acct 201 acct 201 acct 201 dr. fred barbeeacct 2011 reporting and analyzing inventories uaa – acct...
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Dr. Fred Barbee ACCT 201 1
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Reporting and Analyzing Inventories
UAA – ACCT 201 Principles of Financial
Accounting Dr. Fred Barbee
Chap
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Day #2
Topic LO Read HW
Inventory Items and Cost
C1, C2
219-220
QS5, QS7
Other Inventory Valuations
P2, P3
220-223
E7, E8, P3A
Decision Analysis A3224-225
QS12, E9, E10
Chapter 5 - Day 2 - Agenda
P5-2A due today!
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Reporting and Analyzing Inventories
Inventory Items and Costs
Chap
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FOB Destination Point
Public Carrier
Seller Buyer
Items in Merchandise Inventory
Public Carrier
Seller Buyer
FOB Shipping Point
Ownership passes to the buyer here.
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Items in Merchandise Inventory
Goods on Consignment
Goods shipped by the owner (consignor) to another party (consignee).
Merchandise is included in the inventory of the consignor.
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Items in Merchandise Inventory
Goods Damaged or Obsolete
Damaged or obsolete goods are not counted in inventory.
Cost should be reduced to net realizable value.
Include all expenditures necessary to bring an item to a salable condition and
location.
Invoice PriceInvoice PriceInvoice PriceInvoice Price
Import DutiesImport DutiesImport DutiesImport Duties
Freight-inFreight-inFreight-inFreight-in
StorageStorageStorageStorage
InsuranceInsuranceInsuranceInsurance
Cost of Merchandise Inventory
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Physical Count of Merchandise Inventory
Most companies take a physical count of inventory at least once each year. Quantity ___
InventoryCount TagCountedby _______
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Physical Count of Merchandise Inventory
When the physical count does not match the Merchandise Inventory account, an adjustment must be made.
Quantity ___
InventoryCount TagCountedby _______
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Reporting and Analyzing Inventories
Other Inventory Valuations
Chap
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Lower of Cost or Market
Other Inventory Valuations
Lower of Cost or Market
Inventory must be reported at market value when market is
lower than cost.
Market is defined as current replacement cost (not sales
price).Consistent with the
conservatismprinciple.
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Lower of Cost or Market
Can be applied three ways:
separately to each individual item.
to major categories of assets.
to the whole inventory.
A motorsports retailer has the following items in inventory (Exhibit 5.14) :
Lower of Cost or Market
Here is how to compute lower of cost or market for individual inventory items.
Lower of Cost or Market
Lower of Cost or Market
Here is how to compute lower of cost or market for the two groups
of inventory items.
Lower of Cost or Market
Here is how to compute lower of cost or market for the entire inventory.
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Retail Inventory Method
Other Inventory Valuations
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Retail Inventory Method
Often used to estimate inventory for interim period reporting.
Needed Information includes:
Beginning inventory at cost and retail
Net purchases at cost and retail
Net sales
Retail Inventory Method
Step 3Step 3 Cost to Cost to retail ratioretail ratio
Ending Ending inventory inventory at retailat retail
Estimated Estimated ending ending
inventory inventory at costat cost
==××
Step 2Step 2Goods Goods
available available for sale at for sale at
retailretail
Goods Goods available available for sale at for sale at
retailretail
Goods Goods available available for sale at for sale at
costcost
Goods Goods available available for sale at for sale at
costcost=÷ Cost to Cost to
retail ratioretail ratioCost to Cost to
retail ratioretail ratio
Step 1 Net sales at retail
Net sales at retail
Goods available for sale at
retail
Goods available for sale at
retail
– =Ending
inventory at retail
Ending inventory at retail
Retail Inventory Method
Retail Inventory Method
Retail Inventory Method
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Gross Profit Method
Other Inventory Valuations
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Gross Profit Method
Estimate ending inventory by applying the gross profit ratio to net sales (at retail).
Useful when inventory has been destroyed, lost, or stolen.
Gross Profit Method
Step 11.0 – the
gross profit ratio
Net sales at retail × =
Estimated cost of goods sold
Step 2Estimated
cost of goods sold
Goods available for sale at
cost
– =Estimated
ending inventory
at cost
Gross Profit Method
In March of 2002, Chemical Company’s inventory was destroyed by fire. Chemical’s normal gross profit ratio is 30% of net sales. At the time of the fire, Chemical showed the following balances:
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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 1
Gross Profit Method
Step 2
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$
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Reporting and Analyzing Inventories
Decision Analysis
Chap
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Inventory Turnover
Shows how many times a company turns over its inventory during a
period. Indicator of how well management is controlling the amount of inventory available.
Inventory Turnover =
Cost of goods sold Avg. inventory
Days’ Sales in Inventory
Reveals how much inventory is available in terms of the number of days’ sales.
Days' Sales in Inventory =
Ending Inventory
Cost of goods sold
× 365