inventory presentation part 2

8/4/2019 Inventory Presentation Part 2

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A Presentation by:

Prof. Thadeus Abilla, CPA


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BALANCE SHEETAsset

InventoryPurchasecosts (or

Mfg. costs)

WhenGoods are

Sold

INCOME STATEMENT

Revenue

Cost of goods sold

Gross profit

Expenses

Net income


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Goods in Inventory.

Goods in Transit.FOB Shipping Point: buyers inventoryfrom time of shipment.

FOB Destination: sellers inventory untilreceipt by buyer.

Goods on Consignment: inventoryof the consignor, not the consignee.


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FOB Shipping PointFOB Shipping Point

FOB Shipping PointFOB Shipping Point

Buyer

QualityProduce

Seller

Goods being shipped areincluded in inventory of

buyer while in transit.


buyer while in transit.


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FOB DestinationFOB Destination

FOB DestinationFOB Destination

Buyer

QualityProduce

Seller


seller until received bybu er.

Goods being shipped areincluded in inventory ofseller until received bybuyer.


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Title to goodssold onconsignment

remains with theshipper until theirsale or use by the

dealer or

Title to goodssold onconsignment

remains with theshipper until theirsale or use by the

dealer or


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1. ABC Inc. sold Php 1 Million to DEF Inc.

for Php 1.5 Million. The goods wereshipped on March 1 and was receivedon March 5. Terms of shipment was

FOB Destination.Question:

As of March 4, who owns theinventory and for how much?

When should the sale be recordedand for how much?


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1. ABC Inc. sold Php 1 Million to DEF Inc.

for Php 1.5 Million. The goods wereshipped on March 1 and was receivedon March 5. Terms of shipment was

FOB Destination.Question:

If the term was FOB Shipping point,as of March 4, who owns theinventory and for how much?



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2. TUV Inc. sold Php 5 Million to WXY

Inc. for Php 8 Million. The goods wereshipped on May 15 and was receivedon May 28. Terms of shipment was

FOB Shipping Point.Question:

If the term was FOB Shipping point,as of May 25, who owns the inventoryand for how much?



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2. TUV Inc. sold Php 5 Million to WXY

Inc. for Php 8 Million. The goods wereshipped on May 15 and was receivedon May 28. Terms of shipment was

FOB Shipping Point.Question:

If the term was FOB Destination, asof May 25, who owns the inventoryand for how much?

For the month ended May 31, whoowns the inventory and for howmuch?


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1. Perpetual Inventory System

2. Periodic Inventory System

An Illustration


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We use one of these inventory valuationmethods to determine cost of inventory

sold.

SpecificIdentification

Averag

e

Cost

LIFO

FIFOFIFO


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The Bike Company


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When a unit issold, itsspecific cost isadded to cost

of goods sold.

When a unit issold, itsspecific cost isadded to costof goods sold.


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On August 14, TBC sold 20 bikes for $130On August 14, TBC sold 20 bikes for $130

each.each.

Of the bikes sold 9 originally cost $91 andOf the bikes sold 9 originally cost $91 and

11 cost $106.11 cost $106.


each.each.

Of the bikes sold 9 originally cost $91 andOf the bikes sold 9 originally cost $91 and11 cost $106.11 cost $106.


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The Cost of Goods Sold for the August 14 saleThe Cost of Goods Sold for the August 14 sale

is $1,985, leaving $515 and 5 units inis $1,985, leaving $515 and 5 units ininventory.inventory.

The Cost of Goods Sold for the August 14 saleThe Cost of Goods Sold for the August 14 sale

is $1,985, leaving $515 and 5 units inis $1,985, leaving $515 and 5 units ininventory.inventory.

Lets look at the entries for the Aug. 14Lets look at the entries for the Aug. 14

sale.sale.


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Cost of

Goods Soldfor August

31 = $2,610

Cost of

Goods Soldfor August

31 = $2,610


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IncomeStatement

COGS =$4,595

Balance SheetInventory = $1,395

1 @ 111$ = 111$

1 @ 111$ = 111

1 @ 111$ = 111

End. Inv. ,1111$


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When a unit is sold,the average cost of eachaverage cost of each

unitunit in inventory isassigned to costof goods sold.

When a unit is sold,the average cost of eachaverage cost of each

unitunit in inventory isassigned to costof goods sold.

Cost of

GoodsAvailablefor Sale

Units on

hand onthe dateof sale


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each.each.


each.each.

The average cost perunit must be

computed prior toeach sale.

The average cost perunit must be

computed prior toeach sale.

$2,500 / 25 = $100$2,500 / 25 = $100


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The average costThe average cost

per unit is $100.per unit is $100.

The average costThe average cost

per unit is $100.per unit is $100.

Lets look at theentries for the Aug.

14 sale.

$100 = $2,500 25

$100 = $2,500 25


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Additional purchases were made on AugustAdditional purchases were made on August17 and August 28.17 and August 28.

On August 31, an additional 23 units wereOn August 31, an additional 23 units were

sold.sold.

Additional purchases were made on AugustAdditional purchases were made on August17 and August 28.17 and August 28.

On August 31, an additional 23 units wereOn August 31, an additional 23 units were

sold.sold.


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$114 = $3,990 35

$114 = $3,990 35


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$114 = $3,990 35

$114 = $3,990 35

The average costper unit is $114.

The average costper unit is $114.


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Income Statement

COGS = $4,622

Balance Sheet Inventory = $1,368

$114 12 =1 368

$114 12 =$1,368


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Costs of

Goods Sold

Costs ofGoods Sold

EndingInventory

EndingInventory

Oldest

Costs

OldestCosts

RecentCosts

RecentCosts


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each.each.


each.each.

The Cost of Goods Sold for the August 14 sale isThe Cost of Goods Sold for the August 14 sale is

$1,970, leaving $530 and 5 units in inventory.$1,970, leaving $530 and 5 units in inventory.

The Cost of Goods Sold for the August 14 sale isThe Cost of Goods Sold for the August 14 sale is

$1,970, leaving $530 and 5 units in inventory.$1,970, leaving $530 and 5 units in inventory.


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Additional purchases were made on Aug. 17 and Aug. 28.

On August 31, an additional 23 units were sold.

Additional purchases were made on Aug. 17 and Aug. 28.

On August 31, an additional 23 units were sold.Cost of Goods Sold for August 31 =Cost of Goods Sold for August 31 =

$2,600$2,600

Cost of Goods Sold for August 31 =Cost of Goods Sold for August 31 =

$2,600$2,600


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Income Statement

COGS = $4,570

1 @ 111$ = 111$

11 @ 111$ = ,1111

End. Inv. ,1111$


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Costs of

Goods Sold

Costs ofGoods Sold

EndingInventory

EndingInventory

Recent

Costs

RecentCosts

OldestCosts

OldestCosts


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On August 14, TBC sold 20 bikes for$130 each.

On August 14, TBC sold 20 bikes for$130 each.

The Cost of Goods Sold for the August 14

sale is $2,045, leaving $455 and 5 unitsin inventory.

The Cost of Goods Sold for the August 14

sale is $2,045, leaving $455 and 5 unitsin inventory.


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Additional purchases were made on Aug. 17 and Aug.Additional purchases were made on Aug. 17 and Aug.

28.28.

On Aug. 31, an additional 23 units were sold.On Aug. 31, an additional 23 units were sold.

Additional purchases were made on Aug. 17 and Aug.Additional purchases were made on Aug. 17 and Aug.

28.28.

On Aug. 31, an additional 23 units were sold.On Aug. 31, an additional 23 units were sold.


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Cost of Goods Sold for August 31 =$2,685

Cost of Goods Sold for August 31 =$2,685


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Income Statement

COGS = $4,730

1@ 11$ = 111$

1@ 111$ = 111

End. Inv. ,1111$

Inventory Valuation Methods: A Summary


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Costs Allocated to:

Valuation

Method

Cost of Goods

Sold Inventory Comments

Specific Actual cost of Actual cost of units Parallels physical flow

identification the units sold remaining Logical method when units

are uniqueMay be misleading for

identical units

Average cost Number of units

sold times the

Number of units on

hand times the

Assigns all units the same

average unit cost

average unit cost average unit cost Current costs are averaged

in with older costs

First-in, First-out(FIFO)

Cost of earliestpurchases on

Cost of mostrecently

Cost of goods sold is basedon older costs

hand prior to the

sale

purchased units Inventory valued at current

costs

May overstate income during

periods of rising prices; may

increase income taxes due

Last-in, First-out

(LIFO)

Cost of most

recently

Cost of earliest

purchases

Cost of goods sold shown at

recent prices

purchased units (assumed still in

inventory)

Inventory shown at old (and

perhaps out of date) costs

Most conservative method

during periods of rising

prices; often results in lowerincome taxes


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Once a company hasadopted a particularaccounting method,

it should follow thatmethod consistentlyrather than switch

methods from oneyear to the next.


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The inventory onhand and the

cost of goodssold for the year

are notdetermined until

year-end.


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Specific

identification

LIFO

Average

cost

FIFO

We use one of these inventory

valuation methods in a periodicinventory system.


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Computers, Inc.

Mouse Pad Inventory

Date Units $/Unit Total

Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111

June 11 111 .111 .11111Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111

Goods

Available

for Sale ,1111 , .111111$

Ending

Inventory ,1111 ?

Cost of

Goods Sold 111 ?


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Computers, Inc.

Mouse Pad Inventory


Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111

June 11 111 .111 .11111Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111

Goods

Available

for Sale ,1111 , .111111$

Ending

Inventory ,1111 ?

Cost of

Goods Sold 111 ?


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By reviewing actualpurchase invoices,Computers, Inc.

determines that the1,200 mouse pads onhand at year-end havean actual total cost of

$6,400.

Determine the cost ofgoods sold for theyear.


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Computers, Inc.

Mouse Pad Inventory


Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111

June11 111

.111

.11111

Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111

Goods

Available

for Sale ,1111 , .111111$

EndingInventory ,1111 , .111111$

Cost of

Goods Sold 111 , .111111$

Cost of Goods Sold$9,725 - $6,400 = $3,325

Cost of Goods Sold$9,725 - $6,400 = $3,325


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Total Cost ofTotal Cost of

GoodsGoods

Available forAvailable for

SaleSale

TotalTotal

Number ofNumber of

UnitsUnitsAvailable forAvailable for

SaleSale

The averagecost is

calculated at

year-end asfollows:

The averagecost is

calculated at

year-end asfollows:


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Computers, Inc.Mouse Pad Inventory


Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111June 11 111 .111 .11111

Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111Goods

Available

for Sale ,1111 , .111111$

Ending

Inventory ,1111 ?

Cost of

Goods Sold 111 ?

Avg. Cost $9,725 1,800 = $5.40278

Avg. Cost $9,725 1,800 = $5.40278



Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111June 11 111 .111 .11111

Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111Goods

Available

for Sale ,1111 , .111111$

Ending

Inventory ,1111 , .111111$

Cost of

Goods Sold 111 , .111111$

Ending InventoryAvg. Cost $5.40278 1,200 = $6,483

Ending InventoryAvg. Cost $5.40278 1,200 = $6,483Cost of Goods SoldAvg. Cost $5.40278

600 = $3,242

Cost of Goods SoldAvg. Cost $5.40278

600 = $3,242


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Costs of

Goods Sold

Costs ofGoods Sold

EndingInventory

EndingInventory

Oldest

Costs

OldestCosts

RecentCosts

RecentCosts


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Remember:Start with the

11/29purchase and

then add otherpurchases

until you reachthe number of

units in endinginventory.

Remember:Start with the

11/29purchase and

then add otherpurchases

until you reachthe number of

units in endinginventory.



Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111June 11 111 .111 .11111

Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111Goods

Available

for Sale ,1111 , .111111$

Ending

Inventory ,1111 ?

Cost of

Goods Sold 111 ?


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Date Beg. Inv. Purchases End. Inv.

Cost of

Goods Sold, @$ .1111 111 @$ .111 111

@$ .111 111

Jan. 1 @$ .111 111 @$ .111 111

June11

@$ .111 111

@$ .111 111

Sept. 11 @$ .111 111 @$ .111 111

Nov. 11 @$ .111 111 @$ .111 111

Units ,1111 111

Costs $ ,11 1 1 $ ,1111

Cost of Goods Available for Sale $ ,1111


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Completingthe table

summarizesthe

computations justmade.

Completingthe table

summarizesthe

computations justmade.

Computers, Inc.

Mouse Pad Inventory


Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111

June 11 111 .111 .11111

Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111Goods

Available

for Sale ,1111 , .111111$

Ending

Inventory ,1111 , .111111$

Cost of

Goods Sold 111 , .111111$


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Costs ofGoods Sold

Costs ofGoods Sold

EndingInventory

EndingInventory

RecentCosts

RecentCosts

OldestCosts

OldestCosts


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Remember:Start withbeginning

inventory andthen add otherpurchases

until you reach

the number ofunits in ending

inventory.

Remember:Start withbeginning

inventory andthen add otherpurchases

until you reach

the number ofunits in ending

inventory.



Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111June 11 111 .111 .11111

Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111Goods

Available

for Sale ,1111 , .111111$

Ending

Inventory ,1111 ?

Cost of

Goods Sold 111 ?


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Completingthe table

summarizesthe

computations just made.

Completingthe table

summarizesthe

computations just made.

Computers, Inc.

Mouse Pad Inventory


Beginning

Inventory ,1111 .111$ , .111111$

Purchases:

Jan. 1 111 .111 , .111111

June 11 111 .111 .11111

Sept. 11 111 .111 , .111111

Nov. 11 111 .111 .11111Goods

Available

for Sale ,1111 , .111111$

Ending

Inventory ,1111 , .111111$

Cost of

Goods Sold 111 , .111111$


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FOBs

Periodic vs. Perpetual Cost Flow Assumptions

inventory presentation part 2

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