1、Lesson 2InventoryGoods ownedand held for saleto customersCurrent assetInventory DefinedINCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net incomePurchase costs(or manufacturing costs)as goods are soldBALANCE SHEET Asset InventoryThe Flow of Inventory CostsGENERAL JOURNALDateAccount
2、 Titles and ExplanationPR DebitCreditEntry on Purchase DateInventory$Accounts Payable$Entry on Sale DateCost of Goods Sold$Inventory$In a perpetual inventory system,inventory entries parallel the flow of costs.The Flow of Inventory CostsGENERAL JOURNALDateAccount Titles and ExplanationPR DebitCredit
3、Entry on Sale DateCost of Goods Sold$Inventory$When identical units of inventory have different unit costs,a question naturally arises as to which of these costs should be used in recording a sale of inventory.Which Unit Did We Sell?A separate subsidiary account is maintained for each item in invent
4、ory.How can we determine the unit cost for the Sept.10 sale?Item LL002Primary supplier Electronic CityDescription Laser LightSecondary supplier Electric CompanyLocation Storeroom 2Inventory level:Min:25 Max:200 PurchasedSoldBalanceDateUnitsUnit CostTotalUnitsUnit CostCost of Goods SoldUnits Unit Cos
5、tTotalSept.510030$3,000$10030$3,000$Sept.97550 3,750 10030 3,000 7550 3,750 Sept.1010?Inventory Subsidiary LedgerLearning ObjectiveLO1In a perpetual inventory system,you are to determine the cost of goods sold using(a)specific identification,(b)average cost,(c)FIFO,and(d)LIFO.You should be able to d
6、iscuss the advantages and shortcomings of each method.We use one of these inventory valuation methods to determine cost of inventory sold.Inventory Cost FlowsSpecificIdentificationAverageCostLIFO The Bike Company(TBC)Data for an Illustration Specific IdentificationWhen a unitis sold,its specific cos
7、t is added to cost of goods sold.DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Specific IdentificationDatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.149 91$=819$11 106$=1,166$515$Specific IdentificationR
8、etail(20$103)CostA similar entry is made after each sale.Specific IdentificationAdditional purchases were made on August 17 and 28.Costs associated with sales on August 31 were as follows:1$91,3$106,15$115,&4$119.DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$
9、2,500$Aug.149 91$=819$11 106$=1,166$515$Aug.1720 115$=2,300$2,815$Aug.2810 119$=1,190$4,005$DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.149 91$=819$11 106$=1,166$515$Aug.1720 115$=2,300$2,815$Aug.2810 119$=1,190$4,005$Aug.311 91$=91$3 106$=318$15
10、115$=1,725$4 119$=476$1,395$Specific IdentificationCost of Goods Sold for August 31=$2,610Balance Sheet Inventory=$1,395Income Statement COGS=$4,595 Specific IdentificationDatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.149 91$=819$11 106$=1,166$515$A
11、ug.1720 115$=2,300$2,815$Aug.2810 119$=1,190$4,005$Aug.311 91$=91$3 106$=318$15 115$=1,725$4 119$=476$1,395$Since specific identification is so easy,cant we use it all the time?Specific IdentificationCost of Goods Available for SaleUnits on hand on the date of saleAverage-Cost MethodWhen a unit is s
12、old,the in inventory is assigned to costof goods sold.DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$The average cost per unit must be computed prior to each sale.Average-Cost Method$2,500 25=$100DatePurchasesCost of Goods SoldInventory BalanceAug.110 91
13、$=910$910$Aug.315 106$=1,590$2,500$Aug.1420 100$=2,000$500$Lets look at the entries for the Aug.14 sale.Average-Cost Method$100 =$2,500 25GENERAL JOURNALDateAccount Titles and ExplanationPR DebitCreditAug.14 Cash2,600Sales2,60014 Cost of Goods Sold2,000Inventory2,000RetailCostAverage-Cost MethodDate
14、PurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1420 100$=2,000$500$Aug.1720 115$=2,300$2,800$Aug.2810 119$=1,190$3,990$Average-Cost Method$114 =$3,990 35DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1420
15、 100$=2,000$500$Aug.1720 115$=2,300$2,800$Aug.2810 119$=1,190$3,990$Total Purchases55Less:Sales to Date-20Units on Hand35Average-Cost Method$114 =$3,990 35The average cost per unit is$114.Average-Cost MethodIncome Statement COGS=$4,622DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$9
16、10$Aug.315 106$=1,590$2,500$Aug.1420 100$=2,000$500$Aug.1720 115$=2,300$2,800$Aug.2810 119$=1,190$3,990$Aug.3123 114$=2,622$1,368$Balance Sheet Inventory=$1,368$114 12=$1,368Average-Cost MethodCosts of Goods SoldEnding InventoryOldest CostsRecent CostsFirst-In,First-Out Method(FIFO)DatePurchasesCost
17、 of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1410 91$=910$10 106$=1,060$530$First-In,First-Out Method(FIFO)GENERAL JOURNALDateAccount Titles and ExplanationPR DebitCreditAu
18、g.14 Cash2,600Sales2,60014 Cost of Goods Sold1,970Inventory1,970RetailCostFirst-In,First-Out Method(FIFO)Additional purchases were made on Aug.17 and Aug.28.On August 31,an additional 23 units were sold.DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.
19、1410 91$=910$10 106$=1,060$530$Aug.1720 115$=2,300$2,830$Aug.2810 119$=1,190$4,020$First-In,First-Out Method(FIFO)DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1410 91$=910$10 106$=1,060$530$Aug.1720 115$=2,300$2,830$Aug.2810 119$=1,190$4,020$Aug.31
20、5 106$=530$18 115$=2,070$1,420$Balance Sheet Inventory=$1,420DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1410 91$=910$10 106$=1,060$530$Aug.1720 115$=2,300$2,830$Aug.2810 119$=1,190$4,020$Aug.315 106$=530$18 115$=2,070$1,420$Income Statement COGS=
21、$4,570First-In,First-Out Method(FIFO)Costs of Goods SoldEnding InventoryRecent CostsOldest CostsLast-In,First-Out Method(LIFO)On August 14,TBC sold 20 bikes for$130 each.DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Last-In,First-Out Method(LIFO)DatePur
22、chasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1415 106$=1,590$5 91$=455$455$The Cost of Goods Sold for the August 14 sale is$2,045,leaving$455 and 5 units in inventory.GENERAL JOURNALDateAccount Titles and ExplanationPR DebitCreditAug.14 Cash2,600Sales2,60
23、014 Cost of Goods Sold2,045Inventory2,045RetailCostLast-In,First-Out Method(LIFO)DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1415 106$=1,590$5 91$=455$455$Aug.1720 115$=2,300$2,755$Aug.2810 119$=1,190$3,945$Last-In,First-Out Method(LIFO)DatePurcha
24、sesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1415 106$=1,590$5 91$=455$455$Aug.1720 115$=2,300$2,755$Aug.2810 119$=1,190$3,945$Last-In,First-Out Method(LIFO)DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1415
25、 106$=1,590$5 91$=455$455$Aug.1720 115$=2,300$2,755$Aug.2810 119$=1,190$3,945$Aug.3110 119$=1,190$13 115$=1,495$1,260$Cost of Goods Sold for August 31=$2,685DatePurchasesCost of Goods SoldInventory BalanceAug.110 91$=910$910$Aug.315 106$=1,590$2,500$Aug.1415 106$=1,590$5 91$=455$455$Aug.1720 115$=2,
26、300$2,755$Aug.2810 119$=1,190$3,945$Aug.3110 119$=1,190$13 115$=1,495$1,260$Balance Sheet Inventory=$1,260Income Statement COGS=$4,730Last-In,First-Out Method(LIFO)Inventory Valuation Methods:A SummaryCosts Allocated to:Valuation MethodCost of Goods SoldInventoryCommentsSpecificActual cost of Actual
27、 cost of unitsParallels physical flow identificationthe units soldremainingLogical method when units are uniqueMay be misleading for identical unitsAverage costNumber of units sold times the Number of units on hand times the Assigns all units the same average unit costaverage unit cost average unit
28、costCurrent costs are averaged in with older costsFirst-in,First-out(FIFO)Cost of earliest purchases onCost of most recently Cost of goods sold is based on older costshand prior to the salepurchased unitsInventory valued at current costsMay overstate income during periods of rising prices;may increa
29、se income taxes dueLast-in,First-out(LIFO)Cost of most recentlyCost of earliest purchasesCost of goods sold shown at recent pricespurchased units(assumed still in inventory)Inventory shown at old(and perhaps out of date)costsMost conservative method during periods of rising prices;often results in l
30、ower income taxesSlide 37The available method under IFRSFirst in,first out(FIFO)Average cost:simple average weighted averageThe first goods purchased will be the first goods soldOnce a company has adopted a particular accounting method,it should follow that method consistentlyrather than switch meth
31、ods from one year to the next.The Principle of ConsistencyLearning ObjectiveLO2 To explain the need for taking a physical inventory.This inventory arrived just in time for us to use it in the manufacturing process.Just-In-Time(JIT)Inventory SystemsGENERAL JOURNALDateAccount Titles and ExplanationPR
32、DebitCreditDec.31 Cost of Goods Sold$Inventory$The primary reason for taking a physical inventory is to adjust the perpetual inventory records for unrecorded shrinkage losses,such as theft,spoilage,or breakage.Taking a Physical InventoryLearning ObjectiveLO3To record shrinkage losses and other year-
33、end adjustments to inventory.Reduces the value of the inventory.ObsolescenceAdjust inventory value to the lower of historical cost or current replacement cost(market).Lower of Cost or Market(LCM)LCM and Other Write-Downsof InventoryLCM and Other Write-Downsof InventoryYear EndA sale should be record
34、ed when title to the merchandise passes to the buyer.title passes to buyer at the point of shipment.title passes to buyer at the point of destination.Goods In TransitLearning ObjectiveLO4In a periodic inventory system,you are to determine the cost of goods sold using(a)specific identification,(b)ave
35、rage cost,(c)FIFO,and(d)LIFO.GENERAL JOURNALDateAccount Titles and ExplanationPR DebitCreditEntry on Purchase DatePurchases$Accounts Payable$In a periodic inventory system,inventory entries are as follows.Note that an entry is not made to inventory.Periodic Inventory SystemsGENERAL JOURNALDateAccoun
36、t Titles and ExplanationPR DebitCreditEntry on Sale DateNo entry to inventory.Accounts Receivable$Sales$In a periodic inventory system,inventory entries are as follows.Periodic Inventory SystemsThe inventory on hand and the cost of goods sold for the year are not determined until year-end.Periodic I
37、nventory SystemsSpecific identificationLIFOAverage costFIFOWe use one of these inventory valuation methods in a periodic inventory system.Periodic Inventory SystemsComputers,Inc.Mouse Pad InventoryDateUnits$/UnitTotalBeginning Inventory1,0005.25$5,250.00$Purchases:Jan.33005.30 1,590.00 June 201505.6
38、0 840.00 Sept.152005.80 1,160.00 Nov.291505.90 885.00 Goods Available for Sale1,8009,725.00$Ending Inventory1,200?Cost of Goods Sold600?Information for the Following Inventory ExamplesBy reviewing actual purchase invoices,Computers,Inc.determines that the 1,200 mouse pads on hand at year-end have an
39、 actual total cost of$6,400.Determine the cost of goods sold for the year.Specific IdentificationComputers,Inc.Mouse Pad InventoryDateUnits$/UnitTotalBeginning Inventory1,0005.25$5,250.00$Purchases:Jan.33005.30 1,590.00 June 201505.60 840.00 Sept.152005.80 1,160.00 Nov.291505.90 885.00 Goods Availab
40、le for Sale1,8009,725.00$Ending Inventory1,2006,400.00$Cost of Goods Sold6003,325.00$Cost of Goods Sold$9,725-$6,400=$3,325Specific IdentificationThe average cost is calculated at year-end as follows:Average-Cost MethodComputers,Inc.Mouse Pad InventoryDateUnits$/UnitTotalBeginning Inventory1,0005.25
41、$5,250.00$Purchases:Jan.33005.30 1,590.00 June 201505.60 840.00 Sept.152005.80 1,160.00 Nov.291505.90 885.00 Goods Available for Sale1,8009,725.00$Ending Inventory1,200?Cost of Goods Sold600?Avg.Cost$9,725 1,800=$5.40278 Average-Cost MethodComputers,Inc.Mouse Pad InventoryDateUnits$/UnitTotalBeginni
42、ng Inventory1,0005.25$5,250.00$Purchases:Jan.33005.30 1,590.00 June 201505.60 840.00 Sept.152005.80 1,160.00 Nov.291505.90 885.00 Goods Available for Sale1,8009,725.00$Ending Inventory1,2006,483.00$Cost of Goods Sold6003,242.00$Ending InventoryAvg.Cost$5.40278 1,200=$6,483Cost of Goods SoldAvg.Cost$
43、5.40278 600=$3,242Costs of Goods SoldEnding InventoryOldest CostsRecent CostsFirst-In,First-Out Method(FIFO)Remember:Start with the 11/29 purchase and then add other purchases until you reach the number of units in ending inventory.First-In,First-Out Method(FIFO)Computers,Inc.Mouse Pad InventoryDate
44、Units$/UnitTotalBeginning Inventory1,0005.25$5,250.00$Purchases:Jan.33005.30 1,590.00 June 201505.60 840.00 Sept.152005.80 1,160.00 Nov.291505.90 885.00 Goods Available for Sale1,8009,725.00$Ending Inventory1,200?Cost of Goods Sold600?DateBeg.Inv.PurchasesEnd.Inv.Cost of Goods SoldNov.29150$5.90150$
45、5.90Units150Now,lets complete the table.First-In,First-Out Method(FIFO)DateBeg.Inv.PurchasesEnd.Inv.Cost of Goods Sold1,000$5.25600$5.25400$5.25Jan.3300$5.30300$5.30June 20150$5.60150$5.60Sept.15200$5.80200$5.80Nov.29150$5.90150$5.90Units1,200600Now,we have allocated the cost to all 1,200 units in e
46、nding inventory.DateBeg.Inv.PurchasesEnd.Inv.Cost of Goods Sold1,000$5.25600$5.25400$5.25Jan.3300$5.30300$5.30June 20150$5.60150$5.60Sept.15200$5.80200$5.80Nov.29150$5.90150$5.90Units1,200600Costs$6,575$3,150Cost of Goods Available for Sale$9,725Completing the table summarizes the computations just
47、made.First-In,First-Out Method(FIFO)Computers,Inc.Mouse Pad InventoryDateUnits$/UnitTotalBeginning Inventory1,0005.25$5,250.00$Purchases:Jan.33005.30 1,590.00 June 201505.60 840.00 Sept.152005.80 1,160.00 Nov.291505.90 885.00 Goods Available for Sale1,8009,725.00$Ending Inventory1,2006,575.00$Cost o
48、f Goods Sold6003,150.00$Costs of Goods SoldEnding InventoryRecent CostsOldest CostsLast-In,First-Out Method(LIFO)Remember:Start with beginning inventory and then add other purchases until you reach the number of units in ending inventory.Last-In,First-Out Method(LIFO)Computers,Inc.Mouse Pad Inventor
49、yDateUnits$/UnitTotalBeginning Inventory1,0005.25$5,250.00$Purchases:Jan.33005.30 1,590.00 June 201505.60 840.00 Sept.152005.80 1,160.00 Nov.291505.90 885.00 Goods Available for Sale1,8009,725.00$Ending Inventory1,200?Cost of Goods Sold600?DateBeg.Inv.PurchasesEnd.Inv.Cost of Goods Sold1,000$5.251,0
50、00$5.25Units1,000Last-In,First-Out Method(LIFO)DateBeg.Inv.PurchasesEnd.Inv.Cost of Goods Sold1,000$5.251,000$5.25Jan.3300$5.30200$5.30100$5.30Units1,200100Now,we have allocated the cost to all 1,200 units in ending inventory.Next,lets complete the table.DateBeg.Inv.PurchasesEnd.Inv.Cost of Goods So
