Chapter-15-Inventory.ppt

Click to edit Master title style,Click to edit Master text styles,Second Level,Third Level,15-,*,INVENTORIES,CHAPTER 15,Merchandise inventory,Merchandise inventory consists of all goods that are,owned and held for sale in the regular course of,business,including goods in transit.,All the items for sale,The goods in stock for sale,Supermarket,Merchandising company,Merchandise inventory,The Title of the merchandise,passed to the company,Purchased merchandise in transit should be included in the inventory count.,Merchandise inventory,Outgoing goods,Incoming goods,FOB Destination,FOB Shipping Point,Merchandise inventory,Merchandise inventory,Company A,Consigned,Company B,Merchandise,Title belongs to Company A,Merchandise,inventory,?,?,Beginning inventory and ending inventory,At the beginning of,the accounting period,Merchandise inventory,At the end of,accounting period,The beginning inventory,The ending inventory,The beginning inventory,for the next accounting period,The cost of goods sold,Formula,Goods Available for Sale,=,Beginning Inventory,+,Net Purchases,Purchases Purchase Returns and Allowances Purchase Discount+Freight In,Cost of Goods Sold,=,Goods Available for Sale,Ending Inventory,Gross Margin from Sales,=,Revenues from Sales,Cost of Goods Sold,The cost of goods sold,The higher the cost of ending inventory,the lower the cost of goods sold will be and the higher the gross margin.,Vice versa,the lower the ending inventory,the higher,The cost of goods sold will be and the lower the gross,margin.,Methods of Pricing Inventory at Cost,Specific identification method,Average-cost method,First-in,first-out method,Last-in,first-out method,Methods of Pricing Inventory at Cost,Suppose that the following transactions happened in August，2006.,Date,Item,Quantity,(Units),Unit price($),Total,($),August,1,Beginning inventory,50,$2.00,100.00,6,Purchase,60,$2.20,132.00,17,Purchase,80,$2.40,192.00,20,Purchase,100,$2.50,250.00,27,Purchase,150,$2.60,390.00,Goods Available for Sale,440,$1,064,Sale,200,Ending Inventory August 31,240,Specific Identification Method,1,Specific Identification,Method,Method,Specific Identification Method,A method of tracking inventory when each item can be identified.,This method used in the purchase and sale of high-priced articles,such as automobile,heavy equipment,jewels and dear fashions.,Specific Identification Method,First,lets,Look at,an example,Specific Identification Method,Suppose that the sale consists of 50 units from,beginning inventory,60 units of August 6,80 units,of August 17 and 10 units of August 20.,Value of the ending inventory,90$2.50+150$2.60=$615,$1064-$615=$449,?,Ending Inventory,=,Cost of Goods Sold,=,Specific Identification Method,Disadvantages,First,it is difficult and impractical in most cases to keep,track of the purchase and sale of individual items.,Second,the company could raise or reduce income by,choosing whether to sell either the high-cost or the,low-cost items.,Weighted-Average-Cost Method,Weighted-Average-Cost,Method,Method,2,Weighted-Average-Cost Method,Under this method,it is assumed that the cost of inventory,is the average cost of goods on hand at the beginning of the,period plus all goods purchased during the accounting period.,The weighted-average unit cost,=,Total cost of goods available for sale,Total units available for sale,Weighted-Average-Cost Method,Average Unit Cost,=,Total cost of goods available for sale,Total units available for sale,Cost of Beginning Inventory+,(unit price per purchase,quantity per purchase),Formula,Quantity of beginning inventory+,quantity of each purchase,Weighted-Average-Cost Method,Lets go,back to the,previous,example,Weighted-Average-Cost Method,Average Unit Cost,=,(100+132+192+250+390),440,=,$2.42,Cost of Goods Sold,Quantity of sale,=,Average unit cost,=,200$2.42,=,$484,Ending Inventory,=,$1,064-$484,=,$580,Weighted-Average-Cost Method,Advantages,Disadvantages,The value of ending inventory is influenced by all the prices,of beginning inventory and purchases for the period,so it,overlooks the effects of the prices increases and decreases.,The method doesntt make the recent costs gain more,Attention and doesntt reflect the relevance between the,recent prices with the income measurement and,decision-making.,First-In,First-Out Method,Method,3,First-In,First-Out,Method,First-In,First-Out Method,Under this method,it is assumed that the first lots of,Merchandise purchased are sold firstly.,During periods of consistently,rising prices,When the prices are,decreasing,Net Income,Net Income,DECREASE,INCREASE,?,?,First-In,First-Out Method,Lets go,back to the,previous,example,again,First-In,First-Out Method,Cost of Goods Sold,=,50,$2.00+60,$2.20+80,$2.40+10,2.50,=,$(100+132.00+192.00+25),=,$449,Ending Inventory,=,$(1064 449),=,$615,Net Income,=,Revenues from Sales,Cost of Goods Sold,Operating Expenses,First-In,First-Out Method,Suppose the business encounters a price-decreasing period,the,result will be opposite to that of the price-increasing period.,Date,Item,Quantity,(Units),Unit price($),Total,($),August,1,Beginning inventory,502.60,130.00,6,Purchase,60,$2.50,150.00,17,Purchase,80,$2.40,192.00,20,Purchase,100,$2.20,220.00,27,Purchase,150,$2.00,300.00,Goods Available for Sale,440,$992,Sale,200,Ending Inventory August 31,240,First-In,First-Out Method,Cost of Goods Sold,50$2.60+60$2.50+80$2.40+10,$2.20,=,=,$494,$494,$449,During the period of price-decreasing,the cost of goods sold will be higher.,The gross margin,LOWER,The net income,Last-In,First-Out Method,Method,4,Last-In,First-Out,Method,Last-In,First-Out Method,This method is practiced under the assumption that the,items purchased last should be sold first and the cost of,ending inventory is the cost of goods purchased earliest.,The last-in,first-out method indicates that the cost of goods sold will show costs closer to the price level at the time the goods were sold when prices are increasing or decreasing.,Last-In,First-Out Method,Lets still look at the previous example ,Last-In,First-Out Method,Cost of Goods Sold,=,150$2.60+50$2.50,=,$515,Ending Inventory,=,$1064-$515,=,$549,Last-In,First-Out Method,Date,Item,Quantity,(Units),Unit price($),Total,($),August,1,Beginning inventory,50,$2.60,130.00,6,Purchase,60,$2.50,150.00,17,Purchase,80,$2.40,192.00,20,Purchase,100,$2.20,220.00,27,Purchase,150,$2.00,300.00,Goods Available for Sale,440,$992,Sale,200,Ending Inventory August 31,240,Suppose the company meets with a price-decreasing period,Last-In,First-Out Method,Cost of Goods Sold,=,150$2.00+50$2.20,=,$410,Ending Inventory,=,$992-410,=,$582,$515,$410,During the period of price-decreasing,the cost of goods sold will be lower.,Last-In,First-Out Method,During the,price-increasing,period,Net Income,Gross margin,DECREASE,During the,price-increasing,period,Net Income,Gross margin,INCREASE,?,?,Comparison of the four methods,Suppose the revenue from sales is the same data,$1,000.,Methods of inventory pricing,Cost of goods sold,gross margin,The specific identification method,$449,$551,The weighted-average-cost method,$484,$516,The first-in,first-out method,$449,$551,The last-in,first-out method,$515,$485,Comparison of the four methods,The accrual cost,Specific identification method,Average-cost method,First-in,first-out method,Last-in,first-out method,The assumption that,cost is flowing,not the physical,movement of goods,Based,on,Based,on,Comparison of the four methods,First-in,first-out method,Beneficial to yielding higher gross margin and net income.,Last-in,first-out method,Incur higher gross margin and net income than other methods.,During the period of price decreasing,During the period of price increasing,WE ARE SAILING RIGHT ALONG!,