Inventory carrying cost ppt

inventory costing and capacity analysis ppt and inventory cost flow methods ppt
Dr.DouglasPatton Profile Pic
Dr.DouglasPatton,United States,Teacher
Published Date:26-07-2017
Your Website URL(Optional)
CHAPTER 6 INVENTORY COSTING www.Thesisscientist.comINVENTORY BASICS • In the balance sheet of merchandising and manufacturing companies, inventory is frequently the most significant current asset. • In the income statement, inventory is vital in determining the results of operations for a particular period. • Gross profit (net sales - cost of goods sold) is closely watched by management, owners, and other interested parties. www.Thesisscientist.comPerpetual vs. Periodic Inventory Accounting • Perpetual – Updates inventory and cost of goods sold after every purchase and sales transaction • Periodic – Delays updating of inventory and cost of goods sold until end of the period – Misstates inventory during the period This chapter covers the periodic inventory method. www.Thesisscientist.comDETERMINING INVENTORY QUANTITIES • In order to prepare financial statements, it is necessary to determine the number of units of inventory owned by the company at the statement date, and to value them. • The determination of inventory quantities involves 1. taking a physical inventory of goods on hand, and 2. determining the ownership of goods. • Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. www.Thesisscientist.comTAKING A PHYSICAL INVENTORY A company, in order to minimize errors in taking the inventory, should adhere to internal control principles by adopting the following procedures: 1. Employees who do not have custodial responsibility for the inventory should do the counting (segregation of duties). 2. Each counter should establish the authenticity of each inventory item (establishment of responsibility). www.Thesisscientist.comTAKING A PHYSICAL INVENTORY 3. Another employee should make a second count (independent verification). 4. All inventory tags should be pre-numbered and accounted for (documentation procedures). 5. At the end of the count, a designated supervisor should ascertain that all inventory items are tagged and that no items have more than one tag (independent verification). www.Thesisscientist.comTERMS OF SALE FOB Shipping Point FOB Destination Point Seller Seller Ownership passes to buyer here Public Public Ownership Carrier Carrier passes to Co. Co. buyer here Buyer BuyerDETERMINING OWNERSHIP OF CONSIGNED GOODS • Under a consignment arrangement, the holder of the goods (called the consignee) does not own the goods. • Ownership remains with the shipper of the goods (consignor) until the goods are actually sold to a customer. • Consigned goods should be included in the consignor’s inventory, not the consignee’s inventory. Owned by a consignor; do not count in our (consignee) inventory Consignee CompanySALES TRANSACTIONS General Journal J1 Date Account Title and Explanation Ref Debit Credit May 4 Accounts Receivable 3,800 Sales 3,800 To record credit sale. Only one entry is required to record a sale under a periodic method. www.Thesisscientist.comRECORDING SALES RETURNS AND ALLOWANCES General Journal J1 Date Account Title and Explanation Ref Debit Credit May 8 Sales Returns and Allowances 300 Accounts Receivable 300 To record returned goods. The normal balance of Sales Returns and Allowances is a debit. Sales Returns and Allowances is a contra revenue account to the Sales account. www.Thesisscientist.comPURCHASES OF MERCHANDISE General Journal J1 Date Account Title and Explanation Ref Debit Credit May 4 Purchases 3,800 Accounts Payable 3,800 To record goods purchased on account, terms n/30. For purchases on account, Purchases is debited and Accounts Payable is credited. For cash purchases, Purchases is debited and Cash is credited. www.Thesisscientist.comPURCHASE RETURNS AND ALLOWANCES General Journal J1 Date Account Title and Explanation Ref Debit Credit May 8 Accounts Payable 300 Purchase Returns and Allowances 300 To record return of goods For purchases returns and allowances that were originally made on account, Accounts Payable is debited and Purchase Returns and Allowances is credited. The Purchase Returns and Allowances account is a contra account. www.Thesisscientist.comACCOUNTING FOR FREIGHT COSTS General Journal J1 Date Account Title and Explanation Ref Debit Credit May 4 Freight In 150 Cash 150 To record payment of freight. When the purchaser directly incurs the freight costs, the account Freight In is debited and Cash is credited. www.Thesisscientist.comHIGHPOINT ELECTRONICS Income Statement For the Year Ended December 31, 2002 Sales revenue Sales 480,000 Less: Sales returns and allowances 20,000 Net sales 460,000 Cost of goods sold Inventory, January 1 36,000 Purchases 3 25,000 Less: Purchase returns and allowances 17,200 Net purchases 3 07,800 Add: Freight in 12,200 Cost of goods purchased 3 20,000 Cost of goods available for sale 356,000 Inventory, December 31 40,000 Cost of goods sold 316,000 Gross profit 144,000 Operating expenses Salaries expense 45,000 Rent expense 19,000 Utilities expense 17,000 The multi-step income statement under the Advertising expense 16,000 periodic system requires more detail in the cost Amortization expense 8,000 Freight out 7,000 of goods sold section, as shown above. Insurance expense 2,000 Total operating expenses 114,000 Net income 30,000 www.Thesisscientist.comALLOCATION OF INVENTORIABLE COSTS Ending Beginning Inventory Inventory (Balance Sheet) Cost of Goods Available for Sale Goods Cost of Goods Purchased Sold (Income during the Statement) year www.Thesisscientist.comUSING ACTUAL PHYSICAL FLOW COSTING • The specific identification method tracks the actual physical flow of the goods. • Each item of inventory is marked, tagged, or coded with its specific unit cost. • It is most frequently used when the company sells a limited variety of high unit-cost items. www.Thesisscientist.comUSING ASSUMED COST FLOW METHODS • Other cost flow methods are allowed since specific identification is often impractical. • These methods assume flows of costs that may be unrelated to the physical flow of goods. • Cost flow assumptions: 1. First-in, first-out (FIFO). 2. Average cost. 3. Last-in, first-out (LIFO). www.Thesisscientist.comFIFO • The FIFO method assumes that the earliest goods purchased are the first to be sold. • Often reflects the actual physical flow of merchandise. • Under FIFO, the costs of the earliest goods purchased are the first to be recognized as cost of goods sold. The costs of the most recent goods purchased are recognized as the ending inventory. www.Thesisscientist.comFIFO method assumes earliest goods purchased are the first to be sold www.Thesisscientist.comAVERAGE COST • The average cost method assumes that the goods available for sale are homogeneous. • The allocation of the cost of goods available for sale is made on the basis of the weighted average unit cost incurred. • The weighted average unit cost is then applied to the units sold to determine the cost of goods sold and to the units on hand to determine the ending inventory.

Advise: Why You Wasting Money in Costly SEO Tools, Use World's Best Free SEO Tool Ubersuggest.