A Presentation by: Prof.

Thadeus Abilla, CPA

BALANCE SHEET

Purchase costs (or Mfg. costs)

INCOME STATEMENT Revenue Cost of goods sold Gross profit Expenses Net income

Asset Inventory

When Goods Sold

are

Goods in Inventory. Goods in Transit.

FOB Shipping Point: buyers inventory from time of shipment. FOB Destination: sellers inventory until receipt by buyer.

Goods on Consignment: inventory of the consignor, not the consignee.

FOB Shipping Point FOB Shipping Point

Seller Buyer

Quality Produce

Goods being shipped are Goods being shipped are included in inventory of included in inventory of buyer while in transit. buyer while in transit.

FOB Destination FOB Destination

Seller Buyer

Quality Produce

Goods being Goods being included in included in seller until seller until buyer. buyer.

shipped are shipped are inventory of inventory of received by received by

Title to goods Title to goods sold on sold on consignment consignment remains with the remains with the shipper until their shipper until their sale or use by the sale or use by the dealer or dealer or

1. ABC Inc. sold Php 1 Million to DEF Inc. for Php 1.5 Million. The goods were shipped on March 1 and was received on March 5. Terms of shipment was FOB Destination. Question: As of March 4, who owns the inventory and for how much? When should the sale be recorded and for how much?

1. ABC Inc. sold Php 1 Million to DEF Inc. for Php 1.5 Million. The goods were shipped on March 1 and was received on March 5. Terms of shipment was FOB Destination. Question: If the term was FOB Shipping point, as of March 4, who owns the inventory and for how much? When should the sale be recorded and for how much?

2.

TUV Inc. sold Php 5 Million to WXY Inc. for Php 8 Million. The goods were shipped on May 15 and was received on May 28. Terms of shipment was FOB Shipping Point. Question: If the term was FOB Shipping point, as of May 25, who owns the inventory and for how much? When should the sale be recorded and for how much?

2.

TUV Inc. sold Php 5 Million to WXY Inc. for Php 8 Million. The goods were shipped on May 15 and was received on May 28. Terms of shipment was FOB Shipping Point. Question: If the term was FOB Destination, as of May 25, who owns the inventory and for how much? For the month ended May 31, who owns the inventory and for how much?

1. Perpetual Inventory System 2. Periodic Inventory System An Illustration

We use one of these inventory valuation methods to determine cost of inventory sold.
ge era Av st Co

FIFO

LIFO

Specific Identification

The Bike Company

When a unit is When a unit is sold, its sold, its specific cost is specific cost is added to cost added to cost of goods sold. of goods sold.

On August 14, TBC sold 20 bikes for $130 On August 14, TBC sold 20 bikes for $130 each. each. Of the bikes sold 9 originally cost $91 and Of the bikes sold 9 originally cost $91 and 11 cost $106. 11 cost $106.

The Cost of Goods Sold for the August 14 sale The Cost of Goods Sold for the August 14 sale is $1,985, leaving $515 and 5 units in is $1,985, leaving $515 and 5 units in inventory. inventory. Lets look at the entries for the Aug. 14 sale.

Cost of Cost of Goods Sold Goods Sold for August for August 31 = $2,610 31 = $2,610

Income Statement COGS = $4,595

Balance Sheet Inventory = $1,395

1 @ $ 11 = $ 11 1 1 1 @ $ 11 = 1 11 1 1 @ $ 11 = 1 11 1 End. Inv. $ 11 1 , 1

When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold. Cost of Units on Goods hand on Available the date for Sale of sale

The average cost per The average cost per unit must be unit must be computed prior to computed prior to each sale. each sale.

$2,500 / 25 = $100 $2,500 / 25 = $100

On August 14, TBC sold 20 bikes for $130 On August 14, TBC sold 20 bikes for $130 each. each.

The average cost The average cost per unit is $100. per unit is $100.

$100 = $2,500 $100 = $2,500 25 25 Lets look at the entries for the Aug. 14 sale.

Additional purchases were made on August Additional purchases were made on August 17 and August 28. 17 and August 28. On August 31, an additional 23 units were On August 31, an additional 23 units were sold. sold.

$114 = $3,990 $114 = $3,990 35 35

The average cost The average cost per unit is $114. per unit is $114.

$114 = $3,990 $114 = $3,990 35 35

Income Statement
COGS = $4,622

Balance Sheet
Inventory = $1,368

$114 12 = $114 12 = $1,368 $1,368

Oldest Oldest Costs Costs

Costs of Costs of Goods Sold Goods Sold

Recent Recent Costs Costs

Ending Ending Inventory Inventory

The Cost of Goods Sold for the August 14 sale is The Cost of Goods Sold for the August 14 sale is $1,970, leaving $530 and 5 units in inventory. $1,970, leaving $530 and 5 units in inventory.

On August 14, TBC sold 20 bikes for $130 On August 14, TBC sold 20 bikes for $130 each. each.

Additional purchases were made on Aug. 17 and Aug. 28. Additional purchases were made on Aug. 17 and Aug. 28. On August 31, an additional 23 units were sold. On August 31, an additional 23 units were sold.

Cost of Goods Sold for August 31 = Cost of Goods Sold for August 31 = $2,600 $2,600

Income Statement
COGS = $4,570

Balance Sheet
Inventory = $1,420

1 @ $ 11 = $ 11 1 1 1 @ $ 11 = 1 1 11 ,11 End. Inv. $1 1 ,11

Recent Recent Costs Costs

Costs of Costs of Goods Sold Goods Sold

Oldest Oldest Costs Costs

Ending Ending Inventory Inventory

The Cost of Goods Sold for the August 14 The Cost of Goods Sold for the August 14 sale is $2,045, leaving $455 and 5 units sale is $2,045, leaving $455 and 5 units in inventory. in inventory. On August 14, TBC sold 20 bikes for On August 14, TBC sold 20 bikes for $130 each. $130 each.

Additional purchases were made on Aug. 17 and Aug. Additional purchases were made on Aug. 17 and Aug. 28. 28. On Aug. 31, an additional 23 units were sold. On Aug. 31, an additional 23 units were sold.

Cost of Goods Sold for August 31 = Cost of Goods Sold for August 31 = $2,685 $2,685

Income Statement
COGS = $4,730

Balance Sheet
Inventory = $1,260

1 @ $ 1 = $ 11 1 1 1 @ $ 11 = 1 11 1 E nd. Inv. $1 1 ,11

Valuation Method Specific identification

Average cost

First-in, First-out (FIFO)

Last-in, First-out (LIFO)

Inventory Valuation Methods: A Summary Costs Allocated to: Cost of Goods Sold Inventory Comments Actual cost of Actual cost of units Parallels physical flow the units sold remaining Logical method when units are unique May be misleading for identical units Number of units Number of units on Assigns all units the same sold times the hand times the average unit cost average unit cost average unit cost Current costs are averaged in with older costs Cost of earliest Cost of most Cost of goods sold is based purchases on recently on older costs hand prior to the purchased units Inventory valued at current sale costs May overstate income during periods of rising prices; may increase income taxes due Cost of most Cost of earliest Cost of goods sold shown at recently purchases recent prices purchased units (assumed still in Inventory shown at old (and inventory) perhaps out of date) costs Most conservative method during periods of rising prices; often results in lower income taxes

Once a company has adopted a particular accounting method, it should follow that method consistently rather than switch methods from one year to the next.

The inventory on hand and the cost of goods sold for the year are not determined until year-end.

We use one of these inventory valuation methods in a periodic inventory system.

Specific identificatio n

Average cost

FIF O

LIF O

D te a Bg n g e in in In e to v n ry P rc a e : u hs s Jn 1 a. Jn ue 1 1 Sp e t. 1 1 Nv 1 o. 1 Gos od Aa b v ila le fo S le r a Ed g n in In e to v n ry Cso ot f G o sS ld od o

C m u rs In . o p te , c M u e P dIn e to o s a v n ry U its n $ n /U it 11 , 1 1 1 1 1 1 1 1 1 1 1 1 1 1 $ 11 . 1 11 . 1 11 . 1 11 . 1 11 . 1

T ta o l $ 11. 1 , 1 11 11. 1 , 1 11 11 1. 11 11. 1 , 1 11 11 1. 11

11 , 1 1 11 , 1 1 1 1 1

$ 11. 1 , 1 11 ? ?

D te a Bg n g e in in In e to v n ry P rc a e : u hs s Jn 1 a. Jn ue 1 1 Sp e t. 1 1 Nv 1 o. 1 Gos od Aa b v ila le fo S le r a Ed g n in In e to v n ry Cso ot f G o sS ld od o

C m u rs In . o p te , c M u e P dIn e to o s a v n ry U its n $ n /U it 11 , 1 1 1 1 1 1 1 1 1 1 1 1 1 1 $ 11 . 1 11 . 1 11 . 1 11 . 1 11 . 1

T ta o l $ 11. 1 , 1 11 11. 1 , 1 11 11 1. 11 11. 1 , 1 11 11 1. 11

11 , 1 1 11 , 1 1 1 1 1

$ 11. 1 , 1 11 ? ?

By reviewing actual purchase invoices, Computers, Inc. determines that the 1,200 mouse pads on hand at year-end have an actual total cost of $6,400. Determine the cost of goods sold for the year.

Cost of Goods Sold Cost of Goods Sold $9,725 - $6,400 = $3,325 $9,725 - $6,400 = $3,325
11 1 , 1 11 1 , 1 1 1 1 Ed g n in In e to v n ry Cso ot f G o sS ld od o

D te a Bg n g e in in In e to v n ry P rc a e : u hs s Jn 1 a. Jn ue 1 1 Sp e t. 1 1 Nv o. 1 1 Gos od Aa b v ila le fo S le r a

C m u rs In . o p te , c M u eP dIn e to o s a v n ry U its n $ n /U it 11 1 , 1 1 1 1 1 1 1 1 1 1 1 1 1 $ 11 1 . 11 1 . 11 1 . 11 1 . 11 1 .

T ta o l $ 111 1 .1 , 1 111 1 .1 , 1 11 11 1. 111 1 .1 , 1 11 11 1.

$ 111 1 .1 , 1 $ 111 1 .1 , 1 $ 111 1 .1 , 1

The average The average cost is cost is calculated at calculated at year-end as year-end as follows: follows:
Total Total Cost of Number of Goods Units Available for Available for Sale Sale

Avg. Cost $9,725 Avg. Cost $9,725 1,800 = $5.40278 1,800 = $5.40278
Ending Inventory Ending Inventory Avg. Cost $5.40278 Avg. Cost $5.40278 1,200 = $6,483 1,200 = $6,483 Cost of Goods Sold Cost of Goods Sold Avg. Cost $5.40278 Avg. Cost $5.40278 600 = $3,242 600 = $3,242

Date Beginning Inventory Purchases: Jan. 1 June 11 Sept. 11 Nov. 11 Goods A vailable for Sale Ending Inventory Cost of Goods Sold

Computers, Inc. Mouse Pad Inventory Units $/Unit 11 $ ,11 11 1 11 1 11 1 11 1

Total

1 1 $ 1 1.1 .1 ,11 1 11 .1 11 .1 11 .1 11 .1 1 1.1 ,11 1 11 1 1. 1 1 1.1 ,11 1 11 1 1. 1

11 ,11 1,11 11 ,11 1 11 1

$ 1 1.1 ,11 1 $ 1? 1 1 ,1 .1 1 $ 1? 1 1 ,1 .1 1

Oldest Oldest Costs Costs

Costs of Costs of Goods Sold Goods Sold

Recent Recent Costs Costs

Ending Ending Inventory Inventory

Remember: Start with the 11/29 purchase and then add other purchases until you reach the number of units in ending inventory.

Date Beginning Inventory Purchases: Jan. 1 June 11 Sept. 11 Nov. 11 Goods A vailable for Sale Ending Inventory Cost of Goods Sold

Computers, Inc. Mouse Pad Inventory Units $/Unit 11 $ ,11 11 1 11 1 11 1 11 1

Total

1 1 $ 1 1.1 .1 ,11 1 11 .1 11 .1 11 .1 11 .1 1 1.1 ,11 1 11 1 1. 1 1 1.1 ,11 1 11 1 1. 1

11 ,11 11 ,11 11 1

$ 1 1.1 ,11 1 ? ?

Date

Beg. Inv. Purchases 1 1 @$1 1 ,1 1 .1 11 1 1 1 @$ .1 11 1 1 1 @$ .1 11 1 1 1 @$ .1 11 1 1 1 @$ .1

End. Inv. 11 1 1 1 @$ .1 11 1 1 1 @$ .1 11 1 1 1 @$ .1 11 1 1 1 @$ .1 11 1 1 1 @$ .1 11 ,1 1 $1 ,111

Cost of Goods Sold 11 1 1 1 @$ .1

Jan. 1 June 11 Sept. 11 Nov. 11 Units Costs

11 1 $1 ,111

Cost of Goods Available for Sale

$1 ,111

Completing the table summarizes the computatio ns just made.

Date Beginning Inventory Purchases: Jan. 1 June 11 Sept. 11 Nov. 11 Goods A vailable for Sale Ending Inventory Cost of Goods Sold

Computers, Inc. Mouse Pad Inventory Units $/Unit 11 $ ,11 11 1 11 1 11 1 11 1

Total

1 1 $ 1 1.1 .1 ,11 1 11 .1 11 .1 11 .1 11 .1 1 1.1 ,11 1 11 1 1. 1 1 1.1 ,11 1 11 1 1. 1

11 ,11 11 ,11 11 1

$ 1 1.1 ,11 1 $ 1 1.1 ,11 1 $ 1 1.1 ,11 1

Recent Recent Costs Costs

Costs of Costs of Goods Sold Goods Sold

Oldest Oldest Costs Costs

Ending Ending Inventory Inventory

Remember: Start with beginning inventory and then add other purchases until you reach the number of units in ending inventory.

Date Beginning Inventory Purchases: Jan. 1 June 11 Sept. 11 Nov. 11 Goods A vailable for Sale Ending Inventory Cost of Goods Sold

Computers, Inc. Mouse Pad Inventory Units $/Unit 11 $ ,11 11 1 11 1 11 1 11 1

Total

1 1 $ 1 1.1 .1 ,11 1 11 .1 11 .1 11 .1 11 .1 1 1.1 ,11 1 11 1 1. 1 1 1.1 ,11 1 11 1 1. 1

11 ,11 11 ,11 11 1

$ 1 1.1 ,11 1 ? ?

Completing the table summarizes the computation s just made.

Date Beginning Inventory Purchases: Jan. 1 June 11 Sept. 11 Nov. 11 Goods A vailable for Sale Ending Inventory Cost of Goods Sold

Computers, Inc. Mouse Pad Inventory Units $/Unit 11 $ ,11 11 1 11 1 11 1 11 1

Total

1 1 $ 1 1.1 .1 ,11 1 11 .1 11 .1 11 .1 11 .1 1 1.1 ,11 1 11 1 1. 1 1 1.1 ,11 1 11 1 1. 1

11 ,11 11 ,11 11 1

$ 1 1.1 ,11 1 $ 1 1.1 ,11 1 $ 1 1.1 ,11 1

FOBs Periodic vs. Perpetual Cost Flow Assumptions