Fiancial reporting 6

1、Accounting for InventoryRead Chapter 6· You must understand the demonstration problems (pp.249 253) & (pp.254-256)Learnings Objectives· Inventory basics (E6.2)o One of the most important asseto Characteristics of inventory: (1) they are owned by the business; (2) they are in a form rea

2、dy for sale in the ordinary course of businesso For manufacturers, inventory consists of (1) raw materials (2) work in process (3) finished goods· Inventory costing system o Inventory costing under a periodic inventory systemo Inventory costing under a perpetual inventory system· Cost flow

3、 assumptions FIFO, LIFO, weighted average cost (P6-8) o FIFO the earliest goods purchased are the first to be sold; ending inventory (inventory still on hand) is the latest goodso LIFO the latest goods purchased are the first to be sold; ending inventory is the earliest goodso Weighted average cost

4、the goods available for sale have the same cost per unito In a period of inflation (rising prices), FIFO produces a higher profit· Valuing the ending balance of inventoryo The principle lower of cost and net realizable value (E6-8) o Methods of estimating inventories gross profit method (E6-15)

5、 & cost-to-retail method (E6-16)· Presentation of income statement under different inventory systems (P6-4)· Financial analysis of inventory o Inventory turnover ratio the number of times on average the inventory is sold during the periodo Inventory turnover = cost of sales ÷ aver

6、age inventoryo Average inventory = (opening inventory + ending inventory)/2 LO1Inventory basics (E6.2)· Characteristics of inventory: (1) they are owned by the business; (2) they are in a form ready for sale in the ordinary course of businesso For manufacturers, inventory consists of (1) raw ma

7、terials (2) work in process (3) finished goods· Determining ownership of goodso Before we begin to calculate the cost of inventory, we need to consider the ownership of goods goods in transit§ FOB shipping point transaction has been completed at the shipping point and ownership of goods pa

8、sses to the buyer§ FOB destination transaction will be completed at the destination point and ownership of goods remains with the seller until the goods reach the buyer EXERCISE 6-2Ending inventory as reported$740 0001. Subtract from inventory: The goods belong to Superior Ltd. Platinum is mere

9、ly holding them as a consignee(250 000)2. No effect title does not pass to Platinum until goods are received (July 3)03. Subtract from inventory: Office supplies should be carried in a separate account. They are not considered inventory held for resale.(17 000)4. Add to inventory: The goods belong t

10、o Platinum until they are shipped (July 1) .30 0005. Add to inventory: Branch sales ordered goods with a cost of $8000. Platinum should record the corresponding sales revenue of $10 000. Platinums decision to ship extra unordered goods does not constitute a sale. The managers statement that Branch c

11、ould ship the goods back indicates that Platinum knows this over-shipment is not a legitimate sale. The manager acted unethically in an attempt to improve Platinums reported profit by over-shipping52 0006. Subtract from inventory: GAAP require that inventory be valued at the lower of cost and net re

12、alisable value. Obsolete parts should be adjusted from cost to zero if they have no other use.(50 000)Correct inventory$505 000LO2Inventory costing system · Inventory costing under a periodic inventory system· Inventory costing under a perpetual inventory systemCost flow assumptions FIFO,

13、LIFO, weighted average cost (P6-8) · FIFO the earliest goods purchased are the first to be sold; ending inventory (inventory still on hand) is the latest goods· LIFO the latest goods purchased are the first to be sold; ending inventory is the earliest goods· Weighted average cost the

14、goods available for sale have the same cost per unit· In a period of inflation (rising prices), FIFO produces a higher profitAlways remember· Cost of sale = opening inventory + purchases ending inventory· Gross profit = net sales cost of sale· Gross margin (gross profit ratio) =

15、gross profit/net salesPROBLEM 6-8You must know how to work out cost of sale under the periodic method read textbook example (pp.249-252)(a) Sales:January 880units $25$2 000January 10 (return)(10units $25)(250)January 20 90units $252 250160units$4 000 KEY ISSUES: (1) FIFO the earliest goods purchased

16、 are the first to be sold; ending inventory (inventory still on hand) is the latest goodsLIFO the latest goods purchased are the first to be sold; ending inventory is the earliest goodsWeighted average cost the goods available for sale have the same cost per unit(2) LIFO, FIFO, moving average assump

17、tions are applied only to cost of sales, not for purchase and sales returns. The price or cost for sales and purchases must directly attach to the previous transaction. (1)LIFODateCost of goods available for saleCost of salesBalanceJanuary 1600(50 $12)$ 600January 5(50 $12)$2000(100 $14)$1400(100 $1

18、4)January 8(80 $14)$1120(50 $12)$ 880(20 $14)January 10(10 $14)($140)(50 $12)$1020(30 $14)January 15(50 $12)$1560(30 $18)$ 540(30 $14)(30 $18)January 16(50 $12)$1470(5 $18)$ 90(30 $14)(25 $18)(25 $18)January 20(30 $14)$1290(15 $12)$ 180(35 $12)January 25(10 $20)$ 200(15 $12)$ 380_(10 $20)2650$2270(i

19、)Cost of sales: $2650 $380 = $2270. (ii) Ending inventory = $380. (iii) Gross profit = $4000 $2270 = $1730.(2)FIFODateCost of goods available for saleCost of salesBalanceJanuary 1600(50 $12)$ 600January 5(100 $14)$1400(50 $12)$2000(100 $14)January 8(50 $12)$1020(70 $14)$ 980(30 $14)January 10(10 $14

20、)($140)(80 $14)$1120January 15(30 $18)$ 540(80 $14)$1660(30 $18)January 16(5 $18)($ 90)(80 $14)$1570(25 $18)January 20(80 $14)$1300(15 $18)$ 270(10 $18)January 25(10 $20)$ 200(15 $18)$ 470_(10 $20)2650$2180(i)Cost of sales: $2650 $470 = $2180. (ii) Ending inventory = $470. (iii) Gross profit = $4000

21、 $2180 = $1820.(3)Moving AverageDateCost of goods available for saleCost of salesBalanceJanuary 1600(50 $12)$ 600January 5(100 $14)$1400(150 $13.333)a$2000January 8(80 $13.333)$1067*(70 $13.333)$ 933January 10(10 $13.333)($133)*(80 $13.333)$1066January 15(30 $18)$ 540(110 $14.600)b$1606January 16(5

22、$18)($ 90)(105 $14.438)c$1516January 20(90 $14.438)$1299*(15 $14.438)d$ 217January 25(10 $20)$ 200_(25 $16.68)$ 4172650$2233*roundeda2000 ÷ 150 = 13.333c1516 ÷ 105 = 14.438b1606 ÷110 = 14.60d417 ÷ 25 = 16.68(i)Cost of sales: $2650 $417 = $2233. (ii) Ending inventory = $417. (iii)

23、 Gross profit = $4000 $2233 = $1767.(b)Gross profit:LIFOFIFOMoving AverageSales$4000$4000$4000Cost of sales227021802233Gross profit$1730$1820$1767Ending inventory$ 380$ 470$ 417In a period of rising costs, the LIFO cost flow assumption results in the highest cost of sales and lowest gross profit. FI

24、FO gives the lowest cost of sales and highest gross profit. The weighted average cost flow assumption results in amounts between the other two.On the statement of financial position, FIFO gives the highest ending inventory (representing the most current costs); LIFO gives the lowest ending inventory

25、 (representing the oldest costs); and average cost results in an ending inventory falling between the other two.Financial Statement EffectsWhen prices are rising, the financial statement effects are FIFOMoving averageLIFOEnding inventoryHighestMiddleLowestCOSLowestMiddleHighestGross profitHighestMid

26、dleHighestLO3Valuing the ending balance of inventoryo The principle lower of cost and net realizable value (E6-8) o Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenseo Why? inventory values sometimes fall

27、 due to falling demand for the product, physical deterioration of the product, changes in technology and obsolescence. When the value of inventory is lower than its cost, the inventory is written down to its net realizable value. o Dr inventory write-downs Cr inventory EXERCISE 6-8CostNet realisable

28、 valueLower of Cost and net realisable valueCamerasMinolta$ 850$ 780$ 780Canon 900 912 900Total17501692Light MetersVivitar150013201320Kodak161018901610Total31103210Total inventory$4860$4902$ 4610We assumed that a business would be able to physically count its inventory. But what if it cannot?·

29、Two reasons explain why inventories are sometimes estimated. First, management may want monthly or quarterly financial statements, but a physical inventory count is taken only annually; Second, sometimes a physical inventory count is impossible· AASB102 allows the use of retail inventory method

30、 to value inventory, provided the result reasonably approximates the lower of cost and net realizable value· Methods of estimating inventories gross profit method (E6-15) & cost-to-retail method (E6-16)Estimated gross margin could be determined by past practice EXERCISE 6-15(a)Net sales ($5

31、6 100 $1100)$55000Less: Estimated gross profit (30% × $55000)16 500Estimated cost of sales$38500Beginning inventory$22 000Cost of goods purchased ($34320 $1540 + $1320)34 100Cost of goods available for sale56 100Less: Estimated cost of sales38 500Estimated cost of merchandise lost$17600Cost to

32、retail ratio could be establishedEXERCISE 6-16WomensDepartmentMensDepartmentCostRetailCostRetailBeginning inventory$ 32 000$ 45 000$ 45 000$ 60 000Goods purchased148 000179 000137 300185 000Goods available for sale$180 000224 000$182 300245 000Net sales177 000185 000Ending inventory at retail$ 47 00

33、0$ 60 000Cost/retail ratio$180 000= 80.4%$182 300= 74.4%$224 000$245 000Estimated cost of ending inventory $47 000 × 80.4% = $37 788 $60 000 × 74.4% = $44 640LO4Presentation of income statementsPROBLEM 6-4(a)RED PARTS INC.Condensed Income StatementsFor the Year Ending 31 December, 2010FIFO

34、LIFOSales$432 500 $432 500 Cost of salesBeginning inventory11 400 11 400 Cost of goods purchased291 000 291 000 Cost of goods available for sale302 400 302 400 Ending inventory 20 250a17 150bCost of sales282 150 285 250 Gross profit150 350 147 2

35、50 Expenses73 500 73 500 Income before income taxes76 850 73 750 Income taxes (30%) 23 055  22 125 Profit$53 795 $51 625 a15 000 × $1.35 = $20 250.b$11 400 + (5000 × $1.15) = $17 150.(b)(1)It has been urged in the past that the FIFO method produ

36、ces the most meaningful inventory amount for the statement of financial position because the units are costed at the most recent purchases.(2)The LIFO method produces the most meaningful profit because the cost of the most recent purchases are matched against sales.(3)The FIFO method is most likely

37、to approximate actual physical flow because the oldest goods are usually sold first to minimise spoilage and obsolescence.(4)There will be $930 additional cash available under LIFO because income taxes are $22 125 under LIFO and $23 055 under FIFO.(5)Gross profit under the weighted average cost meth

38、od will be: (a) lower than FIFO and (b) higher than LIFO.12Internal control and cashLO1 Internal controlSafeguard its assets from employee theft, robbery and unauthorized useEnhance the accuracy and reliability of its accounting records and financial statementsEXERCISE 8-2(a)(b)ProcedureWeaknessPrin

39、cipleRecommendedChange1.Cash is not adequately protected from theft.Physical, mechanical, and electronic controls.Cash should be stored in a safe until it is deposited in bank.2.Inability to establish responsibility for cash with a specific sales assistantEstablishment of responsibility.There should be separate cash drawers and register codes for each sales assistant.3.The accountant should not handle cash.Segregation of duties.The cashiers department should make the deposits.4.Cash is not independently counted.Independent internal verification.A cashier office supervisor should count