Lecture Accounting principles (8th edition) – Chapter 6: Budgetary planning

In this chapter, the learning objectives are: Describe the steps in determining inventory quantities, explain the accounting for inventories and apply the inventory cost flow methods, explain the financial effects of the inventory cost flow assumptions.

Chapter 6-1

CHAPTER  6

INVENTORIES

Accounting Principles,  Eighth Edition

Reporting and Analyzing Inventory

Taking a physical inventoryDetermining ownership of goods

Determining Inventory Quantities

Inventory Costing

Inventory Costing

Inventory Errors

Inventory Errors

Statement Presentation and Analysis

Statement Presentation and Analysis

Income statement effectsBalance sheet effects

PresentationAnalysis

Regardless of the classification, companies report all inventories under Current 

Assets on the balance sheet.

Ownership of the goods remains  with the seller until the goods reach 

the buyer.

Terms of Sale

Goods in transit should be included in the inventory of the buyer  when the:  

following costing methods:

Specific Identification First­in, first­out (FIFO) Last­in, first­out (LIFO) Average­cost

Inventory Costing

Inventory Costing

Cost Flow  Assumptions

for $15

Young & Crazy Company Income Statement For the Month of Feb 2008

Sales $ 90

Cost of goods sold 15

Gross profit 75

Expenses: Administrative 14

Selling 12

Interest 7

Total expenses 33

Income before tax 42

Taxes 13

Net Income $ 29

“Specific Identification”

Inventory Costing

Inventory Costing

Inventory Balance = 

$ 30

Purchase on 2/2/08 for 

$10 Purchase on 2/25/08 

for $20

Cost of goods sold 10 Gross profit 80 Expenses:

Administrative 14 Selling 12

Total expenses 33 Income before tax 47 47

Taxes 14 Net Income $ 33

Chapter

6-21

Purchase on 2/2/08 for 

$10

Purchase on 2/15/08 

for $15

Inventory Balance = 

$ 25

Purchase on 2/25/08 

for $20

Young & Crazy Company Income Statement For the Month of Feb 2008

Sales $ 90

Cost of goods sold 20

Gross profit 70

Expenses: Administrative 14

Selling 12

Interest 7

Total expenses 33

Income before tax 37 37

Taxes 11

Net Income $ 26

“Last­In­First­Out (LIFO)”

LO 2 Explain the accounting for inventories and apply the 

inventory cost flow methods.

Inventory Costing – Cost Flow Assumptions

Inventory Costing – Cost Flow Assumptions

Allocates cost of goods available for sale on the basis of  weighted average unit cost   incurred.

Assumes goods are similar in nature.

Applies weighted average unit cost to the units on hand to  determine cost of the ending inventory.

Inventory Costing – Cost Flow Assumptions

Inventory Costing – Cost Flow Assumptions

Cost of goods sold 15 Gross profit 75 Expenses:

Administrative 14 Selling 12

Total expenses 33 Income before tax 42 42

Taxes 13 Net Income $ 29

Comparative Financial Statement Summary

LO 3 Explain the financial effects of the inventory cost flow assumptions.

In a period of inflation, the cost flow method that results in the  lowest income taxes is the:  

Chapter

6-29

Q6­12   Casey Company has been using the FIFO cost flow 

method during a prolonged period of rising prices.  During  the same time period, Casey has been paying out all of its net  income as dividends.  What adverse effects may result from  this policy?

Disclosure of change in cost flow method

Market value = Replacement Cost Example of  conservatism

Compute the lower­of­cost­or­market valuation for the company’s total  inventory.

$ 12,000 9,000 12,800

$ 33,800

Over the two years, the total net income is correct because the errors  offset each other.

The ending inventory depends entirely on the accuracy of taking and  costing the inventory.

Income Statement Effects

LO 5  Indicate the effects of inventory errors on the financial statements.

LO 6  Compute and interpret the inventory turnover ratio.

Inventory  Turnover

365 5.4  

67.59  days

 =

Days in  Inventory

Chapter

6-47

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