Hrushik Logistics

8/8/2019 Hrushik Logistics

1/30

1

Agenda Return and go over Quiz 2

Mean: 11

Median: 12

Quiz 3 Monday, May 14: (Chapter 7) Group Project 2 due Wednesday May 23

Midterm 2 Monday, May 21 Chapters 7-9 & 18

Wrap up chapter 7 Notes Receivable example

Transfers of Receivables

Secured borrowing (pledge or assign) Sale with recourse

Sale without recourse

Chapter 8: Inventory


2/30

2

Inventory ReportingReport inventory at the lower of cost or market (conservatism)

Cost the historical cost of the inventory

Retail the cost to get items in location and in condition for sale(i.e. purchase price, purchase discounts, purchase returns,transportation in)

Manufacturing: Raw materials cost of materials on hand but not yet placed in

production. Work-in-process cost of goods on which production has been startedbut not yet completed (i.e. raw materials used, direct labor,manufacturing overhead).

Finished good cost of goods complete but not yet sold.


3/30

Merchandising Operations

Cost of goodssold

$$$

MerchandiseInventory

Purchases C/G/Sold

Inventory Cost Flows


4/30

Flow of Costs through

Manufacturing and MerchandisingCompanies


5/30

Inventory control is important for:1. Ensuring availability of inventory items

2. Preventing excessive accumulation ofinventory items

3. Preventing waste, spoilage, or theft

Inventory Control


6/30

Purchases are debited

to Inventory account Freight-in, Purch.

Returns & Allowancesand Purch. Disc. arerecorded in Inventory

account. Debit COGS and credit

Inventory account foreach sale.

Purchases are debitedto Purchases account.

Freight-in, Purch. R & Aand Purch. Disc. arerecorded in theirrespective accounts.

COGS is computed onlyperiodically:

COG Avail for Sale

- Ending Inventory

COGS

Perpetual Method Periodic Method

Inventory Systems


7/30

7

J/E, Perpetual System:

Purchase of Inventory:

Dr. Inventory 1,000

Cr. A/P, Cash, etc. 1,000

Sale of Inventory:

Dr. Cost of Goods Sold 1,000

Cr. Inventory 1,000

Dr. Cash, A/R, etc. 1,500

Cr. Sales Revenue 1,500

At Year-End: no j/e required, unless errors are found in inventory count

Inventory System - Perpetual


8/30

8

J/E, Periodic System:

Purchase of Inventory:

Dr. Purchases 1,000

Cr. A/P, Cash, etc. 1,000

Sale of Inventory:

Dr. Cash, A/R, etc. 1,500

Cr. Sales Revenue 1,500

At Year-End:

Dr. Ending Inventory (determined by count) 38,000

Dr. Cost of Sales (plug) 283,000

Cr. Purchases 286,000

Cr. Opening Inventory (carried forward from prior year) 35,000

Inventory System - Periodic


9/30

9

Basic Issues:

1. Physical goods to be included

1. Goods in transit (FOB Destination)2. Goods on consignment with consignee

3. Goods sold under buy back agreements

4. Goods sold with high rates of return (if unable to estimate returns)

5. Installment sales (if unable to estimate bad debts)

2. Costs to be included in inventory (e.g. product (RM)vs. period costs (office supplies)

3. Cost flow assumption used (e.g. specificidentification, average cost, FIFO, LIFO, etc.)

Inventory Valuation


10/30

Error in Effect on Effect onEnding Income Balance sheet

Inventory Items ItemsUnder- COGS (over) Inventory (under)stated Net income (under) Retained Earn (under)

Over- COGS (under) Inventory (over)stated Net income (over) Retained Earn (over)

Effect of Inventory Errors


11/30

11

Effect ofInventory Errors (O/S Ending)


12/30

Cost flow assumptions need not be consistentwith physical flow of goods. The objective is to

most clearly reflect periodic income.

The cost flow assumptions are:

1 Specific identification

2 Average cost

3 First-in, first-out (FIFO) and

4 Last-in, first-out (LIFO)

Cost Flow Assumptions


13/30

Spaworld reports the following transactions for 2004(assume no opening inventory):

Date Purchases Purchase Cost

May 12 100 units $1,000

Aug 14 200 units 2,200

Sep 18 120 units 1,800

420 units $5,000

On December 31, the company had 20 units on handand uses the periodic inventory system.

What are the cost of goods sold and the cost ofending inventory?

Cost Flow Assumptions: Example


14/30

Given Data:Date Purchases CostMay 12 100 units $1,000

Aug 14 200 units $2,200Sep 18 120 units $1,800

420 units $5,000

Steps:

1. Calculate per unit average cost: $5,000/420 = $11.905

2. Apply this per unit average cost to units sold to get COGS:400 x $11.905 = $4,762

3. Apply the per unit average cost to units remaining in

inventory to determine Ending inventory: 20 x $11.91 = $238

Average Cost Method


15/30

15

Journal Entries:

Dr. Cost of Sales 4,762

Dr. Ending Inventory 238

Cr. Opening Inventory 0

Cr. Purchases 5,000

Average Cost Method


16/30

Given data:Date Purchases CostMay 12 100 units @ $10 $1,000Aug 14 200 units @ $11 $2,200Sep 18 120 units @ $15 $1,800

420 $5,000

Cost of goods sold $4,700

20 X $15 = $300Ending inventory$5,000

Cost of goodsavailable

Cost of goods sold (FIFO)$1,000 (100 sold)$2,200 (200 sold)$1,500 (100 sold; 20 end inv)$4,700

First-In, First-Out (FIFO) Method

Note: FIFO = LISH (Last In Still Here)

Count from one direction and plug the other


17/30

Cost of goods sold $4,800

20 X $10 = $200Ending inventory$5,000

Cost of goodsavailable

Cost ofgoods sold (LIFO)$ 800 (80 sold; 20, end inv)$2,200 (200 sold)

$1,800 (120 sold)$4,800

Given data:Date Purchases CostMay 12 100 units @ $10 $1,000

Aug 14 200 units @ $11 $2,200Sep 18 120 units @ $15 $1,800

420 $5,000

Last-In, First-Out (LIFO) Method

LIFO = FISH (First In Still Here)


18/30

The ending inventory in units is the same inall three methods: the cost is different.

The cost of goods sold and the cost ofending inventory are different, but

In periods of rising prices, LIFO would resultin the smallest reported net income.

The cost of goods available is the same forall methods

Cost Flow Assumptions: Notes


19/30

LIFO matches more recent costs withcurrent revenues.

With increasing prices, LIFO yields thelowest taxable income (assuming inventorydoes not decrease).

With reduced taxes, cash flow is improved.

Under LIFO, the need to write downinventory down to market is lower.

Advantages ofLIFO Method


20/30

LIFO does not approximate the physical flow ofgoods except in special situations.

LIFO yields the lowest net income and thereforereduced earnings (when prices rise).

Under LIFO, the ending inventory is understatedrelative to current costs.

LIFO involuntary liquidation may result in incomethat is detrimental from a tax view.

LIFO may cause poor buying habits (because of thelayer liquidation problem).

LIFO Conformity Rule: if you use LIFO for taxpurposes, you must use it for financial reportingtoo

Disadvantages ofLIFO Method


21/30

21

Periodic vs. Perpetual FIFO: CGS and EI numbers are exactly the same

under either periodic or perpetual systems

BUT LIFO, Weighted Average will give youdifferent numbers

Under perpetual LIFO, with each sale, you cut into onlyexisting layers (so you must stop and calculate the costof goods sold at each sale)

Under perpetual Weighted Average (more accurately,Moving Average), you stop and calculate a newaverage cost for every sale


22/30

22

Same Example - Perpetual Basis

Unit Total Units

Units Cost Cost Sold

12-May 100 10 1000

1-Jun 85

14-Aug 200 11 2200

1-Sep 100

18-Sep 120 15 1800

20-Sep 215420 5000 400

Unit Extended Unit Extended

FIFO: Units Cost Value LIFO: Units Cost Value

1-Jun 85 10 850 1-Jun 85 10 850

1-Sep 15 10 150 1-Sep 100 11 1100

85 11 935 20-Sep 120 15 1800

20-Sep 115 11 1265 95 11 1045

100 15 1500

COGS 400 4700 COGS 400 4795

EI 20 15 300 EI 15 10 150

Same as Periodic 5 11 55

205

Different from Periodic

Purchased


23/30

23

Same Example - Perpetual BasisSold

Unit ExtendedUnits Cost Cost Units

12-May 100 10 1000

1-Jun 85

14-Aug 200 11 2200

1-Sep 100

18-Sep 120 15 1800

20-Sep 215

420 5000 400

Calculate the average cost at time of each sale

Unit Extended

Wt. Av. Units Cost Value 1-Sep

1-Jun 85 10 850 costs to date 3200

1-Sep 100 10.9 1093.02 costs expensed 850

20-Sep 215 13 2796.81 0 2350

0 215

0 Av Cost 10.9

COGS 400 4739.83

Sept. 20

EI 20 13 260.168 Costs to date 5000

Costs expensed 1943

Remaining costs 3057

Remaining units 235

Different from Periodic Av cost 13

Purchased


24/30

LIFO Reserve (Allowance) account is used,when:

LIFO is used for external reporting and a non-LIFO basis is used for internal reporting.

An Allowance to Reduce Inventory to LIFOis used to reduce the cost to a LIFO basis.

SEC reporting requirements disclose thedifference between LIFO and current cost ofinventory reported on the Balance Sheet

LIFO Reserve


25/30

Jeppo Inc reports the following balances:Inventory (FIFO basis) on Dec 31, 2004: $50,000Inventory (LIFO basis) on Dec 31, 2004: $20,000

Adjust the cost ofending inventory to the LIFO basis

Dr. Cost of goods sold $30,000Cr. Allowance to Reduce Inventory

to LIFO $30,000

Balance Sheet (Assets):Inventory (FIFO) $50,000less: Allowance to Reduce Inventory ($30,000)

Inventory (LIF

O) basis $20,000

LIFO Reserve: Example


26/30

Under the LIFO approach, a businessmay build up layers of inventory from

prior periods.A layer liquidation occurs, when:

Earlier costs are matched against current

sales.

Such matching results in distorted income.

LIFO Layers


27/30

27

Dollar value LIFO applies LIFO procedures to pools ofsimilar goodsbased on dollars rather than units

Used for external purposes (i.e., financial statements and taxes

Advantages over regular LIFO:

Reduces record keeping (maximum ofone layer per year). Reduces likelihood oferoding old layers (some decreases in goods in the

pool are offset by increases in other goods in the pool).

Price index a measure ofthe change in prices from a base year (theyear dollar value LIFO is adopted in this case) to the current year

Internal = Ending inventory quantities X current year costs

Ending inventory quantities X base year costs

External calculated by the Bureau ofLabor Statistics

Dollar Value LIFO


28/30

28

Given:

Base layer (Dec 31, 2003): $20,000

Inventory (current prices)

Dec 31, 2004: $26,400

Prices increased 20% during 2004.

Determine dollar value LIFO at Dec 31,2004

Dollar Value LIFO: Example


29/30

29

Dec 31, 2003 Dec 31, 200

Price increase, 20%

At EOY prices:$26,400

$26,400 / 1.20At base $:$22,000

Net increaseat base $:

$22,000 less$20,000

Restate atcurrent $:

$2,400

(layer added)

$2,000 * 1.20

$20,000plus

$2,400 =

$22,400

Dollar value

LIFO Inventory

Dollar Value LIFO: Example


30/30

30

When the ending inventory (at base yearprices) is less than the beginning inventory

(at base year prices): the decrease must be subtracted from the

most recently added layer.

Once a layer is eliminated (peeled off), itcannot be rebuilt.

Dollar Value LIFO: Notes

Hrushik Logistics

Documents