Professional Documents
Culture Documents
6-1
Chapter 6
Inventories
Chapter
6-2 Accounting Principles, Ninth Edition
Study Objectives
Determining Statement
Classifying Inventory Inventory
Inventory Presentation
Inventory Costing Errors
Quantities and Analysis
Merchandising Manufacturing
Company Company
One Classification: Three Classifications:
Merchandise Inventory Raw Materials
Work in Process
Finished Goods
Chapter
6-5
Chapter
6-6
Determining Inventory Quantities
Periodic System
1. Determine the inventory on hand
2. Determine the cost of goods sold for the period.
Chapter
6-7 SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Chapter
6-8 SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Chapter
6-9 SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Terms of Sale
Illustration 6-1
Chapter
6-10 SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Review Question
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.
Chapter
6-11 SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Chapter
6-12 SO 1 Describe the steps in determining inventory quantities.
Inventory Costing
Illustration 6-3
Physical Movement of
Goods
Illustration 6-11
Use of cost flow methods in
major U.S. companies
“First-In-First-Out (FIFO)”
Earliest goods purchased are first to be sold.
“First-In-First-Out (FIFO)”
Illustration 6-5
“First-In-First-Out (FIFO)”
Illustration 6-5
“Last-In-First-Out (LIFO)”
Latest goods purchased are first to be sold.
“Last-In-First-Out (LIFO)”
Illustration 6-7
“Last-In-First-Out (LIFO)”
Illustration 6-7
“Average-Cost”
Allocates cost of goods available for sale on the
basis of weighted average unit cost incurred.
“Average Cost”
Illustration 6-10
“Average Cost”
Illustration 6-10
Chapter
6-28 SO 3 Explain the financial effects of the inventory cost flow assumptions.
Inventory Costing – Cost Flow Assumptions
Review Question
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
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.
Chapter
6-30 SO 3 Explain the financial effects of the inventory cost flow assumptions.
Inventory Costing – Cost Flow Assumptions
Discussion Question
Q6-12 Casey Company has been using the FIFO
cost flow method during a prolonged period of
rising prices. During the same time period,
Casey has been paying out all of its net income
as dividends. What adverse effects may
result from this policy?
Chapter
6-32 SO 3 Explain the financial effects of the inventory cost flow assumptions.
Chapter
6-33
Inventory Costing
Lower-of-Cost-or-Market
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.
Lower-of-Cost-or-Market
Illustration: Assume that Ken Tuckie TV has the
following lines of merchandise with costs and market
values as indicated.
Illustration 6-15
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.
Chapter
6-36 SO 5 Indicate the effects of inventory errors on the financial statements.
Inventory Errors
Illustration 6-17
Chapter
6-37 SO 5 Indicate the effects of inventory errors on the financial statements.
Inventory Errors
Chapter
6-38 SO 5 Indicate the effects of inventory errors on the financial statements.
Inventory Errors
Illustration 6-18
2010 2011
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
Review Question
Understating ending inventory will overstate:
a. assets.
b. cost of goods sold.
c. net income.
d. owner's equity.
Chapter
6-40 SO 5 Indicate the effects of inventory errors on the financial statements.
Inventory Errors
Illustration 6-19
Chapter
6-41 SO 5 Indicate the effects of inventory errors on the financial statements.
Statement Presentation and Analysis
Presentation
Balance Sheet - Inventory classified as current asset.
Income Statement - Cost of goods sold subtracted
from sales.
Chapter
6-42
Statement Presentation and Analysis
Analysis
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.
Chapter
6-43 SO 6 Compute and interpret the inventory turnover ratio.
Statement Presentation and Analysis
Example Appendix 6A
Chapter
6-46 SO 7 Apply the inventory cost flow methods to perpetual inventory records.
Cost Flow Methods in Perpetual Systems
Chapter
6-49 SO 7 Apply the inventory cost flow methods to perpetual inventory records.
Estimating Inventories
Chapter
6-50 SO 8 Describe the two methods of estimating inventories.
Estimating Inventories
Chapter
6-51 SO 8 Describe the two methods of estimating inventories.
Estimating Inventories
Chapter
6-52 SO 8 Describe the two methods of estimating inventories.
Estimating Inventories
Illustration:
Illustration 6B-4
Chapter
6-53 SO 8 Describe the two methods of estimating inventories.
Copyright
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
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responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.”
Chapter
6-54