Bài giảng Financial Accounting - Chapter 6: Inventory Issues

201Lec06.PPTX16Inventory IssuesALL inventory must be accounted for (also not double counted).Question: Who owns it at year end?Seller2Ship to (FOB)Sale or consignment?ResellerShip to (FOB)BuyerIssues in counting inventoryOwnership of Goods on board a carrier (in transit on a truck, boat, etc) determined by shipping terms :Buyer considered owner when seller ships (carrier departs from seller)Buyer NOT considered owner until the goods reach the buyer.Ownership of inventory rulesConsigned goods are owned by seller until sold by buyer.FOB shipping point (Free On Board)FOB destination 3This is the only account which appears on both the Income Statement and the Balance Sheet.Inventory errors occur often. - Unintentional - Fraudulent manipulation Consider the effects of inventory errors.Inventory Errors4SALESCGS BI +Purchases CGAS - EI CGSGROSS PROFIT - expensesNet loss $900 $ 300 + 500 800 - 200 - 600 300- 350 50Consider this example of a troubled companyin millions5SALESCGS BI +Purchases CGAS - EI CGSGROSS PROFIT - expensesNet loss $900 $ 300 + 500 800 - 200 - 600 300- 350 50in millionsWhat happens to gross profit if:EI Overstated by $150 ? -350-450 450+1006SALESCGS BI +Purchases CGAS - EI CGSGROSS PROFIT - expensesNet loss $900 $ 300 + 500 800 - 200 - 600 300- 350 50in millionsWhat happens to gross profit if:EI Overstated by $150 ? What happens next year? BI= last year EI-350-450 450+10071. SPECIFIC IDENTIFICATION: Tag each item with purchase info. Cost of sale equals amount on tag.COST = $10 eachCOST = $11.BBBBBB10111084 Cost Flow Assumptions2. AVERAGE COST: Use formula: $ CGAS = Average Units available Unit Cost BB $20+$11 = $10.333/unit 3 units9BBBB4 Cost Flow Assumptions3. FIRST-IN FIRST-OUT (FIFO):Items purchased first are recorded as sold first.Items purchased last go into ending inventory!In above: CGS = $10 EI = $10+$11=$21 BBBBBB104 Cost Flow Assumptions4. LAST-IN FIRST-OUT (LIFO):Items purchased last are recorded as sold first.Items purchased first stay in ending inventory!In above: CGS = $11 EI = 2 x $ 10 = $20 11BBBBBB4 Cost Flow AssumptionsDETAILED EXAMPLE:DATE Transaction Units Price/unit Total12/31/15 Beginning Inv 10 $10.00 $100.001/1/16 Sell 2 $17.50 $35.001/5/16 Buy 5 $11.00 $55.001/16/16 Sell 4 $17.50 $70.001/20/16 Buy 5 $12.00 $60.001/31/16 Sell 1 $17.50 $17.5012DETAILED EXAMPLE:DATE Transaction Units Price/unit Total12/31/15 Beginning Inv 10 $10.00 $100.001/1/16 Sell 2 $17.50 $35.001/5/16 Buy 5 $11.00 $55.001/16/16 Sell 4 $17.50 $70.001/20/16 Buy 5 $12.00 $60.001/31/16 Sell 1 $17.50 $17.50 In the accounts: 13 Sales = 7 units Ending Inventory = 13 units (no shortages) Purchases =$55.00 + $60.00 = $115.00.Sales = $35.00 + $70.00 + $17.50 = $122.50.DETAILED EXAMPLE:DATE Transaction Units Price/unit Total12/31/15 Beginning Inv 10 $10.00 $100.001/1/16 Sell 2 $17.50 $35.001/5/16 Buy 5 $11.00 $55.001/16/16 Sell 4 $17.50 $70.001/20/16 Buy 5 $12.00 $60.001/31/16 Sell 1 $17.50 $17.50Ending Inventory (13 units)=5 @ $12.00 = $60.00 +5 @ $11.00 = $55.00 +3 @ $10.00 = $30.0013 $145.00FIFO PERIODIC Income Statement:Sales $122.50 BI $100.00+ Purch 115.00CGAS $215.00- EI - 145.00CGS - 70.00Gross Profit $52.50FIFO PERIODICCost of Sales (7 units)= 7 @ $10.00 = $70.0014DETAILED EXAMPLE:DATE Transaction Units Price/unit Total12/31/15 Beginning Inv 10 $10.00 $100.001/1/16 Sell 2 $17.50 $35.001/5/16 Buy 5 $11.00 $55.001/16/16 Sell 4 $17.50 $70.001/20/16 Buy 5 $12.00 $60.001/31/16 Sell 1 $17.50 $17.50LIFO Periodic: Ending Inventory Cost =LIFO PERIODIC Income Statement:Sales $122.50 BI $100.00+ Purch 115.00CGAS $215.00- EI - 133.00CGS - 82.00Gross Profit $40.5010 @ $10.00 = $100.00 + 3 @ $11.00 = $33.00 13 $133.00LIFO PERIODICCost of Sales =5 @ $12.00 = $60.00 +2 @ $11.00 = 22.007 $82.0015DETAILED EXAMPLE:DATE Transaction Units Price/unit Total12/31/15 Beginning Inv 10 $10.00 $100.001/1/16 Sell 2 $17.50 $35.001/5/16 Buy 5 $11.00 $55.001/16/16 Sell 4 $17.50 $70.001/20/16 Buy 5 $12.00 $60.001/31/16 Sell 1 $17.50 $17.50AVERAGE Periodic:AVERAGE PERIODIC Income Statement:Sales $122.50 BI $100.00+ Purch 115.00CGAS $215.00- EI - 139.75CGS - 75.25Gross Profit $47.25 ($100.00+$55.00+60.00) (10+5+5 units)= $10.75/unit cost Ending inventory = 13 x $10.75 = $139.75AVERAGE PERIODIC16SummaryMETHOD CGS EI Gross ProfitFIFO 70.00 145.00 52.50Average 75.25 139.75 47.25LIFO 82.00 133.00 40.50Questions for Management to consider: Which alternative reports higher net income?Which alternative results in lower taxes?Which alternative results in a more accurate ending inventory cost on the balance sheet? Changes to above if costs fall versus rise?17CGS & Inventory balance must be computed for each sale.18Cost Flows in PERPETUAL SystemsEXAMPLE:DATE Transaction Units Price/unit Total12/31/15 Beginning Inv 10 $10.00 $100.001/1/16 Sell 2 $17.50 $35.001/5/16 Buy 5 $11.00 $55.001/16/16 Sell 4 $17.50 $70.001/20/16 Buy 5 $12.00 $60.001/31/16 Sell 1 $17.50 $17.50LIFO PERPETUALcost=2($10) X 8 cost=4($11.00) X 1 X 4 cost=1($12.00) CGS20.0044.0012.0076.00100.0055.0060.00139.0020.0044.0012.00Inventory8 @ 10.00 = 80.001 @ 11.00 = 11.004 @ 12.00 = 48.00 139.0019Lower-of-Cost-or-Market (LCM)When the value of inventory is lower than its costPer GAAP, companies must “write down” the inventory to its market value in the period in which the price decline occurs. Market value = Replacement CostExample of conservatism.20SPECIAL RULE for Inventory CostingLCM Illustration for Chuck’s Electronics Inc.:$ 60,00045,00045,00012,800$162,80021Not too much: High Inventory Levels may incur high carrying costs (e.g., investment, storage, insurance, obsolescence, and damage).Not too little: Low Inventory Levels may lead to stock outs and lost sales.How much inventory should a company have?22Analysis of Inventory – Size of inventoryInventory turnover measures the number of times on average the inventory is sold during the period.Cost of Goods SoldAverage Inventory Inventory Turnover =Days in inventory measures the average number of days inventory is held.Days in Year (365)Inventory Turnover Days in Inventory =23Analysis of Inventory – RatiosTo enable comparison between companies, GAAP requires LIFO companies to disclose what inventories would be if FIFO were used. In footnotes, companies report the LIFO Reserve which = FIFO inventory less LIFO inventory. In my previous example, LIFO reserve is: EI using FIFO $145.00 EI using LIFO 133.00 LIFO Reserve $ 12.00 24Analysis of Inventory – LIFO Reserve