Inventories and Cost of Sales,Chapter 6,Determining Inventory Items,Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted.,Items requiring special attention include:,Goods in Transit,Goods Damaged or Obsolete,Goods on Consignment,C 1,Goods in Transit,C 1,Goods on Consignment,Merchandise is included in the inventory of the consignor, the owner of the inventory.,Consignor,Consignee,Thanks for selling my inventory in your store.,C 1,Goods Damaged or Obsolete,Damaged or obsolete goods are not counted in inventory if they cannot be sold.,Cost should be reduced to net realizable value if they can be sold.,C 1,Determining Inventory Costs,Invoice Cost,Include all expenditures necessary to bring an item to a salable condition and location.,Minus Discounts and Allowances,Plus Import Duties,Plus Freight,Plus Storage,Plus Insurance,C 2,INTERNAL CONTROLS AND TAKING A PHYSICAL COUNT,Most companies take a physical count of inventory at least once each year.When the physical count does not match the Merchandise Inventory account, an adjustment must be made.,Good internal controls over count include: Pre-numbered inventory tickets. Counters have no inventory responsibility. Counts confirm existence, amount, and quality of inventory item. Second count is taken. Manager confirms all items counted.,C 2,Inventory Costing Under a Perpetual System,Inventory affects . . .,The matching principle requires matching costs with sales.,Balance Sheet,Income Statement,P1,Inventory Cost Flow Assumptions,Costing Method Specific Identification FIFO LIFO Weighted AverageInventory System Perpetual or Periodic,Accounting for inventory requires several decisions . . .,P1,Inventory Cost Flow Assumptions,First-In, First-Out (FIFO),Assumes costs flow in the order incurred.,Last-In, First-Out (LIFO),Assumes costs flow in the reverse order incurred.,Weighted Average,Assumes costs flow at an average of the costs available.,P1,Inventory Costing Illustration,Here is information about the mountain bike inventory of Trekking for the month of August.,P1,Specific Identification,When units are sold, the specific cost of the units sold is added to cost of goods sold.,Trekking sold 20 bikes on August 14th with the following costs:,The 23 bikes sold on August 31st had the following costs:,P1,SPECIFIC IDENTIFICATION,P1,Income Statement Cost of Goods Sold,Balance Sheet Inventory,Specific Identification,Here are the entries to record the purchases and sales. The numbers in red are determined by the cost flow assumption used.,All purchases and sales are made on credit. The selling price of inventory was as follows:8/14 $130 8/31 150,P1,First-In, First-Out (FIFO),Cost of Goods Sold,Ending Inventory,Oldest Costs,Recent Costs,P1,First-In, First-Out (FIFO),The Cost of Goods Sold for the August 14 sale is $1,970. After this sale, there are 5 units in inventory at $530 (5 $106),P1,First-In, First-Out (FIFO),Cost of Goods Sold for August 31 = $2,600,On August 31st, there are 12 units in inventory at $1,420 (2 $115 + 10 $119).,P1,First-In, First-Out (FIFO),Here are the entries to record the purchases and sales entries. The numbers in red are determined by the cost flow assumption used.,All purchases and sales are made on credit. The selling price of inventory was as follows:8/14 $130 8/31 150,P1,Last-In, First-Out (LIFO),Cost of Goods Sold,Ending Inventory,Recent Costs,Oldest Costs,P1,Last-In, First-Out (LIFO),The Cost of Goods Sold for the August 14 sale is $2,045. After this sale, there are 5 units in inventory at $455 (5 $91),P1,Last-In, First-Out (LIFO),Cost of Goods Sold for August 31 = $2,685,On August 31st, there are 12 units in inventory at $1,260: (5 $91 +,7 $115).,P1,Last-In, First-Out (LIFO),Here are the entries to record the purchases and sales entries. The numbers in red are determined by the cost flow assumption used.,All purchases and sales are made on credit. The selling price of inventory was as follows:8/14 $130 8/31 150,P1,Weighted Average,When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold.,P1,Weighted Average,First, we need to compute the weighted average cost per unit of items in inventory.,P1,Weighted Average,The Cost of Goods Sold for the August 14th sale is $2,000. After this sale, there are 5 units in inventory at $500.,P1,Weighted Average,P1,Weighted Average,Cost of Goods Sold for August 31 = $2,622,After the August 31 sale, there are 12 units in inventory at $1,368: (12 $114),P1,Weighted Average,Here are the entries to record the purchases and sales entries for Trekking. The numbers in red are determined by the cost flow assumption used.,All purchases and sales are made on credit. The selling price of inventory was as follows:8/14 $130 8/31 150,P1,Financial Statement Effects of Costing Methods,Because prices change, inventory methods nearly always assign different cost amounts.,