ch06

Chapter 6-1
CHAPTER 6
Inventories
Financial Accounting, Sixth Edition
Chapter 6-2
Study Objectives
1. Describe the steps in determining inventory quantities.
Chapter 6-11
SO 1 Describe the steps in determining inventory quantities.
Inventory Costing
Unit costs can be applied to quantities on hand using the following costing methods: Specific Identification First-in, first-out (FIFO) Last-in, first-out (LIFO) Average-cost
SO 2 Explain the accounting for inventories and apply the inventory cost flow methods.
Inventory Costing
Specific Identification Method
An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory. Practice is relatively rare. Most companies make assumptions (Cost Flow Assumptions) about which units were sold.
1. 2. 3.
One item on 2/2/07 for $10 One item on 2/15/07 for $15 One item on 2/25/07 for $20
Young & Crazy Company sells one item on 2/28/07 for $90. What would be the balance of ending inventory and cost of goods sold for the month ended Feb. 2007, assuming the company used the Specific Identification method to cost inventories? Assume a tax rate of 30%.
materials, shoplifting, or employee theft).
Periodic System
1. Determine the inventory on hand 2. Determine the cost of goods sold for the period.
Chapter 6-6
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 6-8
SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Terms of Sale
Illustration 6-1
Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.
Chapter 6-10
SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Determining Ownership of Goods
Consigned Goods Goods held for sale by one party although ownership of the goods is retained by another party.
Purchase on 2/25/07 for $20 Purchase on 2/15/07 for $15 Purchase on 2/2/07 for $10
Chapter 6-14
Young & Crazy Company Income Statement For the which Feb. 2007 Depends Month of one is sold Sales Cost of goods sold Gross profit Expenses: Administrative Selling Interest Total expenses Income before tax Taxes Net Income $ 90 0 90 14 12 7 33 57 17 $ 40
Chapter 6-3
Reporting and Analyzing Inventory
Classifying Inventory
Determining Inventory Quantities
Taking a physical inventory Determining ownership of goods
Chapter 6-7
SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Determining Ownership of Goods
Goods in Transit Purchased goods not yet received. Sold goods not yet delivered.
SO 1 Describe the steps in determining inventory quantities.
Determining Inventory Quantities
Taking a Physical Inventory
Involves counting, weighing, or measuring each kind of inventory on hand. Taken, when the business is closed or when business is slow. at end of the accounting period.
Ownership of the goods remains with the seller until the goods reach the buyer.
Chapter 6-9
SO 1 Describe the steps in determining inventory quantities.
Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of sale.
Manufacturing Company
Three Classifications: Raw Materials Work in Process Finished Goods
Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.
Cost Flow Assumptions
xplain the accounting for inventories and apply the inventory cost flow methods.
Inventory Costing
Example
Young & Crazy Company makes the following purchases:
Chapter 6-13
SO 2 Explain the accounting for inventories and apply the inventory cost flow methods.
Inventory Costing
“Specific Identification”
Inventory Balance = $ 45
Chapter 6-15
SO 2 Explain the accounting for inventories and apply the inventory cost flow methods.
Income statement effects Balance sheet effects
Chapter 6-4