a finance projct report on inventiry management

1. Chapter
6-1

2. Chapter
6-2
Reporting and
Analyzing Inventory
Accounting, Third Edition

3. Chapter
6-3
1. Describe the steps in determining inventory quantities.
2. Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.
3. Explain the financial statement and tax effects of each of the
inventory cost flow assumptions.
4. Explain the lower-of-cost-or-market basis of accounting for
inventories.
5. Compute and interpret the inventory turnover ratio.
6. Describe the LIFO reserve and explain its importance for comparing
results of different companies.
7. Apply the inventory cost flow methods to perpetual inventory
records.
8. Indicate the effects of inventory errors on the financial statements.
Study Objectives

4. Chapter
6-4
Classifying
Inventory
Finished goods
Work in process
Raw materials
Inventory
turnover ratio
LIFO reserve
Specific
identification
Cost flow
assumptions
Financial
statement and
tax effects
Consistent use
Lower-of-cost-
or-market
Taking a
physical
inventory
Determining
ownership of
goods
Determining
Inventory
Quantities
Inventory
Costing
Analysis of
Inventory
Reporting and Analyzing Inventory

5. Chapter
6-5
Classifying 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.

6. Chapter
6-6

7. Chapter
6-7
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 Quantities
SO 1 Describe the steps in determining inventory quantities.

8. Chapter
6-8
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 Inventory
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.

9. Chapter
6-9
Goods in Transit
Purchased goods not yet received.
Sold goods not yet delivered.
Determining Ownership of Goods
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.

10. Chapter
6-10
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 Sale

11. Chapter
6-11
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 Question
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.

12. Chapter
6-12
Consigned Goods
Goods held for sale by one party although
ownership of the goods is retained by another
party.
Determining Ownership of Goods
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.

13. Chapter
6-13
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 Costing
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.
Cost Flow
Assumptions

14. Chapter
6-14
Illustration: Assume that BPL TV Company purchases
three identical 46-inch TVs on different dates at costs of
rs.700, rs.750, and rs.800. During the year BPL sold two
sets at RS.1,200 each. These facts are summarized below.
Inventory Costing
Illustration 6-2
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

15. Chapter
6-15
“Specific Identification”
Inventory Costing
If Crivitz sold the TVs it purchased on February 3 and May
22, then its cost of goods sold is $1,500 ($700 + $800),
and its ending inventory is $750.
Illustration 6-3
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

16. Chapter
6-16
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 Method
Inventory Costing
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

17. Chapter
6-17
Inventory Costing – Cost Flow Assumptions
Illustration 6-11
Use of cost flow methods in
major U.S. companies
Cost Flow Assumption
does not need to equal
Physical Movement of
Goods
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

18. Chapter
6-18
Illustration: Data for Houston Electronics’ Astro
condensers.
Inventory Costing – Cost Flow Assumptions
Illustration 6-4
(Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

19. Chapter
6-19
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)”
Inventory Costing – Cost Flow Assumptions
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

20. Chapter
6-20
“First-In-First-Out (FIFO)”
Inventory Costing – Cost Flow Assumptions
Illustration 6-5
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.
Solution
on notes
page

21. Chapter
6-21
“First-In-First-Out (FIFO)”
Inventory Costing – Cost Flow Assumptions
Illustration 6-5
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

22. Chapter
6-22
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)”
Inventory Costing – Cost Flow Assumptions
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

23. Chapter
6-23
“Last-In-First-Out (LIFO)”
Inventory Costing – Cost Flow Assumptions
Illustration 6-7
SO 2 Explain the basis of accounting for inventories and apply the inventory
cost flow methods under a periodic inventory system.
Solution
on notes
page

24. Chapter
6-24
“Last-In-First-Out (LIFO)”
Inventory Costing – Cost Flow Assumptions
Illustration 6-7
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

25. Chapter
6-25
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”
Inventory Costing – Cost Flow Assumptions
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

26. Chapter
6-26
“Average Cost”
Inventory Costing – Cost Flow Assumptions
Illustration 6-10
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.
Solution
on notes
page

27. Chapter
6-27
”Average Cost”
Inventory Costing – Cost Flow Assumptions
Illustration 6-10
SO 2 Explain the basis of accounting for inventories and apply the
inventory cost flow methods under a periodic inventory system.

28. Chapter
6-28
FIFO
LO 3 Explain the financial statement and tax effects of
each of the inventory cost flow assumptions.
Inventory Costing – Cost Flow Assumptions
Sales $9,000 $9,000 $9,000
Cost of goods sold 6,200 6,600 7,000
Gross profit 2,800 2,400 2,000
Admin. & selling expense 330 330 330
Income before taxes 2,470 2,070 1,670
Income tax expense 140 120 110
Net income $2,330 $1,950 $1,560
Inventory balance $5,800 $5,400 $5,000
LIFOAverage
Comparative Financial Statement Summary

29. Chapter
6-29
FIFO
Inventory Costing – Cost Flow Assumptions
Sales $9,000 $9,000 $9,000
Cost of goods sold 6,200 6,600 7,000
Gross profit 2,800 2,400 2,000
Admin. & selling expense 330 330 330
Income before taxes 2,470 2,070 1,670
Income tax expense 140 120 110
Net income $2,330 $1,950 $1,560
Inventory balance $5,800 $5,400 $5,000
LIFOAverage
In Period of Rising Prices, FIFO Reports:
Highest
Lowest
LO 3 Explain the financial statement and tax effects of
each of the inventory cost flow assumptions.

30. Chapter
6-30
FIFO
Inventory Costing – Cost Flow Assumptions
Sales $9,000 $9,000 $9,000
Cost of goods sold 6,200 6,600 7,000
Gross profit 2,800 2,400 2,000
Admin. & selling expense 330 330 330
Income before taxes 2,470 2,070 1,670
Income tax expense 140 120 110
Net income $2,330 $1,950 $1,560
Inventory balance $5,800 $5,400 $5,000
LIFOAverage
In Period of Rising Prices, LIFO Reports:
Lowest
Highest
LO 3 Explain the financial statement and tax effects of
each of the inventory cost flow assumptions.

31. Chapter
6-31
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 Question
Inventory Costing – Cost Flow Assumptions
LO 3 Explain the financial statement and tax effects of
each of the inventory cost flow assumptions.

32. Chapter
6-32
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 Question
Inventory Costing – Cost Flow Assumptions
LO 3 Explain the financial statement and tax effects of
each of the inventory cost flow assumptions.

33. Chapter
6-33

34. Chapter
6-34
Using Cost Flow Methods Consistently
Inventory Costing
Method should be used consistently, enhances
comparability.
Although consistency is preferred, a company
may change its inventory costing method.
Illustration 6-14
Disclosure of change
in cost flow method
LO 3 Explain the financial statement and tax effects of
each of the inventory cost flow assumptions.

35. Chapter
6-35
Lower-of-Cost-or-Market
Inventory Costing
SO 4 Explain the lower-of-cost-or-market
basis of accounting for 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.

36. Chapter
6-36
Lower-of-Cost-or-Market
Inventory Costing
SO 4 Explain the lower-of-cost-or-market
basis of accounting for inventories.
Illustration: Assume that Ken Tuckie TV has the
following lines of merchandise with costs and market
values as indicated.
Inventory Cost Market Lower of
Categories Data Data Cost or Market
TVs 60,000$ 55,000$
Radios 45,000 52,000
DVD recorders 48,000 45,000
DVDs 14,000 12,800
Total inventory
$ 55,000
45,000
45,000
12,800
$157,800

37. Chapter
6-37
Analysis of Inventory
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.
Analysis of Inventory
SO 5 Compute and interpret the inventory turnover ratio.

38. Chapter
6-38
Inventory turnover measures the number of times
on average the inventory is sold during the period.
Cost of Goods Sold
Average Inventory
Inventory
Turnover
=
Days in inventory measures the average number of
days inventory is held.
Days in Year (365)
Inventory Turnover
Days in
Inventory
=
SO 5 Compute and interpret the inventory turnover ratio.
Analysis of Inventory

39. Chapter
6-39
Illustration: The following data are available for
Wal-Mart.
$264,152
(33,685 + 31,910) / 2
Inventory
Turnover
2007
=
SO 5 Compute and interpret the inventory turnover ratio.
Analysis of Inventory
= 8.1 times
365 Days
8.1
Days in
inventory
2007
= = 45.1 Days

40. Chapter
6-40
Illustration: The following data are available for
Wal-Mart.
$237,649
(31,910 + 29,419) / 2
Inventory
Turnover
2006
=
SO 5 Compute and interpret the inventory turnover ratio.
Analysis of Inventory
= 7.7 times
365 Days
7.7
Days in
inventory
2006
= = 47.4 Days

41. Chapter
6-41

42. Chapter
6-42
Analysis of Inventory
Companies using LIFO are required to report the amount
that inventory would increase (or occasionally
decrease) if the company had instead been using FIFO.
This amount is referred to as the LIFO reserve.
Analysts’ Adjustments for LIFO Reserve
SO 6 Describe the LIFO reserve and explain its importance
for comparing results of different companies.
Illustration 6-17

43. Chapter
6-43
Analysis of Inventory
The LIFO reserve can have a significant effect on ratios
analysts commonly use.
Analysts’ Adjustments for LIFO Reserve
SO 6 Describe the LIFO reserve and explain its importance
for comparing results of different companies.
Illustration 6-19

44. Chapter
6-44
Illustration:
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual inventory records.
Assuming the Perpetual Inventory System, compute Cost of Goods
Sold and Ending Inventory under FIFO, LIFO, and Average cost.
Appendix 6A
Illustration 6A-1

45. Chapter
6-45
FIFO:
Transactions: Inventory Balance:
Date Units Layer 1 Layer 2 Layer 3 Layer 4 Total
Jan. 1 100 100
Apr. 15 200 200
Aug. 24 300 300
Sept. 10 (550) (100) (200) (250)
Nov. 27 400 400
- - 50 400 450
Cost 10$ 11$ 12$ 13$
450 -$ -$ 600$ 5,200$ 5,800$
Calculation of Cost of Goods Sold: Units Dollars
Beg. inventory 100 1,000$
Purchases 900 11,000
Goods available 1,000 12,000
Ending inventory (450) (5,800)
COGS 550 6,200$
Perpetual Inventory FIFO Method+
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual inventory records.
Solution
on notes
page

46. Chapter
6-46
LIFO:
Transactions: Inventory Balance:
Date Units Layer 1 Layer 2 Layer 3 Layer 4 Total
Jan. 1 100 100
Apr. 15 200 200
Aug. 24 300 300
Sept. 10 (550) (50) (200) (300)
Nov. 27 400 400
50 - - 400 450
Cost 10$ 11$ 12$ 13$
450 500$ -$ -$ 5,200$ 5,700$
Calculation of Cost of Goods Sold: Units Dollars
Beg. inventory 100 1,000$
Purchases 900 11,000
Goods available 1,000 12,000
Ending inventory (450) (5,700)
COGS 550 6,300$
LIFO Method
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual inventory records.
Perpetual Inventory +
Solution
on notes
page

47. Chapter
6-47
Transactions: Average
Date Units Cost Total Units Cost Cost
Jan. 1 100 10.00$ 1,000$ 100 1,000$ 10.00$
Apr. 15 200 11.00 2,200 300 3,200 10.67
Aug. 24 300 12.00 3,600 600 6,800 11.33
Sept. 10 (550) 11.33 (6,233) 50 567 11.33
Nov. 27 400 13.00 5,200 450 5,767 12.46
450 5,767$
Cost of Goods Sold: Units Dollars
Beg. inventory 100 1,000$
Purchases 900 11,000
Goods available 1,000 12,000
Ending inventory (450) (5,767)
COGS 550 6,233$
Running Balances
Perpetual Inventory Moving Average
Cost per unit
sold is
determined by
dividing total
inventory $ by
total units on
hand after each
purchase.
+
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual inventory records.

48. Chapter
6-48
Transactions: Average
Date Units Cost Total Units Cost Cost
Jan. 1 100 10.00$ 1,000$ 100 1,000$ 10.00$
Apr. 15 200 11.00 2,200 300 3,200 10.67
Aug. 24 300 12.00 3,600 600 6,800 11.33
Sept. 10 (550) 11.33 (6,233) 50 567 11.33
Nov. 27 400 13.00 5,200 450 5,767 12.81
450 5,767$
Cost of Goods Sold: Units Dollars
Beg. inventory 100 1,000$
Purchases 900 11,000
Goods available 1,000 12,000
Ending inventory (450) (5,767)
COGS 550 6,233$
Running Balances
Perpetual Inventory Moving Average
Cost per unit
sold is
determined by
dividing total
inventory $ by
total units on
hand after each
purchase.
+
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual inventory records.

49. Chapter
6-49
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial 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.
Appendix 6B

50. Chapter
6-50
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial statements.
Inventory errors affect the computation of cost of
goods sold and net income.
Income Statement Effects
Illustration 6-B2
Illustration 6-B1

51. Chapter
6-51
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial 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 Effects

52. Chapter
6-52
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial 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$
2009 2010
($3,000)
Net Income
understated
$3,000
Net Income
overstated
Combined income for
2-year period is correct.
Illustration 6-B3

53. Chapter
6-53
Understating ending inventory will overstate:
a. assets.
b. cost of goods sold.
c. net income.
d. owner's equity.
Review Question
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial statements.

54. Chapter
6-54
Inventory Errors
SO 8 Indicate the effects of inventory errors on the financial statements.
Effect of inventory errors on the balance sheet is
determined by using the basic accounting equation:.
Balance Sheet Effects
Illustration 6-B1
Illustration 6-B4

55. Chapter
6-55
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