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Reporting and Interpreting CostReporting and Interpreting Cost
of Goods Sold and Inventoryof Goods Sold and InventoryChapter 7
McGraw-Hill/Irwin © 2! "he McGraw-Hill Co#panies$ Inc%
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McGraw-Hill/Irwin Slide 2
&low of Inventory Costs
MerchandiseMerchandise
PurchasesPurchases
MerchandiseMerchandise
PurchasesPurchasesCost of Cost of
Goods SoldGoods Sold
Cost of Cost of
Goods SoldGoods SoldMerchandiseMerchandise
InventoryInventory
MerchandiseMerchandise
InventoryInventory
Merchandiser
RawRaw
MaterialsMaterials
RawRaw
MaterialsMaterialsRaw MaterialsRaw Materials
InventoryInventory
Raw MaterialsRaw Materials
InventoryInventoryWork in ProcessWork in Process
InventoryInventory
Work in ProcessWork in Process
InventoryInventoryFinished GoodsFinished Goods
InventoryInventory
Finished GoodsFinished Goods
InventoryInventory
Cost of Cost of
Goods SoldGoods Sold
Cost of Cost of
Goods SoldGoods Sold
Manufacturer
DirectDirect
Laor Laor
DirectDirect
Laor Laor
FactoryFactory
!verhead!verhead
FactoryFactory
!verhead!verhead
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McGraw-Hill/Irwin Slide "
'at(re of Cost of Goods Sold
#e$innin$#e$innin$InventoryInventory
#e$innin$#e$innin$InventoryInventory
PurchasesPurchasesfor the Periodfor the Period
PurchasesPurchasesfor the Periodfor the Period
%ndin$ Inventory%ndin$ Inventory
&#alance Sheet'&#alance Sheet'
%ndin$ Inventory%ndin$ Inventory
&#alance Sheet'&#alance Sheet'
Goods availaleGoods availalefor Salefor Sale
Goods availaleGoods availale
for Salefor Sale
Cost of Goods SoldCost of Goods Sold
&Inco(e State(ent'&Inco(e State(ent'
Cost of Goods SoldCost of Goods Sold
&Inco(e State(ent'&Inco(e State(ent'
Beginning inventory + Purchases = Goods Available for SaleBeginning inventory + Purchases = Goods Available for Sale
Goods Available for Sale – Ending inventory = Cost of goods soldGoods Available for Sale – Ending inventory = Cost of goods sold
Beginning inventory + Purchases = Goods Available for SaleBeginning inventory + Purchases = Goods Available for Sale
Goods Available for Sale – Ending inventory = Cost of goods soldGoods Available for Sale – Ending inventory = Cost of goods sold
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McGraw-Hill/Irwin Slide )
Inventory Costing Methods
Total ollar A!ount of GoodsTotal ollar A!ount of Goods
Available for SaleAvailable for Sale
Total ollar A!ount of GoodsTotal ollar A!ount of Goods
Available for SaleAvailable for Sale
Ending "nventoryEnding "nventory
Ending "nventoryEnding "nventory Cost of Goods SoldCost of Goods Sold
Cost of Goods SoldCost of Goods Sold
Inventory Costin$
Method
Inventory Costing
Methods1.SpecifcIdentifcation
2.First-in, First-out
3.Last-in, First-out4.eighted !verage
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McGraw-Hill/Irwin Slide *
Speci)c Identi)cation
*hen (nitsare sold$ the
speci)c costof the (nit
sold is addedto cost of
goods sold%
*hen (nitsare sold$ the
speci)c cost of the (nit
sold is addedto cost of
goods sold%
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McGraw-Hill/Irwin Slide +
&irst-In$ &irst-+(t Method
Cost ofCost of
Goods SoldGoods Sold
Cost ofCost of
Goods SoldGoods Sold#ldest Costs#ldest Costs
#ldest Costs#ldest Costs
EndingEnding"nventory"nventory
EndingEnding
"nventory"nventory$ecent Costs$ecent Costs
$ecent Costs$ecent Costs
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,ast-In$ &irst-+(t Method
EndingEnding
"nventory"nventory
EndingEnding
"nventory"nventory
Cost ofCost of
Goods SoldGoods Sold
Cost ofCost of
Goods SoldGoods Sold
#ldest Costs#ldest Costs#ldest Costs#ldest Costs
$ecent Costs$ecent Costs$ecent Costs$ecent Costs
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verage Cost Method
*hen a (nit is sold$ theaverage cost of each(nit in inventory isassigned to cost of
goods sold%
*hen a (nit is sold$ theaverage cost of each(nit in inventory isassigned to cost of
goods sold%Cost of Goods
.vailale for
Sale
/u(er of
0nits
.vailale for
Sale
%
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&inancial State#ent .ects of CostingMethods
.dvanta$es of Methods .dvanta$es of Methods .dvanta$es of Methods .dvanta$es of Methods
#etter (atches#etter (atches
current costs in costcurrent costs in cost
of $oods sold withof $oods sold with
revenuesrevenues
#etter (atches#etter (atches
current costs in costcurrent costs in cost
of $oods sold withof $oods sold with
revenuesrevenues
%ndin$ inventory%ndin$ inventory
a33ro4i(atesa33ro4i(ates
currentcurrent
re3lace(ent costre3lace(ent cost
%ndin$ inventory%ndin$ inventory
a33ro4i(atesa33ro4i(ates
currentcurrent
re3lace(ent costre3lace(ent cost
First5In6First5In6First5!utFirst5!utFirst5In6First5In6First5!utFirst5!ut
Last5In6Last5In6First5!utFirst5!utLast5In6Last5In6
First5!utFirst5!ut
S(oothes outS(oothes out
3rice chan$es3rice chan$es
S(oothes outS(oothes out
3rice chan$es3rice chan$es
Wei$htedWei$hted .vera$e .vera$eWei$htedWei$hted .vera$e .vera$e
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0al(ation at ,ower of Cost or Mar1et
%ndin$ inventory is re3orted at the%ndin$ inventory is re3orted at the
lower of cost or (arket &LCM'lower of cost or (arket &LCM'
%ndin$ inventory is re3orted at the%ndin$ inventory is re3orted at the
lower of cost or (arket &LCM'lower of cost or (arket &LCM'
Re3lace(ent CostRe3lace(ent Cost
9he current 3urchase 3rice9he current 3urchase 3rice
for identical $oodsfor identical $oods
Re3lace(ent CostRe3lace(ent Cost9he current 3urchase 3rice9he current 3urchase 3rice
for identical $oodsfor identical $oods
The company will recognize a “holding” loss in theThe company will recognize a “holding” loss in the
current period rather than the period in which thecurrent period rather than the period in which the
item is sold.item is sold.
This practice isThis practice is conservativeconservative..
The company will recognize a “holding” loss in theThe company will recognize a “holding” loss in the
current period rather than the period in which thecurrent period rather than the period in which the
item is sold.item is sold.
This practice isThis practice is conservativeconservative..
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Internal Control of Inventory
Se3aration of inventoryaccountin$ and 3hysical
handlin$ of inventory
Stora$e in a (anner that3rotects fro( theft and
da(a$e
Li(itin$ access to
authori:ed e(3loyees
Maintainin$ 3er3etual
inventory records
Co(3arin$ 3er3etual
records to 3eriodic
3hysical counts
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erpet(al and eriodic InventorySyste#s
ProvidesProvides u&'to'dateu&'to'date inventory records(inventory records(
ProvidesProvides u&'to'dateu&'to'date inventory records(inventory records(
ProvidesProvides u&'to'dateu&'to'date
cost of sales records(cost of sales records(
ProvidesProvides u&'to'dateu&'to'date
cost of sales records(cost of sales records(
Per&etualPer&etual
Syste!Syste!
Per&etualPer&etual
Syste!Syste!
In a 3eriodic inventory syste(6 endin$ inventory and cost of
$oods sold are deter(ined at the end of the accountin$
3eriod ased on a 3hysical count
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erpet(al and eriodic InventorySyste#s
"nventory Syste!
"te! Periodic Syste! Per&etual Syste!
Beginning "nventoryCarried over
fro! &rior &eriod
Carried over fro!
&rior &eriod
Add) PurchasesAccu!ulated inthe Purchases
account
Accu!ulated inthe "nventory
account
*ess) Ending "nventory
Measured at end
of &eriod by
&hysical
inventory count
Per&etual record
u&dated at every
sale
Cost of Goods Sold
Co!&uted as a
residual a!ount
at end of &eriod
Measured at
every sale based
on &er&etual
record
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.nd of Chapter 7