Chapter F8 Power notes Inventories Learning Objectives 1. Internal control of inventories 2. Effect of Inventory Errors C8 3. Inventory Cost Flow Assumptions 4. Perpetual Inventory Costing Methods 5. Periodic Inventory Costing Methods 6. Comparing Inventory Costing Methods 7. Inventory Valuation Other Than Cost 8. Balance sheet Presentation of merchandise 9. Estimating Inventory Cost 10. Financial Analysis and Interpretation c8-1
C8 - 1 Learning Objectives Power Notes 1. Internal Control of Inventories 2. Effect of Inventory Errors 3. Inventory Cost Flow Assumptions 4. Perpetual Inventory Costing Methods 5. Periodic Inventory Costing Methods 6. Comparing Inventory Costing Methods 7. Inventory Valuation Other Than Cost 8. Balance Sheet Presentation of Merchandise 9. Estimating Inventory Cost 10. Financial Analysis and Interpretation Chapter F8 Inventories C8
Chapter F8 Power notes Inventories Slide #f Power Note Topics 3. Inventory Control and Relationships 7. Perpetual Inventory Accounting 23. LIFO and FIFo CoSt Flow Assumptions 31. Inventory at Lower-of-Cost-or-Market 33. Retail and Gross Profit Methods 37. Inventory Turnover Ratio [ y Note: To select a topic, type the slide and press Enter c8-2
C8 - 2 • Inventory Control and Relationships • Perpetual Inventory Accounting • LIFO and FIFO Cost Flow Assumptions • Inventory at Lower-of-Cost-or-Market • Retail and Gross Profit Methods • Inventory Turnover Ratio Slide # Power Note Topics 3 7 23 31 33 37 Chapter F8 Power Notes Inventories Note: To select a topic, type the slide # and press Enter
Why is Inventory Control Important? Inventory is a significant asset and for many companies the largest asset Inventory is central to the main activity of merchandising and manufacturing companies. Mistakes in determining inventory cost can cause critical errors in financial statements Inventory must be protected from external risks( such as fire and theft )and internal fraud by employees c8-3
C8 - 3 Why is Inventory Control Important? Inventory is a significant asset and for many companies the largest asset. Inventory is central to the main activity of merchandising and manufacturing companies. Mistakes in determining inventory cost can cause critical errors in financial statements. Inventory must be protected from external risks ( such as fire and theft) and internal fraud by employees
Inventory Costs and Relationships LIABILITIES Merchandise ASSETS OWNER'S Inventory EQUITY Net Income Cost of cosTS REVENUES Mdse sold EXPENSES If merchandise inventory is.... overstated Cost of merchandise sold is understated Gross profit and net income are overstated Ending owner's equity is. ,... overstated c8-4
C8 - 4 LIABILITIES OWNER’S EQUITY REVENUES ASSETS COSTS & EXPENSES Inventory Costs and Relationships Merchandise Inventory Cost of Mdse. Sold If merchandise inventory is . . . . . . . overstated Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . . understated overstated overstated Net Income
Inventory Costs and Relationships LIABILITIES Merchandise ASSETS OWNER'S Inventory EQUITY Net Income Cost of cosTS REVENUES Mdse sold EXPENSES If merchandise inventory is understated Cost of merchandise sold is overstated Gross profit and net income are understated Ending owner's equity is understated c8-5
C8 - 5 LIABILITIES OWNER’S EQUITY REVENUES ASSETS COSTS & EXPENSES Inventory Costs and Relationships Merchandise Inventory Cost of Mdse. Sold If merchandise inventory is . . . . . . . understated Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . . overstated understated understated Net Income
Merchandising and Inventory Merchandising involves selling inventory. Inventory is usually an important asset. Inventory must be accounted for periodically or perpetually. Traditional periodic method is often being replaced by perpetual inventory accounting c8-6
C8 - 6 Merchandising and Inventory Merchandising involves selling inventory. Inventory is usually an important asset. Inventory must be accounted for periodically or perpetually. Traditional periodic method is often being replaced by perpetual inventory accounting
Advantages of Using Perpetual Inventory Continuous determination of inventory value Continuous determination of gross profit Affordable with computers, scanners and bar codes on most products Perpetual inventory accounting provides management controls Managers know which items are selling fastest and the profit margin on those items c8-7
C8 - 7 Continuous determination of inventory value Continuous determination of gross profit Affordable with computers, scanners, and bar codes on most products Perpetual inventory accounting provides management controls. Managers know which items are selling fastest and the profit margin on those items. Advantages of Using Perpetual Inventory
Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale $30 10 Purchase 22 Sale 7842 31 28 Sale 32 30 Purchase 10 22 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit c8-8
C8 - 8 Perpetual Inventory Costs Inventory cost data to demonstrate FIFO and LIFO Perpetual Systems Cost of Mdse. Sold Item 127B Units Cost Price Jan. 1 Inventory 10 $20 4 Sale 7 $30 10 Purchase 8 21 22 Sale 4 31 28 Sale 2 32 30 Purchase 10 22 Sale price assumptions are added to demonstrate journal entries and ease of calculating gross profit
FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty.I Cost Cost Qty. CostCost Qty.I Cost Cost Jan. 1 10 20200 20 140 3 2060 The sale of 7 units leaves a balance of 3 units c8-9
C8 - 9 Jan. 1 10 20 200 4 7 20 140 3 20 60 Item 127B FIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost The sale of 7 units leaves a balance of 3 units
FIFO Perpetual Inventory Account Item 127B Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. CostCost Qty. Cost Cost Jan 1 10 20200 20 140 3 60 10821168 3 2060 21168 Because the purchase price of $21 is different than the cost of the previous 3 units on hand, the inventory balance of 11 units is accounted for separately c8-10
C8 - 10 Jan. 1 10 20 200 4 7 20 140 3 20 60 10 8 21 168 3 20 60 8 21 168 Item 127B FIFO Perpetual Inventory Account Purchases Cost of Mdse. Sold Inventory Balance Unit Total Unit Total Unit Total Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost Because the purchase price of $21 is different than the cost of the previous 3 units on hand, the inventory balance of 11 units is accounted for separately