inventory at inventory at costcost
=×
Step 2Step 2Goods Goods
available for available for sale at retailsale at retail
Goods Goods available for available for sale at retailsale at retail
Goods Goods available for available for sale at costsale at cost
Goods Goods available for available for sale at costsale at cost
=÷ Cost to retail Cost to retail ratioratio
Cost to retail Cost to retail ratioratio
Step 1Step 1 Net sales at Net sales at retailretail
Net sales at Net sales at retailretail
Goods Goods available for available for sale at retailsale at retail
Goods Goods available for available for sale at retailsale at retail
– =Ending Ending
inventory at inventory at retailretail
Ending Ending inventory at inventory at
retailretail
Exh. 5.15
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-48
Retail Inventory Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-49
Retail Inventory Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-50
Retail Inventory Method
Exh. 5.16
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-51
Gross Profit Method Estimate ending inventory by applying the Estimate ending inventory by applying the
gross profit ratio to net sales (at retail).gross profit ratio to net sales (at retail). Useful when inventory has been Useful when inventory has been
destroyed, lost, or stolen.destroyed, lost, or stolen.
Estimate ending inventory by applying the Estimate ending inventory by applying the gross profit ratio to net sales (at retail).gross profit ratio to net sales (at retail).
Useful when inventory has been Useful when inventory has been destroyed, lost, or stolen.destroyed, lost, or stolen.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-52
Gross Profit Method
Step 1Step 11.0 1.0 – – the the gross profit gross profit
ratioratio
1.0 1.0 – – the the gross profit gross profit
ratioratio
Net sales at Net sales at retailretail
Net sales at Net sales at retailretail × =
Estimated Estimated cost of cost of
goods soldgoods sold
Estimated Estimated cost of cost of
goods soldgoods sold
Step 2Step 2Estimated Estimated
cost of cost of goods soldgoods sold
Estimated Estimated cost of cost of
goods soldgoods sold
Goods Goods available for available for sale at costsale at cost
Goods Goods available for available for sale at costsale at cost
– =Estimated Estimated
ending ending inventory at inventory at
costcost
Estimated Estimated ending ending
inventory at inventory at costcost
Exh. 5.17
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-53
In March of 2002, Chemical Company’s In March of 2002, Chemical Company’s inventory was destroyed by fire. inventory was destroyed by fire.
Chemical’s normal gross profit ratio is 30% Chemical’s normal gross profit ratio is 30% of net sales. At the time of the fire, of net sales. At the time of the fire,
Chemical showed the following balances:Chemical showed the following balances:
In March of 2002, Chemical Company’s In March of 2002, Chemical Company’s inventory was destroyed by fire. inventory was destroyed by fire.
Chemical’s normal gross profit ratio is 30% Chemical’s normal gross profit ratio is 30% of net sales. At the time of the fire, of net sales. At the time of the fire,
Chemical showed the following balances:Chemical showed the following balances:
Gross Profit Method
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-54
Gross Profit Method
Sales 31,500$ Less: sales returns (1,500) Net sales 30,000 (100% - 30%) 70%Estimated cost of goods sold 21,000$
Sales 31,500$ Less: sales returns (1,500) Net sales 30,000 (100% - 30%) 70%Estimated cost of goods sold 21,000$
Step 1Step 1
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-55
Gross Profit Method
Goods Available for Sale: Inventory, 1/1/02 12,000$ Net cost of goods purchased 20,500 Goods available for sale 32,500 Less estimated cost of goods sold: Estimated cost of goods sold (21,000) Estimated March inventory loss 11,500$
Goods Available for Sale: Inventory, 1/1/02 12,000$ Net cost of goods purchased 20,500 Goods available for sale 32,500 Less estimated cost of goods sold: Estimated cost of goods sold (21,000) Estimated March inventory loss 11,500$
Step 2Step 2
Exh. 5.18
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-56
Inventory TurnoverShows how many times a company turns over its inventory Shows how many times a company turns over its inventory
during a period. Indicator of how well management is during a period. Indicator of how well management is controlling the amount of inventory available.controlling the amount of inventory available.
Shows how many times a company turns over its inventory Shows how many times a company turns over its inventory during a period. Indicator of how well management is during a period. Indicator of how well management is
controlling the amount of inventory available.controlling the amount of inventory available.
Inventory Inventory TurnoverTurnover ==
Cost of goods sold Cost of goods sold
Avg. inventoryAvg. inventory
Exh. 5.19
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-57
Days’ Sales in Inventory
Reveals how much inventory is available in Reveals how much inventory is available in terms of the number of days’ sales.terms of the number of days’ sales.
Reveals how much inventory is available in Reveals how much inventory is available in terms of the number of days’ sales.terms of the number of days’ sales.
Days' Sales in Days' Sales in InventoryInventory ==
Ending Inventory Ending Inventory
Cost of goods soldCost of goods sold ×× 365365
Exh. 5.20
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 5-58
End of Chapter 5