business accounting chap 8

8/21/2019 Business Accounting Chap 8

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© The McGraw-Hill Companies, IncMcGraw-Hill/Irwin

8-1

INVENTORIES AND

THE COST OF GOODS

SOLD

Chapter

8


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8-2

Inventory

Inventory

Goods ownedand held for sale

to customers

Goods ownedand held for sale

to customers

Currentasset

Currentasset

Inventory Defined

Inventory Defined


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8-3

INCOME STATEMENT

Revenue

Cost of goods sold Gross proft

E!penses

Net ncome

As purchase cost"or manufacturng

costs# are ncurred

as goodsare sold

$A%ANCE S&EET

Current assets'

Inventory

$ $

$

The Flow of Inventory Costs



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8-4

GENERA% (O)RNA%

*ate Account Ttles and E!planaton *e,t Credt

Entry on +urchase *ate

Inventory ----

Accounts +aya,le ----

Entry on Sale *ate

Cost of Goods Sold ----

Inventory ----

In a perpetual nventory system. nventory entresparallel the flow of costs/




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8-5

0hen dentcal unts of nventory havedfferent unt costs. a 1ueston naturally

arses as to whch of these costs should ,e

used n recordng a sale of nventory/

Which Unit Did We Sell?

Which Unit Did We Sell?


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8-6

A separate subsidiary account is maintained foreach item in inventory.

A separate subsidiary account is maintained foreach item in inventory.

&ow can we determne the unt cost for the Sept/ 23 sale4

Item %%335 +rmary suppler Electronc Cty

*escrpton %aser %ght Secondar

y suppler Electrc Company%ocaton Storeroo

m 5 Inventory level' Mn' 56 Ma!' 533

+urchased Sold $alance

*ate )nts

)nt

Cost Total )nts

)nt

Cost

Cost of

Goods

Sold )nts

)nt

Cost Total

Sept/ 6 233 73- 7.333- 233 73- 7.333-

Sept/ 8 96 63 7.963 233 73 7.333

96 63 7.963

Sept/ 23 23 4 4 4 4 4

4 4 4

Inventory Subsidiary Leder

Inventory Subsidiary Leder


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8-7

Specfcdentfcaton

%I:O

Averagecost

:I:O

0e use one of these nventory valuatonmethods to determne cost of nventory sold/

Inventory Cost FlowsInventory Cost Flows



8-8

The $;e Company "T$C#

Infor!ation for the Followin Inventory"#a!les




8-

Secific Identification Secific Identification

0hen a unts sold. the

specfc cost ofthe unt sold s

added to cost ofgoods sold/

0hen a unt

s sold. thespecfc cost ofthe unt sold s

added to cost ofgoods sold/



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On August 2



8-11

The Cost of Goods Sold for the August 2< sale s-2.8>6. leavng -626 and 6 unts n nventory/

The Cost of Goods Sold for the August 2< sale s-2.8>6. leavng -626 and 6 unts n nventory/

Continue%et?s loo; at the entres for

the Aug/ 2< sale/




8-12

Continue

RetalRetal

CostCost

A smlar entry s

made after each sale/

A smlar entry smade after each sale/




8-13

Addtonal purchases were made on August 29 and 5>/

Costs assocated wth sales on August 72 were as follows' 2 @ -82.7 @ -23=. 26 @ -226. < @ -228/

Addtonal purchases were made on August 29 and 5>/

Costs assocated wth sales on August 72 were as follows' 2 @ -82.7 @ -23=. 26 @ -226. < @ -228/

Continue


Cost of Goods

Sold forAugust 72 B

-5.=23

Cost of Goods

Sold forAugust 72 B

-5.=23



8-14

$alance Sheet

Inventory B -2.786

Income Statement

COGS B -



8-15

Snce specfcdentfcaton s so

easy. can?t we use tall the tme4

Not really/ Specfcdentfcaton s hard to use

when we sell a lot of

nventory that has lots ofdfferent costs/


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8-16

Cost of #oods Avai$ab$e for

%a$e

&nits on handon the date of

sa$e

%verae&Cost 'ethod%verae&Cost 'ethod

'hen a unit is so$d(the avera)e cost of each unit

in inventory is assi)ned tocostof )oods so$d.

'hen a unit is so$d(the avera)e cost of each unit

in inventory is assi)ned tocostof )oods so$d.


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8-17

On August 2


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8-18

Continue

The average cost perunt s -233/

The average cost perunt s -233/

%et?s loo; at the entres

for the Aug/ 2< sale/


-233 B -5.633 ÷ 56-233 B -5.633 ÷ 56


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8-1

Continue

RetalRetal

CostCost

A smlar entry s





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Addtonal purchases were made on August 29 andAugust 5>/

On August 72. an addtonal 57 unts were sold/

Addtonal purchases were made on August 29 and

August 5>/


Continue



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8-21

-22< B -7.883 ÷ 76-22


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-22< B -7.883 ÷ 76-22


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Income Statement

COGS B -

-22< D 25 B -2.7=>-22< D 25 B -2.7=>



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Costs of

Goods Sold

Costs ofGoods Sold

EndngInventory

EndngInventory

Oldest

Costs

OldestCosts

RecentCosts

RecentCosts

First&In( First&)ut 'ethod *FIF)+First&In( First&)ut 'ethod *FIF)+


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On August 2


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8-26

RetalRetal

CostCost

ContinueA smlar entry s





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8-27

Addtonal purchases were made on Aug/ 29 and Aug/ 5>/




Continue


Cost of Goods Sold for August 72 B -5.=33Cost of Goods Sold for August 72 B -5.=33


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$alance Sheet

Inventory B -2.


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8-2

Costs of

Goods Sold

Costs ofGoods Sold

EndngInventory

EndngInventory

Recent

Costs

RecentCosts

OldestCosts

OldestCosts

Last&In( First&)ut 'ethod *LIF)+Last&In( First&)ut 'ethod *LIF)+


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On August 2


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8-31

Continue

RetalRetal

CostCost





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8-32

Continue



On Aug/ 72. an addtonal 57 unts were sold/


On Aug/ 72. an addtonal 57 unts were sold/


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Continue


Cost of Goods Sold for August 72 B -5.=>6Cost of Goods Sold for August 72 B -5.=>6


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$alance Sheet

Inventory B -2.5=3

Income Statement

COGS B -36

End/ Inv/ 2.5=3-

6 @ 82- "


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8-35

Once a company hasadopted a partcular

accountng method. tshould follow that

method consstently.

rather than swtchmethods from oneyear to the ne!t/

The ,rincile of ConsistencyThe ,rincile of Consistency


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In a perodc nventory system. nventory entres areas follows/

Note that an entry s notmade to nventory/

Note that an entry s not made to nventory/

,eriodic Inventory Syste!s,eriodic Inventory Syste!s


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8-37

In a perodc nventory system. nventory entres areas follows/


8 38


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The nventory onhand and thecost of goods

sold for the year

are notdetermned untlyearend/


8 3


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8-3

Specfcdentfcaton

%I:O

Averagecost

:I:O

0e use one of these nventory valuatonmethods n a perodc nventory system/


8 4!

I f i f h F ll i I


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Computers. Inc/Mouse +ad Inventory

*ate )nts -F)nt Total

$egnnng

Inventory 2.333 6/56- 6.563/33-

+urchases'

(an/ 7 733 6/73 2.683/33

(une 53 263 6/=3 >3 2.2=3/33

Nov/ 58 263 6/83 >>6/33

Goods

Avala,le

for Sale 2.>33 8.956/33-

Endng

Inventory 2.533 4

Cost of

Goods Sold =33 4



8 41


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$y revewng actualpurchase nvoces.

Computers. Inc/ determnes

that the 2.533 mouse padson hand at yearend have

an actual total cost of-=.


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$egnnng

Inventory 2.333 6/56- 6.563/33-

+urchases'

(an/ 7 733 6/73 2.683/33

(une 53 263 6/=3 >3 2.2=3/33

Nov/ 58 263 6/83 >>6/33

Goods

Avala,le

for Sale 2.>33 8.956/33-

Endng

Inventory 2.533 =.


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*ota$ Cost of#oods

Avai$ab$e for%a$e

*ota$ +umberof &nits

Avai$ab$e for%a$e

The average cost scalculated at year

end as follows'

The average cost scalculated at year

end as follows'


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$egnnng

Inventory 2.333 6/56- 6.563/33-

+urchases'

(an/ 7 733 6/73 2.683/33 (une 53 263 6/=3 >3 2.2=3/33

Nov/ 58 263 6/83 >>6/33

Goods

Avala,le

for Sale 2.>33 8.956/33-

Endng

Inventory 2.533 4

Cost of

Goods Sold =33 4

Avg/ Cost -8.956 ÷ 2.>33 B-6/

Avg/ Cost -8.956÷

2.>33 B-6/




$egnnng

Inventory 2.333 6/56- 6.563/33-

+urchases'

(an/ 7 733 6/73 2.683/33 (une 53 263 6/=3 >3 2.2=3/33

Nov/ 58 263 6/83 >>6/33

Goods

Avala,le

for Sale 2.>33 8.956/33-

Endng

Inventory 2.533 =.7/33-

Cost of

Goods Sold =33 7.5


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Costs of

Goods Sold

Costs ofGoods Sold

EndngInventory

EndngInventory

Oldest

Costs

OldestCosts

RecentCosts

RecentCosts


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8 46

Remem,er' Startwth the 22F58

purchase and thenadd other purchasesuntl you reach the

num,er of unts nendng nventory/




$egnnng

Inventory 2.333 6/56- 6.563/33-

+urchases'

(an/ 7 733 6/73 2.683/33 (une 53 263 6/=3 >3 2.2=3/33

Nov/ 58 263 6/83 >>6/33

Goods

Avala,le

for Sale 2.>33 8.956/33-

Endng

Inventory 2.533 4

Cost of

Goods Sold =33 4

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*ate $eg/ Inv/ +urchases End/ Inv/Cost of

Goods Sold

Nov/ 58 263@-6/83 263@-6/83

)nts 263

Now. let?s complete theta,le/

Now. let?s complete theta,le/



Goods Sold

2.333@-6/56 =33@-6/56

3 533@-6/>3

Nov/ 58 263@-6/83 263@-6/83

)nts 2.533 =33

Now. we have allocatedthe cost to all 2.533 unts

n endng nventory/


Goods Sold

2.333@-6/56 =33@-6/56

3 533@-6/>3

Nov/ 58 263@-6/83 263@-6/83

)nts 2.533 =33

Costs -=.696 -7.263

Cost of Goods Avala,le for Sale -8.956

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Completng the ta,lesummares the

computatons Hustmade/




$egnnng

Inventory 2.333 6/56- 6.563/33-

+urchases'

(an/ 7 733 6/73 2.683/33 (une 53 263 6/=3 >3 2.2=3/33

Nov/ 58 263 6/83 >>6/33

Goods

Avala,le

for Sale 2.>33 8.956/33-

Endng

Inventory 2.533 =.696/33-

Cost of

Goods Sold =33 7.263/33-

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Costs of

Goods Sold

Costs ofGoods Sold

EndngInventory

EndngInventory

Recent

Costs

RecentCosts

OldestCosts

OldestCosts


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Remem,er' Start wth,egnnng nventoryand then add otherpurchases untl youreach the num,er of

unts n endngnventory/




$egnnng

Inventory 2.333 6/56- 6.563/33-

+urchases'

(an/ 7 733 6/73 2.683/33 (une 53 263 6/=3 >3 2.2=3/33

Nov/ 58 263 6/83 >>6/33

Goods

Avala,le

for Sale 2.>33 8.956/33-

Endng

Inventory 2.533 4

Cost of

Goods Sold =33 4

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Goods Sold

2.333@-6/56 2.333@-6/56

)nts 2.333



Goods Sold

2.333@-6/56 2.333@-6/56

(an/ 7 733@-6/73 533@-6/73

233@-6/73

)nts 2.533 233

Now. we have allocatedthe cost to all 2.533 unts

n endng nventory/

Ne!t. let?scomplete the

ta,le/

Ne!t. let?scomplete the

ta,le/


Goods Sold

2.333@-6/56 2.333@-6/56

(an/ 7 733@-6/73 533@-6/73

233@-6/73

(une 53 263@-6/=3 263@-6/=3

Sept/ 26 533@-6/>3 533@-6/>3

Nov/ 58 263@-6/83 263@-6/83

)nts 2.533 =33

Costs -=.723 -7.


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Completng the ta,lesummares the

computatons Hustmade/




$egnnng

Inventory 2.333 6/56- 6.563/33-

+urchases'

(an/ 7 733 6/73 2.683/33 (une 53 263 6/=3 >3 2.2=3/33

Nov/ 58 263 6/83 >>6/33

Goods

Avala,le

for Sale 2.>33 8.956/33-

Endng

Inventory 2.533 =.723/33-

Cost of

Goods Sold =33 7.


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Errors n Measurng Inventory$egnnng Inventory Endng Inventory

Effect on Income Statement Overstated )nderstated Overstated )nderstated

Goods Avala,le for Sale NE NE

Cost of Goods Sold

Gross +roft

Net Income

Effect on $alance Sheet

Endng Inventory NE NE

Retaned Earnngs

An error n endng nventory n a year wll result n the same error n the ,egnnng nventory of the ne!t year/

An error n endng nventory n a year wll result n the same error n the ,egnnng nventory of the ne!t year/

I!ortance of an %ccurate -aluation ofInventory

I!ortance of an %ccurate -aluation ofInventory

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: or nt er m f nancal st at ement s. w e may need t o est mat e endng nv ent or y and cost of

goods sold/

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*etermne cost of goods

avala,le for sale/

Estmate cost of goods

sold ,y multplyng the net

sales ,y the cost rato/

*educt cost of goods sold

from cost of goodsavala,le for sale to

determne endng

nventory/

*etermne cost of goods

avala,le for sale/

Estmate cost of goods

sold ,y multplyng the netsales ,y the cost rato/

*educt cost of goods sold

from cost of goodsavala,le for sale to

determne endng

nventory/

The .ross ,rofit 'ethodThe .ross ,rofit 'ethod

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,n arch of 2!!5( ChemCos inventory /as destroyedby fire. ChemCos norma$ )ross profit ratio is 3!0 of

net sa$es. At the time of the fire( ChemCo sho/edthe fo$$o/in) ba$ances

,n arch of 2!!5( ChemCos inventory /as destroyedby fire. ChemCos norma$ )ross profit ratio is 3!0 of

net sa$es. At the time of the fire( ChemCo sho/edthe fo$$o/in) ba$ances

Sales 72.633-

Sales returns 2.633 $egnnng Inventory 25.333

Net cost of goods purchased 53.633

Sales 72.633-

Sales returns 2.633 $egnnng Inventory 25.333

Net cost of goods purchased 53.633


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#oods Avai$ab$e for %a$e

e)innin) ,nventory 12(!!!

+et cost of )oods purchased 2!(5!!

#oods avai$ab$e for sa$e 32(5!!

ess estimated cost of )oods so$d

%a$es 31(5!!

ess sa$es returns 1(5!!

+et sa$es 3!(!!!

stimated cost of )oods so$d 21(!!!

stimated arch inventory $oss 11(5!!

Estmatng InventoryThe Gross +roft Method


D 93J

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The /etail 'ethodThe /etail 'ethod

*he retai$ method of estimatin) inventory reuiresthat mana)ement determine the va$ue of endin)

inventory at retai$ prices.

*he retai$ method of estimatin) inventory reuiresthat mana)ement determine the va$ue of endin)

inventory at retai$ prices.

#oods avai$ab$e for sa$e at cost 32(5!!

#oods avai$ab$e for sa$e at retai$ 5!(!!!

9hysica$ count of endin) inventory priced at retai$ 22(!!!

Informaton for ChemCo

The Retal Method

,n arch of 2!!5( ChemCos inventory /as destroyedby fire. At the time of the fire( ChemCos

mana)ement co$$ected the fo$$o/in) information

,n arch of 2!!5( ChemCos inventory /as destroyedby fire. At the time of the fire( ChemCos

mana)ement co$$ected the fo$$o/in) information

8-5


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The /etail 'ethodThe /etail 'ethod

a #oods avai$ab$e for sa$e at cost 32(5!!

b #oods avai$ab$e for sa$e at retai$ 5!(!!! c Cost ratio :a ÷ b; 650

d 9hysica$ count of endin) inventory priced at retai$ 22(!!!

e stimated endin) inventory at cost : c × d; 14(3!!

Estmatng Inventory

The Retal Method

ChemCo /ou$d fo$$o/ the steps be$o/ toestimate their endin) inventory usin) the retai$

method.

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"nd of Chater 8"nd of Chater 8

business accounting chap 8

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