INVENTORIES
CHAPTER 8
Principles of Accounting
with Key Words in Korean Soon Suk Yoon • Hyo Jin KimPowerPoint Presentation by:
Soon Suk Yoon, Professor, Western Illinois University
Hyo Jin Kim, Associate Professor, Jeonju University 2018
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INTRODUCTION Objective 1
Objective 1
Definition of Inventories
Goods/merchandise (assets) that are awaiting for sale as part of the principal activity of the firm
(Note: firms also sell off assets that are not inventory)
2 types of firms = 2 types of inventories
Merchandising firms
Purchased goods for resale
Manufacturing firms
Goods manufactured from scratch within the firm for original sale
Manufactured Inventory = 3 components 1. Raw Materials
2. Works in Process 3. Finished Goods
• Show all 3 on the Statement of Financial Position
Merchandiser’s Inventory = 1 component
1. Inventory
DETERMINING THE OWNERSHIP OF
GOODS
Objective 2
Objective 2
When the terms are FOB (free on board) shipping point ( 선적지인도조건 ), the ownership of the goods passes to the buyer when the public carrier accepts the goods from
the seller. Thus, the buyer bears and incurs transporta- tion-in ( 매입운임 ). Included in the transportation-in are
freight-in and insurance expense.
When the terms are FOB destination ( 도착지인도조건 ), the ownership of the good remains with the seller until the
goods reach the buyer. As such, the seller incurs trans- portation-out ( 판매운임 ).
THE OWNERSHIP OF GOODS
Terms of Transactions
Figure 8-1
F.O.B. Destination
Seller Buyer
Goods in Transit
Shipping Point Destination
F.O.B. Shipping Point
Title transfer Title transfer
Consigned Goods
Figure 8-2
Sells Consignor
(Owner)
Consignee (Agent)
Customers Consigns
Consigned Goods
PERPETUAL AND PERIODIC INVENTORY SYSTEMS
Objective 3
Objective 3
Perpetual vs Periodic
Periodic method
Compute COGS and Ending Inventory once at the end of the accounting period
Perpetual method
Compute COGS and Ending Inventory after each sale
Timing of Inventory Computations
Perpetual Inventory
Purchases are debited directly to ‘Inventory’ as items for resale are acquired.
Items sold are credited to ‘Inventory’ at their acquisition cost at the time of sale. Two journal entries are recorded at the time of sale.
Dr. Accounts Receivable xxx Cr. Sales xxx
Dr. Cost of Goods Sold xxx Cr. Inventory xxx
Periodic Inventory Method
Acquisitions:
Charged to “Purchases” account
Sales recognition
: Record sales but not COGS.
Valuation:
Inventory is counted and valued only at the end of the accounting period
Weakness:
On any given day during period: Clueless what balance is of inventory
Advantage:
Less bookkeeping costs in the pre-computer era.Cost of Goods Sold
＝ Beginning Inventory
＋ Net Purchases
－ Ending Inventory
Perpetual vs. Periodic Inventory Methods
Table 8-1
Perpetual Periodic
Purchases Inventory ×××
Cash ××× Purchases ×××
Cash ×××
Sales
Cash ×××
Sales ×××
Cost of Goods Sold ×××
Inventory ×××
Cash ×××
Sales ×××
Periodic close-outs
Sales ×××
Income Summary ×××
Income Summary ×××
Cost of Goods Sold ×××
Income Summary ×××
Retained Earnings ×××
Sales ×××
Income Summary ×××
Income Summary ×××
Inventory(Beginning) ×××
Purchases ×××
Inventory(Ending) ×××
Income Summary ×××
Income Summary ×××
Retained Earnings ×××
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COST-BASED INVENTORY VALUATION METHODS
Objective 4
Objective 4
Physical Flow Cost Flow
Actual physical flows:
Specific Identification
FIFO
LIFO
Average Cost
Cost Flow used for F/S valuation
Pick one.
Choice determined by management strategy
Sometimes constrained by tax law
Inventory Data
Date/Type Units Cost per Unit Total Cost
Jan. 1 Inventory 150 $8 $1,200
Feb. 20 Purchases 200 9 1,800
Apr. 20 Purchases 250 10 2,500
Sept. 20 Purchases 200 11 2,200
Goods available for sale
800 $7,700
First-In First-Out Method
Under the FIFO method, merchandise on hand is considered to be that which was most recently received. Hence, year-end inventory of 430 units is valued as follows ：
Example 8-1
Last purchase(Sep. 20) 200 units @ $11＝ $2,200
Next most recent purchase(Apr. 20) 230 units @ $10 ＝ 2,300
Total 430 $4,500
Last-In First-Out Method
Under the LIFO method, ending inventory is reflected at the costs of the earliest purchases. Therefore, cost of goods sold is based upon the most recent costs. The year-end inventory is computed as follows ：
Example 8-2
Initial purchase (Jan. 1) 150 units @ $8＝ $1,200
Next purchase (Feb. 20) 200 units @ $9＝ 1,800
Next later purchase (Apr. 20) 80 units @ $10＝ 800
Total 430 $3,800
Simple vs Weighted Average
Note: Inventory method is actually a ‘weighted’ average in that it takes into account both quantity and cost.
Example: If purchases are 100 units @$10 and 10 units @ $2
Weighted Average
[(100x $10) + (10 x $2)] / 110 = $9.27 Simple Average
($10 + $2)/2 = $6.00
Weighted-Average Method
The average unit cost is computed as follows ：
The value of the ending inventory is therefore ： 430 units @ $9.625 ＝ $4,139
The cost of goods sold is:
370 units @ $9.625 ＝ $3,561
Example 8-3
Cost per unit ＝ Cost of goods available
＝ $7,700
＝ $9.625 Units available 800
Cost of goods available for sale － Ending inventory ＝ Cost of goods sold, Cost of goods available for sale ＝ Ending inventory ＋ Cost of goods sold, or Cost of goods sold ＝ Beginning inventory ＋ Purchases － Ending inventory
Comparison of Inventory Valuation Methods
The tabulated results of the three methods reveal the following com- parisons ：
Example 8-4
FIFO LIFO WA
Cost of Goods Available for Sale $7,700 $7,700 $7,700 Less: Ending Inventory, Dec. 31 4,500 3,800 4,139
Cost of Goods Sold $3,200 $3,900 $3,561
Specific Identification Method
A reference to specific invoices reveals that items purchased on Febru- ary 20, April 20 and September 20 are left unsold. Then, the ending inventory is calculated by individually identifying specific invoices.
Example 8-5
Purchase invoice #131 (Feb. 20) 180 units @ $9 ＝ $1,620
Purchase invoice #145 (Apr. 20) 130 units @ $10 ＝ 1,300
Purchase invoice #198 (Sep. 20) 120 units @ $11 ＝ 1,320
Ending inventory 430 $4,240
OTHER INVENTORY VAL- UATION METHODS
Objective 5
Objective 5
Inventory Valuation at LCM
LCM (Lower of Cost or Market)
Lesser of Cost or “Market Value”
“Market( 시가 )” is defined as Current Cost ( 현 행원가 ) or Net Realizable Value ( 순실현가능가 치 )
Allows a company to recognize an unrealized holding loss from declines in market value
Conservatism: Holding gains are not recognized until goods are sold
Application of LCM
- There are 3 alternatives: (1) Individual Item basis, (2) Major Category Basis and (3) Aggregate Basis.
Individual Item Basis ( 개별기준 ) is the principle.
Major Category Basis ( 조별기준 )is allowed if reasonable.
However, Aggregate Basis ( 총계기준 ) is not
allowed.
Determination of LCM
Lot Quantity Unit Cost Unit
Replacement Cost
Total Cost
Total
Replacement Cost LCM
W 200 $7.00 $7.50 $1,400 $1,500 $1,400
X 250 9.00 10.00 2,250 2,500 2,250
Y 300 10.00 9.00 3,000 2,700 2,700
Z 400 11.00 12.00 4,400 4,800 4,400
Total $11,050 $11,500 $10,750
LCM requires the recording of a loss for decline in inventory value:
Dr. Loss on Inventory Valuation 300
Cr. Inventory 300
Gross Profit Method ( 매출총이익 법 )
Gross Profit Method (used if there is a fire or between accounting period ends)
GP% = (Sales – COGS) / Sales
For example, if selling price is $100 and cost is $70 the GP% is 30%
When Sales are known and Ending Inventory is
unknown, Sales – (Sales x GP%) = COGS
Gross Profit Method
Assume that the beginning inventory is $15,000, net purchases are $90,000, and net sales are
$200,000. The gross profit rate has been running 60 percent of net sales.
Since cost of goods available for sale less ending inventory is equal to cost of goods sold, the ending inventory must be $25,000. The proof is
Cost of Goods Available for Sale－ Ending Inventory ＝ Cost of Goods Sold $105,000 － $25,000 ＝ $80,000
Example 8-6
Income Statement(partial)
Net Sales $200,000
Less ： Cost of Goods Sold
Beginning Inventory $15,000
Net Purchases 90,000
Cost of Goods Available for Sale $105,000
Less ： Ending Inventory ?
Cost of Goods Sold (40%) 80,000
Gross Profit on Sales (60%×$200,000) $120,000
Retail Inventory Method ( 소매재고 법 )
The retail inventory method utilizes the fact that
“Units Sold = Units of BI + Units of P – Units of EI” can be expressed in terms of both cost ( 원가 ) and retail price ( 소매가 ).
“COGS = BI @ cost + P@cost – EI@cost”
“Sales = BI@retail + P@retail - EI@retail”
Þ
Goods Available for Sale - Sales = EI@retail
Þ
EI@retial x Ratio of Cost/Retail = EI@Cost
*
Ratio of Cost/Retail = (BI @ cost + P@cost )/(BI@retail + P@retail )Goods Sold ＝ Beginning Inventory ＋ Purchases － Ending Inventory
Ending Inventory at Cost ＝ Ending Inventory at Retail Price×Cost/Retail Price
Retail Inventory Method
Merchandise records for the month of December of a retail company show the following in- formation.
Then, the ending merchandise inventory can be estimated as follows ：
Example 8-7
Cost Retail Price
Merchandise Inventory, December 1 $45,000 $60,000
Purchases 50,000 68,000
Sales for December 100,000
Cost Retail Price
Merchandise Inventory, December 1 $45,000 $60,000
Purchases 50,000 68,000
Merchandise Available for Sale $95,000 $128,000
Sales for December 100,000
Merchandise Inventory, December 31, at retail $28,000
Merchandise Inventory, December 31, at cost $20,776*
Cost $95,000
* Ratio＝―――＝――――＝ 74.2%
Retail $128,000
$28,000×74.2%＝ $20,776
Accounting Terminologies in Chapter 8
aggregate basis 총계기준
beginning inventory 기초재고
consigned goods 위탁품
cost 원가
cost of goods sold 매출원가
cost of goods available for sale 판매가능원가
current assets 유동자산
current cost 현행원가
ending inventory 기말재고
FIFO method 선입선출법
finished goods 완제품
first-in, first-out method 선입선출법
Accounting Terminologies in Chapter 8
FOB destination 도착지인도조건
FOB shipping point 선적지인도조건
goods in transit 적송품
gross profit method 매출총이익법
income summary 집합손익
individual item basis 개별기준
interim financial statements 중간재무제표
inventory 재고자산
inventory shrinkage 재고자산감모손실
last-in, first-out method 후입선출법
legal title 법적소유권
LIFO method 후입선출법
Accounting Terminologies in Chapter 8
lower of cost or market method 저가법
major category basis 조별기준
net realizable value 순실현가능가치
periodic inventory method 실지재고조사법 perpetual inventory method 계속기록법
purchase discounts 매입할인
purchase returns and allowances 매입환출 및 에누리
Purchases 매입
ratio of cost to retail price 원가 대 소매가격 비율
raw materials 원재료
retail business 소매업
retail inventory method 소매가격법
Accounting Terminologies in Chapter 8
retail price 소매가격
sales 매출
specific identification method 개별법
terms of transaction 거래조건
total inventory basis 총재고기준
transportation-in 매입운임
transportation-out 매출운임
units of goods available for sale 판매가능수량 weighted-average method 총평균법
works in process 재공품
