Chapter 6-1 CHAPTER 6 Inventories Financial Accounting, Sixth Edition.
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Chapter 6-1
CHAPTER CHAPTER 66
InventoriesInventories
Financial Accounting, Sixth Edition
Chapter 6-2
1. Describe the steps in determining inventory quantities.
2. Explain the accounting for inventories and apply the inventory cost flow methods.
3. Explain the financial effects of the inventory cost flow assumptions.
4. Explain the lower-of-cost-or-market basis of accounting for inventories.
5. Indicate the effects of inventory errors on the financial statements.
6. Compute and interpret the inventory turnover ratio.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 6-3
Reporting and Analyzing InventoryReporting and Analyzing InventoryReporting and Analyzing InventoryReporting and Analyzing Inventory
Taking a Taking a physical physical inventoryinventory
Determining Determining ownership of ownership of goodsgoods
Classifying Classifying
InventoryInventory
Classifying Classifying
InventoryInventory
Determining Determining
Inventory Inventory
QuantitiesQuantities
Determining Determining
Inventory Inventory
QuantitiesQuantities
Inventory Inventory
CostingCosting
Inventory Inventory
CostingCostingInventory Inventory
ErrorsErrors
Inventory Inventory
ErrorsErrors
Statement Statement
Presentation Presentation
and Analysisand Analysis
Statement Statement
Presentation Presentation
and Analysisand Analysis
Merchandising Merchandising inventoryinventory
Manufacturing Manufacturing inventoryinventory
Specific identificationSpecific identification
Cost flow Cost flow assumptionsassumptions
Financial statement Financial statement and tax effectsand tax effects
Consistent useConsistent use
Lower-of-cost-or-Lower-of-cost-or-marketmarket
Income Income statement statement effectseffects
Balance sheet Balance sheet effectseffects
PresentationPresentation
AnalysisAnalysis
Chapter 6-4
Classifying InventoryClassifying InventoryClassifying InventoryClassifying Inventory
One Classification:
Merchandise Inventory
Three Classifications:
Raw Materials
Work in Process
Finished Goods
Merchandising Company
Manufacturing Company
Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.
Chapter 6-5
Physical Inventory taken for two reasons:Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft).
Periodic System
1. Determine the inventory on hand
2. Determine the cost of goods sold for the period.
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
Chapter 6-6
Involves counting, weighing, or measuring each kind of inventory on hand.
Taken,
when the business is closed or when business is slow.
at end of the accounting period.
Taking a Physical InventoryTaking a Physical Inventory
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
Chapter 6-7
Goods in Transit
Purchased goods not yet received.
Sold goods not yet delivered.
Determining Ownership of Determining Ownership of GoodsGoods
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
Goods in transit should be included in the inventory of the company that has legal title to
the goods. Legal title is determined by the terms of sale.
Chapter 6-8
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
Illustration 6-1
Ownership of the goods passes to the buyer
when the public carrier accepts the goods from
the seller.
Ownership of the goods remains with the seller
until the goods reach the buyer.
Terms of SaleTerms of Sale
Chapter 6-9
Goods in transit should be included in the inventory of the buyer when the:
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.
Review QuestionReview Question
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
Chapter 6-10
Consigned Goods
Goods held for sale by one party although ownership of the goods is retained by another party.
Determining Ownership of Determining Ownership of GoodsGoods
Determining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory QuantitiesDetermining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.SO 1 Describe the steps in determining inventory quantities.
Chapter 6-11
Unit costs can be applied to quantities on hand using the following costing methods:
Specific Identification
First-in, first-out (FIFO)
Last-in, first-out (LIFO)
Average-cost
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Cost Flow Assumptio
ns
Chapter 6-12
Young & Crazy Company makes the following purchases:
1. One item on 2/2/07 for $10
2. One item on 2/15/07 for $15
3. One item on 2/25/07 for $20
Young & Crazy Company sells one item on 2/28/07 for $90. What would be the balance of ending inventory and cost of goods sold for the month ended Feb. 2007, assuming the company used the Specific Identification method to cost inventories? Assume a tax rate of 30%.
Example
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Chapter 6-13
Purchase on 2/2/07 for $10
Purchase on 2/15/07 for $15
Purchase on 2/25/07 for $20
Inventory Balance = $ 45
Young & Crazy CompanyIncome Statement
For the Month of Feb. 2007 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40
“Specific Identification”
Depends which one is Depends which one is soldsold
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Chapter 6-14
An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.
Practice is relatively rare.
Most companies make assumptions (Cost Flow Assumptions) about which units were sold.
Specific Identification MethodSpecific Identification Method
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Chapter 6-15
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Illustration 6-11Use of cost flow methods in major U.S. companies
Cost Flow
Assumption
does not need to
equal
Physical Movement
of Goods
Chapter 6-16
Young & Crazy Company makes the following purchases:
1. One item on 2/2/07 for $10
2. One item on 2/15/07 for $15
3. One item on 2/25/07 for $20
Young & Crazy Company sells one item on 2/28/07 for $90. What would be the balance of ending inventory and cost of goods sold for the month ended Feb. 2007, assuming the company used the FIFO, LIFO, and Average cost flow assumptions? Assume a tax rate of 30%.
Example
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Chapter 6-17
Earliest goods purchased are first to be sold.
Often parallels actual physical flow of merchandise.
Generally good business practice to sell oldest units first.
““First-In-First-Out (FIFO)”First-In-First-Out (FIFO)”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-18
Purchase on 2/2/07 for $10
Purchase on 2/15/07 for $15
Purchase on 2/25/07 for $20
Inventory Balance = $ 45
Young & Crazy CompanyIncome Statement
For the Month of Feb. 2007 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40
“First-In-First-Out (FIFO)”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-19
Purchase on 2/2/07 for $10
Purchase on 2/15/07 for $15
Purchase on 2/25/07 for $20
Inventory Balance = $ 35
Young & Crazy CompanyIncome Statement
For the Month of Feb. 2007 Sales $ 90 Cost of goods sold 10 10 Gross profit 80 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 4747 Taxes 14 14 Net Income $ 33 $ 33
“First-In-First-Out (FIFO)”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-20
Latest goods purchased are first to be sold.
Seldom coincides with actual physical flow of merchandise.
Exceptions include goods stored in piles, such as coal or hay.
““Last-In-First-Out (LIFO)”Last-In-First-Out (LIFO)”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-21
Purchase on 2/2/07 for $10
Purchase on 2/15/07 for $15
Purchase on 2/25/07 for $20
Inventory Balance = $ 45
Young & Crazy CompanyIncome Statement
For the Month of Feb. 2007 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40
“Last-In-First-Out (LIFO)”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-22
Purchase on 2/2/07 for $10
Purchase on 2/15/07 for $15
Inventory Balance = $ 25
Purchase on 2/25/07 for $20
Young & Crazy CompanyIncome Statement
For the Month of Feb. 2007 Sales $ 90 Cost of goods sold 20 20 Gross profit 70 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 37 37 Taxes 11 11 Net Income $ 26$ 26
“Last-In-First-Out (LIFO)”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-23
Allocates cost of goods available for sale on the basis of weighted average unit cost incurred.
Assumes goods are similar in nature.
Applies weighted average unit cost to the units on hand to determine cost of the ending inventory.
““Average Cost”Average Cost”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-24
Purchase on 2/2/07 for $10
Purchase on 2/15/07 for $15
Purchase on 2/25/07 for $20
Inventory Balance = $ 45
Young & Crazy CompanyIncome Statement
For the Month of Feb. 2007 Sales $ 90 Cost of goods sold 0 Gross profit 90 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 57 Taxes 17 Net Income $ 40
“Average Cost”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-25
Purchase on 2/2/07 for $10
Purchase on 2/15/07 for $15
Purchase on 2/25/07 for $20
Inventory Balance = $ 30
Young & Crazy CompanyIncome Statement
For the Month of Feb. 2007 Sales $ 90 Cost of goods sold 15 15 Gross profit 75 Expenses: Administrative 14 Selling 12 Interest 7 Total expenses 33 Income before tax 42 42 Taxes 12 12 Net Income $ 30$ 30
“Average Cost”
SO 2 Explain the accounting for SO 2 Explain the accounting for inventories and apply the inventory inventories and apply the inventory cost flow methods.cost flow methods.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Chapter 6-26
FIFO
LO 3 Explain the financial effects of the inventory cost flow LO 3 Explain the financial effects of the inventory cost flow assumptions.assumptions.
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Sales $90 $90 $90
Cost of goods sold 10 15 20
Gross profit 80 75 70
Admin. & selling expense 33 33 33
Income before taxes 47 42 37
Income tax expense 14 12 11
Net income $33 $30 $26
Inventory balance $35 $30 $25
LIFOAverage
Comparative Financial Statement SummaryComparative Financial Statement Summary
Chapter 6-27
In Period of Rising Prices,In Period of Rising Prices, FIFO Reports: FIFO Reports:
FIFO
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Highest
Lowest
Sales $90 $90 $90
Cost of goods sold 10 15 20
Gross profit 80 75 70
Admin. & selling expense 33 33 33
Income before taxes 47 42 37
Income tax expense 14 12 11
Net income $33 $30 $26
Inventory balance $35 $30 $25
LIFOAverage
LO 3 Explain the financial effects of the inventory cost flow LO 3 Explain the financial effects of the inventory cost flow assumptions.assumptions.
Chapter 6-28
In Period of Rising Prices,In Period of Rising Prices, LIFO Reports: LIFO Reports:
FIFO
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
Highest
Lowest
Sales $90 $90 $90
Cost of goods sold 10 15 20
Gross profit 80 75 70
Admin. & selling expense 33 33 33
Income before taxes 47 42 37
Income tax expense 14 12 11
Net income $33 $30 $26
Inventory balance $35 $30 $25
LIFOAverage
LO 3 Explain the financial effects of the inventory cost flow LO 3 Explain the financial effects of the inventory cost flow assumptions.assumptions.
Chapter 6-29
The cost flow method that often parallels the actual physical flow of merchandise is the:
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.
Review QuestionReview Question
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
LO 3 Explain the financial effects of the inventory cost flow LO 3 Explain the financial effects of the inventory cost flow assumptions.assumptions.
Chapter 6-30
In a period of inflation, the cost flow method that results in the lowest income taxes is the:
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.
Review QuestionReview Question
Inventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptionsInventory Costing – Cost Flow Inventory Costing – Cost Flow AssumptionsAssumptions
LO 3 Explain the financial effects of the inventory cost flow LO 3 Explain the financial effects of the inventory cost flow assumptions.assumptions.
Chapter 6-31
Using Cost Flow Methods Using Cost Flow Methods ConsistentlyConsistently
Inventory CostingInventory CostingInventory CostingInventory Costing
Method should be used consistently, enhances comparability.
Although consistency is preferred, a company may change its inventory costing method.
Illustration 6-14Disclosure of change in cost flow method
LO 3 Explain the financial effects of the inventory cost flow LO 3 Explain the financial effects of the inventory cost flow assumptions.assumptions.
Chapter 6-32
Lower-of-Cost-or-MarketLower-of-Cost-or-Market
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 4 Explain the lower-of-cost-or-SO 4 Explain the lower-of-cost-or-market basis of accounting for market basis of accounting for inventories.inventories.
When the value of inventory is lower than its cost
Companies can “write down” the inventory to its market value in the period in which the price decline occurs.
Market value = Replacement Cost
Example of conservatism.
Chapter 6-33
Lower-of-Cost-or-MarketLower-of-Cost-or-Market
Inventory CostingInventory CostingInventory CostingInventory Costing
SO 4 Explain the lower-of-cost-or-SO 4 Explain the lower-of-cost-or-market basis of accounting for market basis of accounting for inventories.inventories.
Exercise: Alou Appliance Center accumulates the following cost and market data at December 31.
I nventory Cost Market Lower of
Categories Data Data Cost or Market
Cameras 12,000$ 12,100$
Camcorders 9,000 9,700
VCRs 14,000 12,800
Compute the lower-of-cost-or-market valuation for the company’s total inventory.
$ 12,000
9,000
12,800$ 33,800
Chapter 6-34
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Common Cause:
Failure to count or price inventory correctly.
Not properly recognizing the transfer of legal title to goods in transit.
Errors affect both the income statement and balance sheet.
Chapter 6-35
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Inventory errors affect the computation of cost of goods sold and net income.
Income Statement EffectsIncome Statement Effects
Illustration 6-17
Illustration 6-16
Chapter 6-36
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Inventory errors affect the computation of cost of goods sold and net income in two periods.
An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period.
Over the two years, the total net income is correct because the errors offset each other.
The ending inventory depends entirely on the accuracy of taking and costing the inventory.
Income Statement EffectsIncome Statement Effects
Chapter 6-37
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Incorrect Correct Incorrect Correct
Sales 80,000$ 80,000$ 90,000$ 90,000$
Beginning inventory 20,000 20,000 12,000 15,000
Cost of goods purchased 40,000 40,000 68,000 68,000
Cost of goods available 60,000 60,000 80,000 83,000
Ending inventory 12,000 15,000 23,000 23,000
Cost of good sold 48,000 45,000 57,000 60,000
Gross profit 32,000 35,000 33,000 30,000
Operating expenses 10,000 10,000 20,000 20,000
Net income 22,000$ 25,000$ 13,000$ 10,000$
2008 2009
($3,000)Net Income understated
$3,000Net Income overstated
Combined income for 2-year period is
correct.
Illustration 6-18
Chapter 6-38
Understating ending inventory will overstate:
a. assets.
b. cost of goods sold.
c. net income.
d. owner's equity.
Review QuestionReview Question
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Chapter 6-39
Inventory ErrorsInventory ErrorsInventory ErrorsInventory Errors
SO 5 Indicate the effects of inventory errors on the financial SO 5 Indicate the effects of inventory errors on the financial statements.statements.
Effect of inventory errors on the balance sheet is determined by using the basic accounting equation:.
Balance Sheet EffectsBalance Sheet Effects
Illustration 6-16
Illustration 6-19
Chapter 6-40
Statement Presentation and Statement Presentation and AnalysisAnalysisStatement Presentation and Statement Presentation and AnalysisAnalysis
Balance Sheet - Inventory classified as current asset.
Income Statement - Cost of goods sold subtracted from sales.
There also should be disclosure of
1) major inventory classifications,
2) basis of accounting (cost or LCM), and
3) costing method (FIFO, LIFO, or average).
PresentationPresentation
Chapter 6-41
Statement Presentation and Statement Presentation and AnalysisAnalysisStatement Presentation and Statement Presentation and AnalysisAnalysis
Inventory management is a double-edged sword
1. High Inventory Levels - may incur high carrying costs (e.g., investment, storage, insurance, obsolescence, and damage).
2. Low Inventory Levels – may lead to stockouts and lost sales.
AnalysisAnalysis
SO 6 Compute and interpret the inventory turnover ratio.SO 6 Compute and interpret the inventory turnover ratio.
Chapter 6-42
Inventory turnover measures the number of times on average the inventory is sold during the period.
Cost of Goods Sold
Average Inventory
Inventory Turnover
=
Statement Presentation and Statement Presentation and AnalysisAnalysisStatement Presentation and Statement Presentation and AnalysisAnalysis
Days in inventory measures the average number of days inventory is held.
Days in Year (365)
Inventory Turnover
Days in Inventory
=
SO 6 Compute and interpret the inventory turnover ratio.SO 6 Compute and interpret the inventory turnover ratio.
Chapter 6-43
BE6-9 At December 31, 2008, the following information was available for J. Graff Company: ending inventory $40,000, beginning inventory $60,000, cost of goods sold $270,000, and sales revenue $380,000. Calculate inventory turnover and days in inventory for J. Graff Company.
Statement Presentation and Statement Presentation and AnalysisAnalysisStatement Presentation and Statement Presentation and AnalysisAnalysis
SO 6 Compute and interpret the inventory turnover ratio.SO 6 Compute and interpret the inventory turnover ratio.
$270,000
($60,000 + 40,000) / 2
5.4 =
Inventory
Turnover 365
5.4 67.59 days
=
Days in Inventor
y
Chapter 6-44
Inventory theft is a HUGE problem.
Companies use sophisticated technologies tomonitor their customers and employees
Examples:
Closed-circuit cameras
Radio frequency identification (RFID).
Taking frequent inventory counts
Employees keep belongings in a separate room
Surprise checks of employees’ bags as they leave.
All About YouAll About YouAll About YouAll About You
Employee Theft—An Inside JobEmployee Theft—An Inside Job
Chapter 6-45
Some Facts:
Theft costs U.S. restaurants $15 billion to $25 billion annually.
The average supermarket has inventory shrinkage losses of 2.28% of sales, or $224,808 per year.
Tips from customers are the No. 1 way that many stores catch thieving employees.
The average employee caught stealing costs his or her company $1,341, while the average loss from a shoplifting incident is only $207.
All About YouAll About YouAll About YouAll About You
Employee Theft—An Inside JobEmployee Theft—An Inside Job
Chapter 6-46
All About YouAll About YouAll About YouAll About You
Source: Data from 2003 National Retail Security Survey, University of Florida.
Chapter 6-47
What Do You Think?What Do You Think?
Suppose you own a number of wine shops. Assuming that it would be cost-effective, would you install video cameras to reduce both employee and customer theft?
All About YouAll About YouAll About YouAll About You
YES: Management has a responsibility to employreasonable, cost-effective approaches to safeguard company assets.
NO: The use of video technology to monitor employees and customers sends a message of distrust. Cameras might also reduce the welcoming atmosphere for your customers, who might find the cameras offensive.
Chapter 6-48
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