Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Inventories: Measurement 8 8-2 Inventory Those assets that a company: 2. Has in production (work in process) for future sale. 2. Has in production (work in process) for future sale. 1. Intends to sell in the normal course of business. 1. Intends to sell in the normal course of business. 3. Uses currently in the production of goods to be sold (raw materials). 3. Uses currently in the production of goods to be sold (raw materials). 8-3 Types of Inventories Merchandise Inventory Merchandise Inventory Goods acquired for resale Goods acquired for resale Manufacturing Inventory Manufacturing Inventory • Raw Materials • Work-in-Process • Finished Goods • Raw Materials • Work-in-Process • Finished Goods Types of Inventory Types of Inventory 8-4 Inventory Cost Flows Raw Materials (1) $XX $XX (4) Work in Process Finished Goods Cost of Good Sold Direct Labor Manufacturing Overhead $XX $XX (7) $XX $XX (8) $XX (2) $XX $XX (5) (3) $XX $XX (6) (1) Raw materials purchased (2) Direct labor incurred (3) Manufacturing overhead incurred (4) Raw materials used (5) Direct labor applied (6) Manufacturing overhead applied (7) Work in process transferred to finished goods (8) Finished goods sold (1) Raw materials purchased (2) Direct labor incurred (3) Manufacturing overhead incurred (4) Raw materials used (5) Direct labor applied (6) Manufacturing overhead applied (7) Work in process transferred to finished goods (8) Finished goods sold 8-5 Learning Objective Explain the difference between a perpetual inventory system and a periodic inventory system. 8-6 Inventory Methods Perpetual Inventory System Perpetual Inventory System The inventory account is continuously updated as purchases and sales are made. The inventory account is continuously updated as purchases and sales are made. Periodic Inventory System Periodic Inventory System The inventory The inventory account is adjusted account is adjusted at the end of a at the end of a reporting cycle. reporting cycle. The inventory The inventory account is adjusted account is adjusted at the end of a at the end of a reporting cycle. reporting cycle. Two accounting systems are used to record transactions involving inventory: 8-7 Perpetual Inventory System Matrix, Inc. purchases on account $600,000 of merchandise for resale to customers. GENERAL JOURNAL Date Description Debit Credit Inventory 600,000 Accounts Payable 600,000 2006 Returns of inventory are credited to the inventory account. Discounts on inventory purchases can be recorded using the gross or net method. Returns of inventory are credited to the inventory account. Discounts on inventory purchases can be recorded using the gross or net method. 8-8 Perpetual Inventory System Matrix, Inc. sold, on account, inventory with a retail price of $820,000 and a cost basis of $540,000, to a customer. GENERAL JOURNAL Date Description Debit Credit Accounts Receivable 820,000 Sales Cost of Goods Sold 540,000 Inventory 820,000 540,000 2006 8-9 Periodic Cost of Goods Sold Equation Beginning Inventory + Net Purchases Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold 8-10 Periodic Inventory System Matrix, Inc. purchases on account $600,000 of merchandise for resale to customers. GENERAL JOURNAL Date Description Debit Credit Purchases 600,000 Accounts Payable 600,000 2006 Returns of inventory are credited to the Purchase Returns and Purchase Returns and Allowances Allowances account. Discounts on inventory purchases can be recorded using the gross or net method. Returns of inventory are credited to the Purchase Returns and Purchase Returns and Allowances Allowances account. Discounts on inventory purchases can be recorded using the gross or net method. [...]... 25.00 27.00 28.00 Total $ 17,600.00 7,200.00 6,250.00 5,400.00 11,200.00 8-3 1 Moving-Average Perpetual System 8-3 2 Moving-Average Perpetual System $11,600.00 ÷ (80 0-6 00+300) = $23.200 8-3 3 Moving-Average Perpetual System $27,490.00 ÷ (80 0-6 00+30 0-3 00+250+200+400) = $26.181 8-3 4 Moving-Average Perpetual System Sum 8-3 5 First-In, First-Out The FIFO method assumes that items are sold in the chronological... and cost of goods sold  8-2 2 Inventory Cost Flow Methods Specific cost identification Specific cost identification Average cost Average cost First-in, first-out (FIFO) First-in, first-out (FIFO) Last-in, first-out (LIFO) Last-in, first-out (LIFO) 8-2 3 Specific Cost Identification  Items are added to  Items are added to  The specific cost of  The specific cost of  COGS for each sale is  COGS... Inventory shows a balance of $180,000 Let’s calculate Cost of Goods Sold at the end of the accounting period  8-1 2 Periodic Inventory System Adjusting entry to determine Cost of Goods Sold 8-1 3 Comparison of Inventory Systems 8-1 4 Learning Objective Explain which physical quantities of goods should be included in inventory  8-1 5 What is Included in Inventory? General Rule General Rule All goods owned by the... shipping terms Goods on Goods on Consignment Consignment 8-1 6 Learning Objective Determine the expenditures that should be included in the cost of inventory  8-1 7 Expenditures Included in Inventory Invoice Invoice Price Price Purchase Purchase Returns Returns + Freight-in Freight-in on on Purchases Purchases Purchase Purchase Discounts Discounts 8-1 8 Purchase Discounts Discount terms are 2/10, n/30 $14,000... 30 shows 600 frames in ending inventory shows 600 frames in ending inventory Use the periodic weighted-average method to Use the periodic weighted-average method to determine: determine: (1) Ending inventory cost (1) Ending inventory cost (2) Cost of goods sold (2) Cost of goods sold  8-2 6 Weighted-Average Periodic System Yore Frame, Inc Frame Inventory Date Beg Inventory 9/3 9/15 9/21 9/29 Goods Available... average per unit cost 8-2 8 Weighted-Average Periodic System Yore Frame, Inc Frame Inventory Date Beg Inventory 9/3 9/15 9/21 9/29 Goods Available for Sale Ending Inventory Cost of Goods Sold Units 800 300 250 200 400 1,950 600 1,350 $/Unit $ 22.00 24.00 25.00 27.00 28.00 Total $ 17,600.00 7,200.00 6,250.00 5,400.00 11,200.00 24.4359 24.4359 $ 47,650.00 14,661.54 $ 32,988.46 8-2 9 Moving-Average Perpetual... 30 shows 600 frames in ending inventory shows 600 frames in ending inventory Use the perpetual weighted-average method to Use the perpetual weighted-average method to determine: determine: (1) Ending inventory cost (1) Ending inventory cost (2) Cost of goods sold (2) Cost of goods sold  8-3 0 Moving-Average Perpetual System Yore Frame, Inc Frame Inventory Date Beg Inventory 9/3 9/15 9/21 9/29 Goods Available... entries under both the perpetual and periodic accounting system assuming Matrix uses the net method to record merchandise purchases  8-2 0 Net Method Using Perpetual and Periodic 8-2 1 Learning Objective Differentiate between the specific identification, FIFO, LIFO, and average cost methods used to determine the cost of ending inventory and cost of goods sold  8-2 2 Inventory Cost Flow Methods Specific cost... each inventory item must be known must be known items from inventory items from inventory at the time of sale, at the time of sale, income can be income can be manipulated manipulated  8-2 4 Average Cost Method 8-2 5 Weighted-Average Periodic System The following schedule shows the frame The following schedule shows the frame inventory for Yore Frame, Inc for September inventory for Yore Frame, Inc for September... charged to COGS when goods are sold when goods are sold  The cost of the  The cost of the newest inventory newest inventory items remain in items remain in ending inventory ending inventory  8-3 6 First-In, First-Out Even though the periodic Even though the periodic and the perpetual and the perpetual approaches differ in the approaches differ in the timing of adjustments to timing of adjustments to . Inventory Manufacturing Inventory • Raw Materials • Work-in-Process • Finished Goods • Raw Materials • Work-in-Process • Finished Goods Types of Inventory Types of Inventory 8-4 Inventory Cost Flows Raw Materials (1). Goods Sold at the end of the accounting period. 8-1 2 Periodic Inventory System Adjusting entry to determine Cost of Goods Sold 8-1 3 Comparison of Inventory Systems 8-1 4 Learning Objective Explain. 540,000 Inventory 820,000 540,000 2006 8-9 Periodic Cost of Goods Sold Equation Beginning Inventory + Net Purchases Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold 8-1 0 Periodic Inventory