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CHAPTER 8

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(1)

CHAPTER 8

INVENTORIES

(2)

2

Introduction

Objective 1

Objective 1

(3)

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)

(4)

Two types of inventories

Merchandising firms

Purchased goods for resale

Manufacturing firms

Goods manufactured from scratch within the fir m for original sale

(5)

Manufacturer’s 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

(6)

6

Objective 2 Objective 2

Determining the

Ownership of Goods

(7)

When the terms are FOB (free on board) shipping point ( 선적지인도 조건 ), the ownership of the goods passes to the buyer when the pub- lic carrier accepts the goods from the seller. Thus, the buyer bears and incurs transportation-in ( 매입운임 ). Included in the transporta- tion-in are freight-in and insurance expense.

When the terms are FOB destination ( 도착지인도조건 ), the owner- ship of the good remains with the seller until the goods reach the buyer. As such, the seller incurs transportation-out ( 판매운임 ).

The Ownership Of Goods

(8)

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

(9)

Consigned Goods

Figure 8-2

Sells Consignor

(Owner)

Consignee (Agent)

Customers Consigns

Consigned Goods

(10)

10

Objective 3 Objective 3

Perpetual and Periodic

Inventory Systems

(11)

Perpetual vs Periodic Inventory Systems

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

(12)

Timing of Inventory Computation s

Perpetual Inventory

Purchases are debited directly to ‘Inventory’ as items for resale are acquired.

Items sold are credited to ‘Inventory’ at their acquisiti on cost at the time of sale. Two journal entries are rec orded at the time of sale.

Dr. Accounts Receivable xxx

Cr. Sales xxx

Dr. Cost of Goods Sold xxx

Cr. Inventory xxx

(13)

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 ba lance is of inventory

Advantage:

Less bookkeeping costs in the pre-computer era.

(14)

Cost of Goods Sold

= Beginning Inventory

+ Net Purchases

- Ending Inventory

(15)

Perpetual vs. Periodic Inventory Methods

Table 8-1

Perpetual System Periodic System

Purchases Inventory×××

Cash ×××

Purchases ×××

Cash ×××

Sales

Cash ×××

Sales ×××

Cost of Goods Sold ×××

Inventory ×××

Cash ×××

Sales ×××

Periodic closing

entries

No closing entry is needed for purchase and inventory-related accounts.

Income Summary ×××

Inventory(Ending) ×××

Purchase R&A ×××

Purchase Discounts ×××

Inventory(Beginning) ×××

Purchases ×××

Transportation-in ×××

(16)

16

Cost-based Inventory Valu- ation Methods

Objective 4

Objective 4

(17)

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

(18)

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

(19)

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 un its 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

(20)

Last-In First-Out Method

Under the LIFO method, ending inventory is reflected at the costs of th e earliest purchases. Therefore, cost of goods sold is based upon the mo st recent costs. The year-end inventory is computed as follows

Example 8-2

Beginning inventory(Jan. 1) 150 units @ $8 $1,200

First purchase (Feb. 20) 200 units @ $9 1,800

Next purchase (Apr. 20) 80 units @ $10 800

Total 430 $3,800

(21)

Simple vs. Weighted Average

Note: Inventory method is actually a ‘weighted’ average in that it t akes 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

(22)

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

(23)

Cost of Goods Available for Sale

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

(24)

Comparison of Inventory Valuation Method s

The tabulated results of the three methods reveal the following compar isons

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

(25)

Specific Identification Method

Assume that a reference to specific invoices for Poinsettia Company reveal s that items purchased on February 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

(26)

26

Other Inventory Valuation Methods

Objective 5

Objective 5

(27)

Inventory Valuation at LCM

LCM (Lower of Cost or Market)

Lesser of Cost or “Market Value”

“Market( 시가 )” is defined as Net Realizable Value

( 순실현가능가치 )

Decreases in market value of inventory are recognized.

However, increases in market value of inventory are not recorded since this would violate the conservatism.

(28)

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 reason able.

However, Aggregate Basis ( 총계기준 ) is not allowed.

(29)

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

(30)

LCM requires the recording of a loss for decline in i nventory value:

Dr. Loss on Inventory Valuation 300

Cr. Inventory 300

(31)

Gross Profit Method ( 매출총이익법 )

Gross Profit Method (used if there is a fire or betw een 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 un

known, Sales – (Sales x GP%) = COGS

(32)

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

(33)

Retail Inventory Method ( 소매재고법 )

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”

ÞGoods 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 )

(34)

Estimated Ending Inventory at Cost

Beginning Inventory at Retail Price + Purchases at Retail Price - Sales

= Ending Inventory at Retail Price

Ending Inventory at Cost = Ending Inventory at Retail Price × Cost to Retail Ratio

(35)

Retail Inventory Method

Merchandise records for the month of December of a retail company show the following informati on.

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

(36)

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

(37)

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

(38)

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

(39)

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

(40)

Chapter 8

The end

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