TAILIEUCHUNG - Lecture Introduction to financial accounting - Chapter 6: Inventory issues

Chapter 6 - Inventory issues. The main contents of this chapter include all of the following: Issues in counting inventory, ownership of inventory rules, inventory errors, 4 cost flow assumptions, special rule for inventory costing,. | 1 6 Inventory Issues ALL inventory must be accounted for (also not double counted). Question: Who owns it at year end? Seller 2 Ship to (FOB) Sale or consignment? Reseller Ship to (FOB) Buyer Issues in counting inventory Ownership of Goods on board a carrier (in transit on a truck, boat, etc) determined by shipping terms : Buyer considered owner when seller ships (carrier departs from seller) Buyer NOT considered owner until the goods reach the buyer. Ownership of inventory rules Consigned goods are owned by seller until sold by buyer. FOB shipping point (Free On Board) FOB destination 3 This is the only account which appears on both the Income Statement and the Balance Sheet. Inventory errors occur often. - Unintentional - Fraudulent manipulation Consider the effects of inventory errors. Inventory Errors 4 SALES CGS BI +Purchases CGAS - EI CGS GROSS PROFIT - expenses Net loss $900 $ 300 + 500 800 - 200 - 600 300 - 350 50 Consider this example of a troubled company in millions 5 SALES CGS BI +Purchases CGAS - EI CGS GROSS PROFIT - expenses Net loss $900 $ 300 + 500 800 - 200 - 600 300 - 350 50 in millions What happens to gross profit if: EI Overstated by $150 ? -350 -450 450 +100 6 SALES CGS BI +Purchases CGAS - EI CGS GROSS PROFIT - expenses Net loss $900 $ 300 + 500 800 - 200 - 600 300 - 350 50 in millions What happens to gross profit if: EI Overstated by $150 ? What happens next year? BI= last year EI -350 -450 450 +100 7 1. SPECIFIC IDENTIFICATION: Tag each item with purchase info. Cost of sale equals amount on tag. COST = $10 each COST = $11. BB BB BB 10 11 10 8 4 Cost Flow Assumptions 2. AVERAGE COST: Use formula: $ CGAS = Average Units available Unit Cost BB $20+$11 = $ 3 units 9 BB BB 4 Cost Flow Assumptions 3. FIRST-IN FIRST-OUT (FIFO): Items purchased first are recorded as sold first. Items purchased last go into ending inventory! In above: CGS = $10 EI = $10+$11=$21 BB BB BB 10 4 Cost Flow Assumptions 4. LAST-IN FIRST-OUT (LIFO):

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