Retail inventory - Pearson Education

Retail inventory - Pearson Education

Retail Inventory Chapter 9 HORNGREN HARRISON BAMBER BEST FRASER WILLETT Objectives 1 Account for inventory by the physical and perpetual systems. 2. Apply the inventory costing methods: specific unit cost, weighted average cost, FIFO and LIFO 3. Identify the profit effects of the inventory costing methods Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9-2 Objectives 4. Apply the lower-of-cost-and-netreliable-value rule to inventory 5. Determine the effects of inventory errors on cost of goods sold and net

profits 6. Estimate ending inventory by the gross profit and retail inventory method Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9-3 Objective 1 Account for inventory by the periodic and perpetual systems Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9-4 Inventory Accounting Systems Perpetual Perpetual systems systems maintain

maintain aa running running record record to to show show the the inventory inventory on on hand hand at at all all times. times. Periodic Periodic systems systems do do not not keep keep aa continuous continuous record record of of inventory

inventory on on hand. hand. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9-5 Perpetual System Debit Debit Inventory Inventory Credit Credit Cash Cash or or Accounts Accounts Payable Payable Debit Debit Cash Cash or or Accounts

Accounts Receivable Receivable Credit Credit Sales Sales Revenue Revenue Debit Debit Cost Cost of of Goods Goods Sold Sold Credit Credit Inventory Inventory Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9-6 Perpetual System (see page 369 text) Item: Sandals

Quantity Date Received Nov. 1 5 7 25 12 26 25 30 Totals 50 Quantity Sold 6 13 21 40 Quantity on Hand

10 4 29 16 41 20 20 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9-7 Periodic System Cost of Goods Sold Beginning Inventory $100,000 Cost of Goods Available for Sale $660,000 +

Ending Inventory $120,000 Net Purchases $560,000 = Cost of Goods = Sold $540,000 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9-8

Gross Profit Sales Sales revenues revenues Cost Cost of of goods goods sold sold == Gross Gross profit profit (before (before operating operating expenses) expenses) Gross Gross profit profit Operating Operating expenses expenses == Net Net profit profit

Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9-9 Cost-of-Goods-Sold Model Budgeted Cost of Goods Sold + Budgeted Ending Inventory = Budgeted Cost of Goods Available for Sale Actual Beginning Inventory = Purchases Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 10

Calculating the Cost of Inventory Cost Cost of of inventory inventory on on hand hand == Quantity Quantity unit unit cost cost Physical count is made at least once a year, even with a perpetual system. Consigned goods are excluded. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 11 Periodic System

At the end of the period make a physical count and apply unit cost to determine ending inventory. Inventory purchases are debited to the purchases account. The inventory account carries the beginning inventory balance until adjusted at period end. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 12 Periodic System Inventory Purchases 100,000 100,000 Beginning Beginning Balance Balance

120,000 Ending Balance 560,000560,000 Purchases Purchases Accounts Payable 560,000 Purchases Cost of Goods Sold 100,000 120,000 560,000 Ending Balance 540,000 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 13

Objective 2 Apply the inventory costing methods: specific unit cost, weighted-average cost, FIFO and LIFO Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 14 Units Purchased in 2004 January 20 January 88 20 units units @ @ $20 $20 == $$ 400 400 May 55

May 19 19 55 units units @ @ $30 $30 == $1,650 $1,650 October October 23 23 25 25 units units @ @ $31 $31 == $$ 775 775 Total Total units units 100 100 Units 70 Units sold sold

70 Units 30 Units left left 30 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 15 Units Sold and in Ending Inventory Units Units sold sold by by date: date: Jan 17 Jan 55 17

May 33 May 19 19 33 Oct 20 Oct 23 23 20 Total Total sales sales 70 70 30 30 units units left left in in inventory inventory Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia

9 - 16 Specific Identification 20 Units @ $31 Cost of Goods Sold Oct 23 $ 620 May 19 990 Jan 5 340 Total $1,950 5 Units @ $31 33 Units @ $30 22 Units @ $30 17 Units @ $20 3 Units @ $20 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 17

Specific Identification 20 Units @ $31 Ending Inventory Oct $155 May 660 Jan 60 Total $875 5 Units @ $31 33 Units @ $30 22 Units @ $30 17 Units @ $20 3 Units @ $20 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 18

Weighted Average 25 Units @ $31 (Oct) = $ 775 55 Units @ $30 (May) = 1,650 20 Units @ $20 (Jan) = 400 100 Total Units = $2,825 Total Cost Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 19

Weighted Average $2,825 $2,825 total total cost/100 cost/100 units units == $28.25/unit $28.25/unit Cost Cost of of goods goods sold sold == 70 70 $28.25 $28.25 == $1977.50 $1977.50 Ending Ending inventory inventory == 30 30 $28.25 $28.25 == $847.50 $847.50

Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 20 First-In, First-Out 25 Units @ $31 (Oct) Cost of Goods Sold Jan $ 400 May 1,500 Total $1,900 5 Units @ $30 (May) 50 Units @ $30 20 Units @ $20 (Jan) Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 21

First-In, First-Out 25 Units @ $31 (Oct) Ending Inventory Oct $775 May 150 Total $925 5 Units @ $30 (May) 50 Units @ $30 20 Units @ $20 (Jan) Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 22 Last-In, First-Out 25 Units @ $31 (Oct)

Cost of Goods Sold Oct $ 775 May 1,350 Total $2,125 45 Units @ $30 (May) 10 Units @ $30 20 Units @ $20 (Jan) Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 23 Last-In, First-Out 25 Units @ $31 (Oct) Ending Inventory Oct $300 May

400 Total $700 45 Units @ $30 (May) 10 Units @ $30 20 Units @ $20 (Jan) Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 24 Comparison of Methods Ending Inventory Specific identification FIFO LIFO Weighted-average $875.00 $925.00 $700.00

$847.50 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 25 Comparison of Methods Cost of Goods Sold Specific identification $1,965.00 FIFO $1,900.00 LIFO $2,125.00 Weighted-average $1,977.50 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 26

Comparison of Methods Gross Profit from Sales: Specific identification $1,035.00 FIFO $1,100.00 LIFO $ 875.00 Weighted-average $1,022.50 When prices are rising LIFO produces the lowest income and lowest income tax. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 27 Objective 3 Identify the profit effects of the inventory costing methods Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia

Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 28 The Income Tax Advantage of LIFO During periods of inflation, LIFOs income is the lowest. The most attractive feature of LIFO is reduced income tax payments. That is probably why it cannot be used not tax (and financial reporting purposes) in Australia! Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 29 Perpetual System FIFO Example Many companies keep their perpetual

inventory records in quantities only. Other companies keep perpetual records in both quantities and dollar cost. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 30 Perpetual System FIFO Example (see page 379 text Deckers Outdoor Item: Wambat Sandals Received Unit Date Qty. Cost Total Nov. 1 5

7 25 $31 $775 12 Sold Unit Qty. Cost Total 6 $30 $180 4 9 30 31 120 279 Balance on Hand Unit

Qty. Cost Tot 10 $30 4 30 1 4 30 1 25 31 7 16 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 31 9 - 31 Perpetual System FIFO Example Deckers Outdoor

Item: Teva Sandals Received Unit Date Qty. Cost Total Nov. 26 25 $32 $ 800 30 Totals 50 $1,575 Sold Unit Qty. Cost Total 16 5 40 $31 32

496 160 $1,235 Balance on Hand Unit Qty. Cost Tot 16 $31 25 32 8 25 32 20 32 20 $32 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 32

Accounting Principles: Comparability The The business business should should use use the the same same accounting accounting methods methods and and procedures procedures from from one one period period to to the the next. next. A A company

company may may change change inventory inventory methods, methods, but but itit must must disclose disclose the the effects effects of of the the change change on on net net profits. profits. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 33

Accounting Principles: Relevance The financial statements should report sufficient information to enable an outsider to make knowledgeable decisions about the company. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 34 Accounting Principles: Materiality An An item item isis material material ifif itit has has the the potential potential to

to alter alter aa statement statement users users decision. decision. Materiality Materiality isis specific specific to to the the entity entity being being evaluated. evaluated. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 35 Accounting Principles: Conservatism

Err on the side of caution when reporting any item in the financial statements. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 36 Objective 4 Apply the lower-of-costand-net-realisable-value rule to inventory Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 37 Lower-of-Cost-and-N-R-V An asset is reported at the lower of its historical cost or market (replacement)

value. If the replacement cost falls below its historical cost, the business must write down the value of its inventory. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 38 Lower-of-Cost-and-N-R-V Example Cost of inventory: $3,000 Market value at balance sheet date: $2,200 What is the journal entry? June June 30 30 Loss Loss on on Inventory

Inventory (or (or COGS) COGS) 800 800 Inventory 800 Inventory 800 Write Write down down inventory inventory to to LCNRV LCNRV Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 39 Objective 5

Determine the effects of inventory errors on cost of goods sold and net profit Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 40 Inventory Errors If inventory is calculated incorrectly, how many years of financial statements will it affect? Two years The current years ending inventory is next years beginning inventory. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 41

Objective 6 Estimate ending inventory by the gross profit and retail inventory method Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 42 Gross Profit Method Example Net Net Sales Sales Gross Gross Profit Profit Margin Margin Beginning Beginning Inventory Inventory Net

Net Purchases Purchases $150,000 $150,000 31.5% 31.5% $$ 18,500 18,500 $110,500 $110,500 Net Net Sales Sales Gross Gross Profit Profit of of 31.5% 31.5% == Cost Cost of of Goods

Goods Sold Sold $150,000 $150,000 47,250 47,250 $102,750 $102,750 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 43 Gross Profit Method Example Beginning Inventory $18,500 Cost of Goods Available for Sale $129,000

+ Net Purchases $110,500 Cost of Goods = Sold $102,750 = Ending Inventory $26,250 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 44

Retail Inventory Method Businesses with high turnover, low cost inventory, AASB 1019 allows the use of the retail inventory method. Like the gross profit method it is based on the COGS model. Requires the recording of inventory purchases at cost and at retail (selling) price. See exhibit 9-13 page 385 of you text book. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 45 Internal Control over Inventory Physically counting inventory (stocktake) Safe storage Separate inventory and accounting records Keeping perpetual inventory records Sufficient inventory to prevent stock-outs

Not too much inventory avoid obsolesce Economic order quantities Investigate just-in-time inventory systems. Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 46 End of Chapter 9 Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia Horngren Harrison Bamber Best Fraser Willett, Accounting 4e Copyright 2004 Pearson Education Australia 9 - 47

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