Chapter Eight and Appendix C

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Chapter Eight and Appendix C

• InventoriesA major asset of many firms and a big
  demand on cash.

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Beg. Inventory
Purchases
Beg. Inventory
-End Inventory
Raw Materials
Direct Labor
Beg. Inventory
Mfg. Overhead
sold
Cost of Goods Manufactured
End Inventory
End Inventory
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Cost of Goods Sold

• Beg. RM Inventory 11,000
• Add RM Purchased 73,000
• Less End RM Inventory (8,000)
• Transferred to WIP 76,000
• Add Direct Labor 18,000
• Add Mfg. Overhead 11,000
• Add Beg WIP Inventory 6,000
• Less End WIP Inventory (7,000)
• Transferred to FG 104,000
• Add Beg FG Inventory 12,000
• Less End. FG Inventory (11,000)
• This is Cost of Goods Sold 105,000

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Inventory MethodsConceptual Differences

• Perpetual
• Better Knowledge of what is in stock
• Generally computerized
• Periodic
• Many Accounts
• Need inventory count to compute cost of goods sold

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Inventory MethodsWorksheet Procedures

• Perpetual
• Ending inventory on worksheet
• Cost of goods sold on worksheet
• Periodic
• Beginning inventory on worksheet
• No cost of goods sold account
• Many inventory accounts

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Mechanics

• Purchase of inventory
• Perpetual
• Debit Inventory 1,200
• Credit Accounts Pay 1,200
• Periodic
• Debit Purchases 1,200
• Credit Accounts Pay 1,200

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Sale of Inventory

• Perpetual
• Debit Accounts Receivable 300
• Credit Sales 300
• Debit Cost of Goods Sold 250
• Credit Inventory 250
• Periodic
• Debit Accounts Receivable 300
• Credit Sales 300
• No Entry for Cost of Goods Sold

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AT Year End

• Perpetually
• Nothing needs to be done
• A physical inventory may be taken for control
• Periodically
• Create Cost of Goods Sold as part of the
  adjusting and closing process
• Physical inventory must be taken or estimated.

The value of the inventory is the same using FIFO
periodic and perpetual. Different under LIFO and
AVERAGE.
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Ownership Issues

• In Transit Items--FOB rules
• We looked at these in introductory accounting.
  Remember title transfers at either the shipping
  point or the destination.
• Consignments
• Merchandise which is on your premises but you
  have no ownership interest in it. It should be
  excluded from your inventory and put in the
  owners inventory

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Costs to be included in inventory

• Gross vs. Net
• We will be reviewing example on next slide
• Freight if material
• Interest is usually not included
• Watch for purchase returns.

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Gross vs. Net Again

• May 10 Entry
• Debit Purchases (INV) 25,000
• Credit A/P 25,000
• Debit Purchases (INV) 24,500
• Credit A/P 24,500
• May 11 Entry
• Debit Purchases (INV) 13,000
• Credit A/P 13,000
• Debit Purchases (INV) 12,870
• Credit A/P 12,870

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Gross vs. Net Again

• May 19th
• Debit A/P 25,000
• Credit Pur Dis.(INV) 500
• Credit Cash 24,500
• Debit A/P 24,500
• Credit Cash 24,500
• Side issue - what if paid late?
• Now you owe 25,000 and Purchase Discount Lost
  will have to be debited under the Net Method

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Gross vs. Net

• May 31 (should do May 26)
• No entry under Gross Method
• Debit Purchase Discounts Lost 130
• Credit A/P 130
• Net method
• emphasizes Discounts lost
• Gross method
• emphasizes Discounts taken

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Allocation of Basket Purchases
Each car should be set up in inventory at its
allocated cost.
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LIFO ISSUES

• LIFO conformity rules for tax
• Better Matching
• Tax Savings helps cash flows
• Can lead to silly buying
• Irrelevant balance sheet
• Trouble with involuntary conversions

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Example Dollar Value Lifo
60,000
70,000
72,000
71,000
80,000
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Pricing the Layers

• X2 Deflated Cost 73,500/1.05 70,000
• 60,000 X 1 60,000
• 10,000 X 1.05 10,500
• 70,000 70,500
• X3 Deflated Cost 77,760/1.08 72,000
• 60,000 X 1 60,000
• 10,000 X 1.05 10,500
• 2,000 X 1.08 2,160
• 72,000 72,660
• See how you fare on X4 and X5
• X4 71,580 X582,380

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Lower of Cost or Market

• Really is the lower of cost or constrained market
• Upper limit-(Ceiling) is NRV which is selling
  price minus cost of completion and disposal
• Lower limit (Floor) is Upper limit minus profit
• Treat like a Funnel

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Sales price -Cost of Completion and
DisposalNRV(13)
Constrained Market
Market (14.50)
NRV - Normal Profit (13-112)
Constrained market is then compared to cost--Look
and Examples.
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Potential Loss on Commitments

• In December Indigo Girls company has a purchase
  commitment for 46,000 gallon of raw material at
  3.00 per gallon
• At December 31, price was 3.30
• At December 31, price was 2.70
• What entries should one make?

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Potential Loss on Commitments

• at 12/31with Price at 3.30
• No adjustment is made because a gain cannot be
  recognized.
• At 12/31 with Price at 2.70
• Loss on Purchase Commitments 13,800
• Est. Liability on Pur Comm. 13,800
• When Buy
• Debit Purchases (460002.70)
• Debit Estimated Lia 13,800
• Credit Accounts Payable (46,0003)

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Gross Profit Method-Inventory Estimation

• Facts
• Beg. Inventory is 170,000
• Net Purchases are (390 -30) or 360,000
• Sales are (650-24) 626,000
• Gross Profit percentage is 40
• Merchandise with selling price of 21,000
  undamaged, damaged has selling price of 15,000
  and NRV of 5,300.

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Computation

• Goods Available - 530,000
• Sales at cost 626,000 X .60 375,600
• Estimated inventory 154,400
• Less Salvage value (5,300)
• Less Cost of undamaged (12,600)
• Loss 136,500

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The Retail Method

• Inventory Estimation

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Retail-Computations--Refer to notes page 9 for
facts

• Computation of Ending inventory at retail
• Cost Retail
• Beginning inventory 35,000 87,500
• Purchases 65,000 134,000
• Freight In 3,000
• Net Markups 7,000
• Net Markdowns ( 5,000)
• Current Year Values 68,000 136,000
• Total Goods Available 103,000 223,500
• Less Sales (125,000)
• Less Normal Shrinkage ( 2,000)
• Less Employee Discounts ( 5,000)
• Ending Inventory at Retail 91,500

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Retail-Computations--Refer to notes page 9 for
facts

• Cost Percentages and Computations
• Simple Average
• 103,000/223,500 46
• 91,500.46 42,090
• Conventional-Average lower of cost or market
• 103,000/(223,5005000) 45
• 91,500.45 41,175
• FIFO
• 68,000/136,000 50
• 91,500 .50 45,750

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Retail-Computations--Refer to notes page 9 for
facts

• Cost Percentages and Computations
• FIFO Lower of Cost or Market
• 68,000/(136,0005,000) 48
• 91,500 .48 43,920
• LIFO
• 68,000/136,000 50
• Notice unique way of determining inventory
• 91,500
• less 87,500 which has a cost of 35,000
• equal 4,000 (new layer) X .50 2,000
• Total 37,000

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Retail-Computations-X3--See Page 9

• Computation of Ending inventory at retail and
  conventional retail inventory
• Cost Retail LIFO
• Beginning inventory-Conventional 41,175 91,500
• Purchases 86,000 202,000
• Freight In 4,000
• Net Markups 6,000
• Net Markdowns (8,000)
• Current Year Values 90,000
  200,000 45
• Total Goods Available 131,175 291,500
• Less Sales (180,500)
• Less Normal Shrinkage ( 3,000)
• Less Employee Discounts ( 8,000)
• Ending Inventory at Retail 100,000
• Conventional 131,175/(291,5008,000) .438
• Value of Ending Inventory 100,000 .438
  43,800

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Retail-Computations for X4 --See page 9 for facts

• Computation of inventory at retail and
  conventional retail inventory
• Cost Retail LIFO
• Beginning inventory 43,800 100,000
• Purchases 112,500
  211,000
• Freight In 3,000
• Net Markups 2,000
• Net Markdowns ( 3,000)
• Current Year Values
  115,500 210,000 55
• Total Goods Available
  159,300 310,000
• Less Sales (225,000)
• Less Normal Shrinkage ( 5,000)
• Less Employee Discounts ( 10,000)
• Ending Inventory at Retail 70,,000
• Conventional 159,300/(310,0003000) .509
• Inventory 70,000 .509 35,630

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LIFO RETAIL

• Review of Facts
• X1 Retail 87,500 Cost .40
• X2 Retail 91,500 Cost .50
• X3 Retail 100,000 Cost .45
• X4 Retail 70,000 Cost .55
• X2 ( 91,500 - 87,500) new layer 4,000
• 87,500 x .40 35,000
• 4,000 x .50 2,000
• Total 37,000
• Try X3 and X4

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LIFO RETAIL -X3 and X4

• X3
• 87,500 x .4 35,000
• 4,000 x.5 2,000
• 8,500 x .45 3,825
• 100,000 40,825
• X4 Notice the decrease
• 70,000 x .4 28,000

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Dollar Value Lifo Retail
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Dollar Value Lifo Retail for 12/31/X2
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Dollar Value Retail Lifo for X3