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