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
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12. Determining Inventory Quantities Consigned Goods Goods held for sale by one party although ownership of the goods is retained by another party. Determining Ownership of Goods SO 1 Describe the steps in determining inventory quantities.
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14. Inventory Costing Illustration: Assume that Crivitz TV Company purchases three identical 46-inch TVs on different dates at costs of $700, $750, and $800. During the year Crivitz sold two sets at $1,200 each. These facts are summarized below. 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. Inventory Costing “ Specific Identification” 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.
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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. Inventory Costing – Cost Flow Assumptions Illustration: Data for Houston Electronics’ Astro condensers. 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.
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20. Inventory Costing – Cost Flow Assumptions “ First-In-First-Out (FIFO)” 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. Inventory Costing – Cost Flow Assumptions “ First-In-First-Out (FIFO)” Illustration 6-5 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
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23. Inventory Costing – Cost Flow Assumptions “ Last-In-First-Out (LIFO)” 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. Inventory Costing – Cost Flow Assumptions “ Last-In-First-Out (LIFO)” Illustration 6-7 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
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26. Inventory Costing – Cost Flow Assumptions “ Average Cost” 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. Inventory Costing – Cost Flow Assumptions ” Average Cost” Illustration 6-10 SO 2 Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system.
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36. Inventory Costing Lower-of-Cost-or-Market 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. $ 55,000 45,000 45,000 12,800 $157,800
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38. Analysis of Inventory 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.
39. Analysis of Inventory 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. = 8.1 times 365 Days 8.1 Days in inventory 2007 = = 45.1 Days
40. Analysis of Inventory 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. = 7.7 times 365 Days 7.7 Days in inventory 2006 = = 47.4 Days
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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. 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. 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. 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. 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. 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. 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.
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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
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52. Inventory Errors SO 8 Indicate the effects of inventory errors on the financial statements. ($3,000) Net Income understated $3,000 Net Income overstated Combined income for 2-year period is correct. Illustration 6-B3
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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
1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
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