Transcript Retail inventory

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
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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
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Objective 1
Account for inventory
by the periodic and
perpetual systems
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Inventory Accounting Systems
Perpetual systems maintain a running record
to show the inventory on hand at all times.
Periodic systems do not keep a
continuous record of inventory on hand.
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9-5
Perpetual System
Debit Inventory
Credit Cash or Accounts Payable
Debit Cash or Accounts Receivable
Credit Sales Revenue
Debit Cost of Goods Sold
Credit Inventory
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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
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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
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9-8
Gross Profit
Sales revenues – Cost of goods sold =
Gross profit (before operating expenses)
Gross profit – Operating expenses =
Net profit
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Cost-of-Goods-Sold Model
Budgeted Cost of Goods Sold
+
Budgeted Ending Inventory
=
Budgeted Cost of Goods Available for Sale
–
Actual Beginning Inventory
=
Purchases
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Calculating the Cost of Inventory
Cost of inventory on hand = Quantity × unit cost
Physical count is made at least once a
year, even with a perpetual system.
 Consigned goods are excluded.

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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.

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Periodic System
Inventory
100,000 100,000
Beginning Beginning
Balance Balance
120,000
Ending
Balance
Accounts Payable
560,000
Purchases
Purchases
560,000 560,000
Purchases Purchases
Cost of Goods Sold
100,000
560,000
540,000
120,000
Ending
Balance
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Objective 2
Apply the inventory costing
methods: specific unit cost,
weighted-average cost,
FIFO and LIFO
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Units Purchased in 2004
January 8
May 19
October 23
Total units
Units sold
Units left
20 units @ $20 = $ 400
55 units @ $30 = $1,650
25 units @ $31 = $ 775
100
70
30
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Units Sold and in
Ending Inventory
Units sold by date:
Jan 5
17
May 19
33
Oct 23
20
Total sales 70
30 units left in inventory
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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
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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
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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
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Weighted Average
$2,825 total cost/100 units = $28.25/unit
Cost of goods sold = 70 × $28.25 = $1977.50
Ending inventory = 30 × $28.25 = $847.50
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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)
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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)
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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)
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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)
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Comparison of Methods
Ending Inventory
Specific identification
FIFO
LIFO
Weighted-average
$875.00
$925.00
$700.00
$847.50
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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
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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.
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Objective 3
Identify the profit effects
of the
inventory costing methods
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The Income Tax
Advantage of LIFO
During periods of inflation, LIFO’s
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!

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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.

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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 Total
10 $30 $300
4
30
120
4
30
120
25
31
775
16
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496
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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 Total
16 $31 $496
25
32
800
25
32
800
20
32
640
20 $32 $640
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Accounting Principles: Comparability
The business should use the same accounting
methods and procedures from one period to the next.
A company may change inventory methods, but it
must disclose the effects of the change on net profits.
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Accounting Principles: Relevance
The financial statements
should report sufficient
information to enable
an outsider to make
knowledgeable decisions
about the company.
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Accounting Principles: Materiality
An item is material if it has the potential
to alter a statement user’s decision.
Materiality is specific to
the entity being evaluated.
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Accounting Principles: Conservatism
Err on the side
of caution when
reporting any item in
the financial statements.
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Objective 4
Apply the lower-of-costand-net-realisable-value
rule to inventory
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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.

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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 30
Loss on Inventory (or COGS) 800
Inventory
800
Write down inventory to LCNRV
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Objective 5
Determine the effects of
inventory errors on cost of
goods sold and net profit
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Inventory Errors
If inventory is calculated incorrectly, how
many years of financial statements will it
affect?
 Two years
 The current year’s ending inventory is
next year’s beginning inventory.

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Objective 6
Estimate ending inventory
by the gross profit and
retail inventory method
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Gross Profit Method Example
Net Sales
Gross Profit Margin
Beginning Inventory
Net Purchases
$150,000
31.5%
$ 18,500
$110,500
Net Sales
– Gross Profit of 31.5%
= Cost of Goods Sold
$150,000
47,250
$102,750
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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
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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.

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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.

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End of Chapter 9
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