Financial Accounting and Reporting Inventory.ppt

1、1,Financial Accounting and Reporting,Module 8: Inventory,Instructor: Jun,Copyright 高才国际教育集团,2,Inventory,A: Determining INV & COGS (P184-185),B: Inventory Valuation (P185-190),C: Cost-Flow Method (P185-190),M8,D: Ratios (P191),E: Long-Term Construction Contracts (P191-194),- Measurement issue (how mu

2、ch),- classification issue,- What to be included,3,Determining INV & COGS,4,A,Determining Inventory & COGS,Types of Inventories Held for Re-Sale Goods and Materials to be Included in Inventory Cost Component of Production Inventory Perpetual System vs. Periodic System,5,A,Determining Inventory & COG

3、S,Retail inventory RM, WIP, and FG inventory,1. Types of inventories held for re-sale,Re-sold in substantially the same form in which it was purchased,Raw Material: inventory that is being held for use in the production process Working in process: inventory that is in production but incomplete Finis

4、hed goods: inventory that complete and ready for sale,6,A,Determining Inventory & COGS,2. Goods and Materials to be included in inventory,a) G.R.,b) Exceptions and Special Applications,Goods in transit Shipment of non-conforming goods Sales with a right to return Consigned goods Public warehouses Sa

5、les with a mandatory buyback Installment sales,Goods and materials in which the company has legal title should be included in inventory, and legal title typically follows possession of goods,7,A,Determining Inventory & COGS,2. Goods and Materials to be included in inventory,c) Goods in Transit,If th

6、ere is explicitly agreement: title passes in terms of the agreement If there is no such agreement: title passes when sellers performance regarding delivery of goods is complete F.O.B. (free on board): requires the seller to deliver the goods to the location indicated as F.O.B. the sellers expense.,F

7、.O.B shipping point, Title passes to buyer when seller delivers goods to a common carrier Goods shipped should be included in the buyers inventory upon shipment,F.O.B destination, Title passes to buyer when buyer receives goods from common carrier Goods shipped should be included in the sellers inve

8、ntory until received by buyer,- buyers inventory upon shipment,- sellers inventory until received by buyer,8,A,Determining Inventory & COGS,2. Goods and Materials to be included in inventory,d) Shipment of Non-Conforming goods,The seller ships the wrong goods Title reverts to the seller upon rejecti

9、on by the buyer Goods should not be included in the buyers inventory even if the buyer possesses the goods prior to their return to the seller,- Sellers inventory upon buyers rejection,9,A,Determining Inventory & COGS,2. Goods and Materials to be included in inventory,e) Sales with a Right to Return

10、,The goods should be included in the sellers inventory if the amount of the goods likely to be returned cannot be determined If the amount of goods likely to be returned can be estimated, the transaction will be recorded as a sale with an allowance for estimated returns recorded Conditions must be m

11、et to be qualified as a sale,- Sellers inventory if returned amount not determined, The sales price is substantially fixed at the date of sale The buyer assumes all risk of loss (goods in buyers possession) The buyer has paid some for considerations The product sold is substantially complete The amo

12、unt of future returns can be reasonably estimated,10,A,Determining Inventory & COGS,2. Goods and Materials to be included in inventory,f) Consigned Goods,The seller (consignor) delivers goods to an agent (consignee) to hold and sell on the consignors behalf The seller should include the consigned go

13、ods in its inventory because title and risk of loss is retained by the seller even though the buyer possesses the goods Revenue will be recognized when goods are sold to a 3rd party. Title passes directly to the 3rd party (seller 3rd party),- Sellers inventory until goods sold to a 3rd party,11,A,De

14、termining Inventory & COGS,2. Goods and Materials to be included in inventory,g) Public Warehouses,Goods stored in a public warehouse and evidenced by a warehouse receipt Goods should be included in the company holding the warehouse receipt even though the owner does not have possession.,- Belongs t

15、o an entity who is holding the warehouse receipt,12,A,Determining Inventory & COGS,2. Goods and Materials to be included in inventory,h) Sales with a Mandatory Buyback,The seller has a requirement to repurchase goods from the buyer The seller should include the goods in inventory even though title h

16、as passed to the buyer.,- sellers inventory since the seller must buyback the goods later,13,A,Determining Inventory & COGS,2. Goods and Materials to be included in inventory,i) Installment Sales,The seller sells goods on a installment basis but retains legal title as security for the loan The goods

17、 should be included in the sellers inventory if the % of uncollectible amounts cannot be estimated. If the uncollectible amount can be estimated, the transaction would be accounted for as a sale, and an allowance for uncollectible amounts would be recorded,- sellers inventory if the uncollectible am

18、ounts cannot be estimated,14,A,Determining Inventory & COGS,3. Cost Components of Production Inventory,Costs include in inventory are the sum of all expenditures in bringing the goods to the condition and location so that they are ready for sale.,Direct Materials (DM) Direct Labor (DL), and Manufact

19、uring Overhead (MOH),c) There are 3 types of product costs:,b) Under GAAP, only product costs are included in inventory while period costs (i.e. not a necessary part of the manufacturing process ) are not included as production inventory,15,A,Determining Inventory & COGS,3. Cost Components of Produc

20、tion Inventory,Raw materials that are placed into production and are directly traceable to the item being produced,Freight in Insurance Storage Import duties Purchasing/Receiving dept. costs,d) Direct Material (DM),Raw materials would be transferred into Work-in-process (WIP) should include:,- While

21、 freight out is selling EXP,16,A,Determining Inventory & COGS,3. Cost Components of Production Inventory,e) Direct Labor (DL),Labor that is directly traceable to the item being produced,Indirect labor includes items such as supervision, inspection, and maintenance Indirect materials include items su

22、ch as fuel, lubricants, and shop supplies Overhead includes items such as depreciation of factory equipment, factory insurance and manufacturing costs,f) Manufacturing Overhead (MOH),Includes all indirect costs of production that cannot be directly traced or are uneconomical to trace to the item bei

23、ng produced but are still necessary for production, including:,17,A,Determining Inventory & COGS,3. Cost Components of Production Inventory,g) Period Costs,Non-production costs, including:,Freight out Marketing costs Re-handing costs Abnormal spoilage Idle plant costs,- Not included in inventory,18,

24、A,Determining Inventory & COGS,4. Periodic System vs. Perpetual System,a) Periodic System,The quantity of INV END is determined only by physical count, usually at least annually COGS for the period is determined by squeezing Does not keep a running total of the inventory balances,INV BEG PurchasesCO

25、GAFS (COGS) squeeze INV END physical count,- Key difference,19,A,Determining Inventory & COGS,4. Periodic System vs. Perpetual System,b) Perpetual System,Inventory record for each item of inventory is updated for each purchase and each sale as they occur. COGS is determined and recorded with each sa

26、le Keeps running total of inventory balances Perpetual with period at year end - Many companies that maintain a perpetual inventory system still perform either complete periodic physical inventory count or test count inventories on a random basis,- Key difference,20,A,Determining Inventory & COGS,4.

27、 Periodic System vs. Perpetual System,c) Comparison of periodic and perpetual inventory methods,To record purchase:, periodic system:,Example: A company purchased 50,000 units of merchandise for $6/unit. 20,000 units was sold $7/unit during the 1st operating year,Dr. Purchases $300,000 Cr. Cash or A

28、/P $300,000, perpetual system:,Dr. Inventory $300,000 Cr. Cash or A/P $300,000,21,A,Determining Inventory & COGS,4. Periodic System vs. Perpetual System,c) Comparison of periodic and perpetual inventory methods,To record sale, periodic system:,Dr. Cash $140,000 Cr. Sales $140,000, perpetual system:,

29、Dr. Cash $140,000 Cr. Sales $140,000,Dr. COGS $120,000 Cr. Inventory $120,000,- Same as periodic system,- Additional,Example: A company purchased 50,000 units of merchandise for $6/unit. 20,000 units was sold $7/unit during the 1st operating year,22,A,Determining Inventory & COGS,4. Periodic System

30、vs. Perpetual System,c) Comparison of periodic and perpetual inventory methods,End-of-period adjustment, periodic system:,Dr. COGS $120,000 Dr. INV END 180,000 Cr. Purchases $300,000, perpetual system:,No entry needed,- adjusts inventory to the physical count, closes out any purchase accounts, and r

31、uns any difference through cost of goods sold.,Example: A company purchased 50,000 units of merchandise for $6/unit. 20,000 units was sold $7/unit during the 1st operating year,23,Question Time,1. The following info applied to Fenn, Inc. for 2008:,$400,000 404,000 408,000 413,000,Merchandise purchas

32、ed for resale $400,000 Freight-in 10,000 Freight-out 5,000 Purchase returns 2,000,Fenns inventoriable cost was:,Answer: c),24,Question Time,2. On 06/01/08, Pitt Corp. sold merchandise with a list price of $5,000 to Burr on account. Pitt allowed trade discounts of 30% and 20%. Credit terms were 2/15,

33、 n/40 and the sale was made FOB shipping point. Pitt prepared $200 of delivery costs for Burr for accommodation. On 06/12/08, Pitt received from Burr a remittance in full payment amount to:,$2,744 2,940 2,944 3,140,Answer: c),25,Question Time,2. Answer:,Answer: c),Cash paid net of trade discount = $

34、5,000 X (1 30%) X (1 20%) = $3,500 Cash paid within 15 days = $3,500 X (1 98%) = $2,744 Add: Delivery cost for Burr 200 Cash received from Burr $2,944,26,Question Time,3. How should the following costs affect a retailers inventory?,Increase No effect Increase Increase No effect Incease No effect No

35、effect,Answer: a),Freight-in,Interest on inventory loan,27,B. Inventory Valuation,28,B,Inventory Valuation,1. G.R.,a) GAAP requires that inventory be stated its actual costs,No loss should be recognized even though replacement or reproduction costs are lower,Current cost Lower of Cost or Market (LCM

36、) Precious metals and farm products Gross profit Standard cost Direct costing Cost apportionment by relative sales value,2. Exceptions (i.e. where inventory may be not valued its act costs),- Valued Market if lower,- Valued NRV,- Valued GP% to convert sales to COGS,- Valued std cost,- Valued variabl

37、e costs only (no fixed product cost),- Valued based on relative value within basket purchase,- Valued replacement cost if price unstable,29,B,Inventory Valuation,3. Lower of Cost or Market,“A departure from the cost basis of pricing the inventory is required when the utility of the goods is no longe

38、r as great as its costs.”,b) Rationale: conservatism and matching principle,Once inventory has been written down there can be no recovery from the write-down until the units are sold,(Differs from marketable securities where recoveries of prior write-downs allowed),d) Exceptions,The subsequent sales

39、 prices is not affected by its market value (ex. the company has a firm sales price contract),- Valued cost even if cost market value,30,B,Inventory Valuation,3. Lower of Cost or Market,e) Steps used in determining LCM rule,Memorize!,Determine market (i.e. replacement cost),Replacement cost,Ceiling,

40、floor,NRV,NRV Normal profit, Determine cost, Select the LCM for each individual item or for inventory as a whole,Selling price Less: Selling cost or Cost to complete NRV,Replacement cost = cost to purchase the item valuation date,31,B,Inventory Valuation,3. Lower of Cost or Market,f) Example of LCM,

41、Item Cost Replacement cost Selling price Selling cost Normal profit,A B C,$10.50 5.75 4.25,$10.25 5.25 4.75,$15.00 8.00 5.50,$2.50 1.50 1.00,$2.50 1.00 1.50,10.25,5.25,4.75,12.50,10.00,6.50,5.50,4.50,3.00,Market = $10.25 Cost = $10.50,Market = $5.50 Cost = $5.75,Market = $4.50 Cost = $4.25,LCM = $10

42、.25,LCM = $5.50,LCM = $4.25,32,B,Inventory Valuation,3. Lower of Cost or Market,g) Losses from purchase commitments,Legally enforceable agreement to purchase a specified amount of goods at fixed prices in the future,Dr. Estimated Loss on PC Cr. Accrued Loss on PC,If market value contract price and t

43、he contract is uncancellable, loss should be recognized, To record loss in the period of decline,Dr. Purchases market value Dr. Accrued loss on PC Cr. Cash contract price, To record goods subsequently received,- I/S (other EXP and Losses),- B/S (liab),Dr. Accrued Loss on PC Cr. Recovery on Loss on P

44、C, To record partial or full recovery of loss before inventory received,33,4. Gross Profit,Used for interim F/S as a part of periodic inventory system Used also for establishing the amount of loss due to destruction of inventory,a) Definition,INV END is estimated by using the GP% to convert sales to

45、 COGS Not acceptable for tax or annual F/S purposes,b) When use it,B,Inventory Valuation,34,4. Gross Profit,c) Example:,Dahl Co. sells soap at a gross profit percentage of 20%. The following figures apply to the 8 months ended 08/31/year 1,Sales INV BEG Purchases,$200,000 100,000 100,000,On 09/01/ye

46、ar 1, a flood destroys all of Dahls soap inventory. Estimate the cost of the destroyed inventory.,B,Inventory Valuation,35,Step 1: calculate COGS%,COGS = Sales X COGS % = $200,000 X 80% = $160,000,Sales 100% (COGS) GP 20%,Step 2: calculate COGS,Step 3: calculate INV END (which is destroyed inventory

47、 from flood),INV BEG Purchases (COGS) INV END,$100,000 100,000 (160,000) $40,000,c) Answer:,4. Gross Profit,B,Inventory Valuation,36,5. Cost Apportionment by Relative Sales Value,Acquisition of a group of assets for a single price basket purchase Requires cost allocation based on relative fair marke

48、t value,Example:,Assume $75,000 is paid to acquire land, building, and equipment having the FMV of $40,000, $25,000 and $35,000 respectively. The allocated cost is shown below:,Land Building Equipment,Item,% of FMV in total,40% 25% 35%,X,Lump-Sum-Price,$75,000 75,000 75,000,=,Allocated Cost,$30,000

49、18,750 26,250,B,Inventory Valuation,37,Question Time,1. On 12/31/08, Chewy Co. determined its inventory on a FIFO basis $26,000 with a replacement cost of $20,000. Chewy estimated that, after further processing costs of $12,000, the inventory could be sold at for $40,000. Chewys normal profit is 10%

50、 of sales. Under LCM, what is the inventory valued on 12/31/08 B/S?,$28,000 26,000 24,000 20,000,Answer: c),38,Question Time,1. Answer:,Answer: c),Replacement cost $20,000,Ceiling,floor,NRV $28,000,NRV Normal profit $24,000,Vs. Cost $26,000,39,Question Time,2. Reporting inventory LCM is a departure

51、from the accounting principle of,Historical cost Consistency Conservatism Full disclosure,Answer: a),40,Question Time,3. Which of the following statements are correct when a company applying the LCM reports its inventory at replacement cost?,I only II only Both I and II Neither I and II,Answer: b),T

52、he original cost is less than replacement cost The NRV is greater than replacement cost,41,Question Time,4. On 07/01/08, Casa Development Co. purchased a tract of land for $1,200,000. Casa incurred additional cost of $300,000 during the remainder of 2008 in preparing the land for sale. The tract was

53、 subdivided into residential lots as follows:,$300,000 375,000 600,000 720,000,Answer: c),A B C,$24,000 16,000 10,000,What amount of costs should be allocated to the Class A lots?,Lot class,Number of lots,SP per lot,100 100 200,42,Question Time,4. Answer:,Answer: c),A B C,$24,000 16,000 10,000,Lot c

54、lass,Number of lots,SP per lot,100 100 200,X,=,$2,400,000 (40%) 1,600,000 2,000,000 $6,000,000,SP,Costs,$1,500,000,Cost allocation,$600,000,43,C. INV Cost Flow Method,44,C,Inventory Cost-Flow Method,1. Specific Identification,a) High dollar value, physically large, small number of items in inventory

55、 b) The seller determines which item is sold c) The purchaser has no preference because the items are identical d) The seller is able to manipulate income because s/he can sell any item,45,1. Specific Identification,Example: A seller has 3 identical machines costing $1,000,000, $1,200,000, and $1,30

56、0,000 that could be sold $1,500,000,If machine 1 is sold, COGS = $1,000,000, GP = $500,000 If machine 2 is sold, COGS = $1,200,000, GP = $300,000 If machine 3 is sold, COGS = $1,300,000, GP = $200,000,Although either machine is to be sold the same selling price, the sale of machine 1 would generate

57、$200,000 more GP than that of machine 2,C,Inventory Cost-Flow Method,46,2. Weighted-Average,Averages the cost of all items on hand and purchased during the period. The units in INV END and units sold are costed at this average cost. Most suitable for homogeneous products and a periodic inventory sys

58、tem,Weighted-Avg Cost =,$ INV BEG + $ purchasing,Units in INV BEG + Units purchased,C,Inventory Cost-Flow Method,- Periodic inventory system,47,2. Weighted-Average,Example:,INV BEG $200 100 Purchase 1 315 150 Purchase 2 85 50,Costs Units,Weighted-Avg Cost =,$ INV BEG + $ purchasing,Units in INV BEG + Units purchased,Answer:,=,$ 200 + $315 + $85,100 + 150 + 50,=,=,$2.00,C,I