PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Inventories:
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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
The inventory The inventory account is adjusted account is adjusted
at the end of a at the end of a reporting cycle.reporting cycle.
The inventory The inventory account is adjusted account is adjusted
at the end of a at the end of a reporting cycle.reporting cycle.
Two accounting systems are used to record transactions involving inventory:
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Perpetual Inventory SystemPerpetual Inventory SystemLothridge Wholesale Beverage Company (LWBC) begins
2011 with $120,000 in inventory. During the period itpurchases on account $600,000 of merchandise for resale
to customers.
Returns of inventory are credited to the inventory account.
Discounts on inventory purchases can be recorded using the gross or net method.
2011Inventory 600,000
Accounts payable 600,000Purchase of merchandise inventory on account
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Perpetual Inventory SystemDuring 2011, LWBC sold, on account, inventory with a retail
price of $820,000 and a cost basis of $540,000, to customers.
2011Inventory 600,000
Accounts payable 600,000Purchase of merchandise inventory on account.
2011Accounts receivable 820,000
Sales revenue 820,000Record sales on account.
Cost of goods sold 540,000Inventory 540,000
Record cost of goods sold.
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Periodic Inventory System
Beginning Inventory+ Net Purchases
Cost of Goods Available for Sale
- Ending Inventory= Cost of Goods Sold
The periodic inventory system is not designed to track either the quantity or cost of merchandise inventory. Cost of goods sold is calculated, using the schedule below, after
the physical inventory count at the end of the period.
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Periodic Inventory SystemLothridge Wholesale Beverage Company (LWBC) begins
2011 with $120,000 in inventory. During the period itpurchases on account $600,000 of merchandise for resale
to customers.
2011Purchases 600,000
Accounts payable 600,000Purchase of merchandise inventory on account
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Periodic Inventory System
No entry is made to record Cost of Goods Sold. A physical countof Ending Inventory shows a balance of $180,000. Let’s
calculate Cost of Goods Sold at the end of 2011.
During 2011, LWBC sold, on account, inventory with a retailprice of $820,000 to customers, and a cost basis of $540,000.
2011Accounts receivable 820,000
Sales revenue 820,000Record sales on account.
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Periodic Inventory System
Beginning inventory 120,000$ Plus: Purchases 600,000 Cost of goods available for sale 720,000 Less: Ending inventory (180,000) Cost of goods sold 540,000$
Calculation of Cost of Goods Sold
We need the following adjusting entry to record cost of good sold.December 31, 2011Cost of goods sold 540,000Inventory (ending) 180,000
Inventory (beginning) 120,000Purchases 600,000
To adjust inventory, close purchases, and record cost of goods sold.
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Comparison of Inventory Systems
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What is Included in Inventory?
General RuleAll goods owned by the company on the inventory
date, regardless of their location.
Goods in TransitGoods in Transit Goods on Consignment
Goods on Consignment
Depends on FOB shipping terms.
Depends on FOB shipping terms.
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Expenditures Included in InventoryExpenditures Included in Inventory
Invoice PriceInvoice Price
Freight-in on Purchases
Freight-in on Purchases
+
Purchase Returns and Allowances
Purchase Returns and Allowances
Purchase Discounts
Purchase Discounts
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Purchase Returns
November 8, 2011Accounts payable 2,000 Accounts payable 2,000 Purchase returns and allowances 2,000 Inventory 2,000
On November 8, 2011, LWBC returns merchandise that had a cost to LWBC of $2,000, and a cost basis to the seller of 1,600.
Goods Available for Sale 4,050 100,350.00$ Ending Inventory 1,400 31,200.00 Cost of Goods Sold 2,650 69,150.00$
Units Unit Cost Total CostBeginning inventory 1,200 22.00$ 26,400$ Purchase of September 3 200 24.00 4,800 Cost of goods available for sale 1,400 31,200
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Last-In, First-OutPerpetual Inventory System
Picture This, LLCFrame Inventory
Date Units $/Unit TotalBeg. Inventory 1,200 22.00$ 26,400.00$
Goods Available for Sale 4,050 100,350.00$ Ending Inventory 1,400 31,200.00 Cost of Goods Sold 2,650 69,150.00$
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When Prices Are Rising . . .
LIFO• Matches high (newer)
costs with current (higher) sales.
• Inventory is valued based on low (older) cost basis.
• Results in lower taxable income.
FIFO• Matches low (older)
costs with current (higher) sales.
• Inventory is valued at approximate replacement cost.
• Results in higher taxable income.
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U. S. GAAP vs. IFRS
• LIFO is permitted and used by U.S. Companies.
• If used for income tax reporting, the company must use LIFO for financial reporting.
• Conformity with IAS No. 2 would cause many U.S. companies to lose a valuable tax shelter.
• IAS No. 2, Inventories, does not permit the use of LIFO.
• Because of this restriction, many U.S. companies use LIFO only for domestic inventories.
LIFO is an important issue for U.S. multinational companies. Unless the U.S. Congress repeals the LIFO conformity rule, in inability to use LIFO under IFRS will
impose a serious impediment to convergence.
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Decision Makers’ Perspective
Factors Influencing Method Choice
How are income taxes affected by inventory method
choice?
How closely do reported
costs reflect actualflow of inventory?
How well are costs matched against
related revenues?
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LIFO Liquidation
LIFO inventory costs in the balance sheet are “out of date” because they
reflect old purchase transactions.
LIFO inventory costs in the balance sheet are “out of date” because they