PA - #07 - Inventory - Handout

HANDOUT Principles of Accounting Inventory Handout Video #1 1. Inventory Introduction a. Terminology and Review Inventory Product bought for the purpose of reselling it (as is)   Cost of Goods Sold (COGS) Amount company paid for the product   Consignment Inventory sent to (in possession of) a third party who acts as the owner's agent. Third party does not own the inventory Gross Profit (GP) What's left from the sale after accounting for cost   Gross Margin (GM) Ratio of what's left from the sale after accounting for cost   Perpetual Inventory System Each purchase and sale is recorded in the inventory records in real time. The system updates what is sold and what is on hand continuously (perpetually). Periodic Inventory System Inventory records are NOT recorded or updated in real time. The inventory is calculated at the end of the accounting period (periodically). b. What inventory does a company own? + All inventory on hand when the physical inventory is taken + Inventory in transit that was purchased FOB Shipping Point + Inventory in transit that was sold FOB Destination + Inventory on consignment in other locations that is still owned by the company taking the inventory count – Inventory included in the inventory on hand that belongs to another company but is being held on consignment = Inventory value shown on the financial statements Page 1

HANDOUT c. Multiple-Step Income Statement Revisited: Format and Supporting Calculations Periodic vs. Perpetual Method Simplified Multiple-Step Income Statement: General Format   Net Sales * - Cost of Goods Sold **   Gross Profit - Operating Expenses   Net Income Supporting Detail for Multiple-Step Income Statement: Sales   Sales Periodic vs. Perpetual Diff accounts - Sales Returns & Allowances - Sales Discounts Same Sales Acct * Net Sales COGS   Inventory on hand at the beginning of the year Inventory (Periodic) + Cost of Goods Purchased *** Periodic Beg Inv   Goods Available for Sale (GAFS) + Purch   - Inventory left at the end of the year = GAFS   ** Cost of Goods Sold (Periodic Method)   - COGS = End Inv Purchases   Purchases - Purchase Returns and Allowances - Purchase Discounts Periodic vs. Perpetual Diff accounts   Net Purchases + Transportation In Same Inventory Acct ** * Cost of Goods Purchased (Periodic) Video #2 Page 2

HANDOUT 2. At the beginning of the current year, John Bach opened a music store that sells vinyl records of classical music. The store is called Strictly Classical . During the year, Strictly Classical purchased 10,000 records for $7 each. At the end of the year, a physical inventory count revealed that 1,000 of those records were on hand. Strictly Classical uses a periodic inventory system. a. How many units were sold during the year? b. What amount should be shown for cost of the inventory (ending inventory value) on the year-end balance sheet? c. What amount should be shown for cost of goods sold on the year-end income statement? Inventory (Periodic) Inventory (Periodic) Units Beg Inv x $ / Unit + Purchases   Purchases = GAFS     - COGS = End Inv d. Now assume that Strictly Classical purchased 10,000 vinyl records as follows: Page 3

HANDOUT A B A x B Date # of Units Purchase d Cost per Unit Total Cost 1/1 800 $ 7.00 5,600 3/1 2,200 $ 7.50 16,500 6/23 4,000 $ 7.25 29,000 9/15 3,000 $ 7.40 22,200 Total 10,000 73,300 e. If the year-end inventory count (still) reveals 1,000 records on hand, what is the inventory value on the balance sheet? Date # of Units Purchased Cost per Unit Total Cost f. What is the store’s cost of merchandise sold? Date # of Units Purchased Cost per Unit Total Cost Video #3.1 3. Inventory Cost Flow Assumptions - Introduction Page 4

HANDOUT Recall: Strictly Classical A B A x B Date # of Units Purchase d Cost per Unit Total Cost 1/1 800 $ 7.00 5,600 Layers of Inventory 3/1 2,200 $ 7.50 16,500 6/23 4,000 $ 7.25 29,000 9/15 3,000 $ 7.40 22,200 Total 10,000 73,300 a. Things to Remember Flow of accounting information --> the order of product sales for acctg Physical flow of units can be different than accounting flow In examples, we will use the physical flow --> assume same as acctg flow Inventory Layers --> think of boxes, buckets, or pallets that are accessed in a certain order . One needs to be emptied before you can access the next. Many cost flow assumptions. These methods are all GAAP. You can choose any of them. Must choose! Once you choose, you have to use the same method every year (consistency) We will concentrate on three methods in this class b. Specific Identification (we will not cover in detail in this course) Examples: Page 5