Chapter 7
Reporting and interpreting cost of goods sold and inventory
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
McGrawHill/Irwin Copyright © 2014 by The McGrawHill Companies, Inc. All rights reserved.-1
Understanding the Business
Provide sufficient quantities of high-quality inventory.
Primary Goals of Inventory Management
Minimize the costs of carrying inventory.
7-2
Items Included in Inventory
Merchandisers
Merchandise Inventory
Manufacturing
Raw Materials
Work in Process
Finished Goods
7-3
Costs Included in Inventory Purchases
The cost principle requires that inventory be recorded at the price paid or the consideration given.
Invoice Price
Inspection Costs
Freight-In
Preparation Costs
Any purchase returns and allowances and purchase discounts taken are subtracted.
7-4
Flow of Inventory Costs
7-5
Cost of Goods Sold equation
Beginning Inventory
Purchases for the Period
Goods Available for Sale
(Inventory remaining)
Ending Inventory (Balance Sheet)
(Inventory sold)
Cost of Goods Sold (Income Statement)
Beginning inventory + Purchases = Goods Available for Sale
Goods Available for Sale – Ending inventory = Cost of goods sold
7-6
Perpetual and periodic inventory systems
Perpetual
Purchase transactions are recorded directly in an inventory account.
Sales require two entries to record: (1) the retail sale and (2) the cost of goods sold.
Periodic
No up-to-date record of inventory is maintained during the year.
Sales require one entry to record the retail sale. Cost of goods sold is
calculated.
7-7
Inventory Costing Methods
Inventory Costing Methods 1. Specific Identification
2. First-in, First-out (FIFO) 3. Last-in, First-out (LIFO) 4. Weighted Average
Total Dollar Amount of Goods Available for Sale
Inventory Costing Method
Ending Inventory Cost of Goods Sold
7-8
Specific Identification
When units are sold, the specific cost of the unit sold is added to cost of goods sold.
7-9
Cost Flow Assumptions
The choice of an inventory costing method is not based on the physical flow of goods on and off the shelves.
FIFO
LIFO
Weighted Average
7-10
First-In, First-Out Method