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6-1
Slide
6-2
Chapter 6
Inventories
Financial Accounting, IFRS Edition
Weygandt Kimmel Kieso
Slide
6-3
1. Describe the steps in determining inventory quantities.
2. Explain the accounting for inventories and apply the
inventory cost flow methods.
3. Explain the financial effects of the inventory cost flow
assumptions.
. Explain the lower!of!cost!or!net reali"able value basis of
accounting for inventories.
#. Indicate the effects of inventory errors on the financial
statements.
$. %ompute and interpret the inventory turnover ratio.
Study Objectives
Study Objectives
Study Objectives
Study Objectives
Slide
6-4
Statement Statement
Presentation Presentation
and Analysis and Analysis
Statement Statement
Presentation Presentation
and Analysis and Analysis
Inventories
Inventories
Inventories
Inventories
&a'ing a &a'ing a
physical physical
inventory inventory
Determining Determining
ownership of ownership of
goods goods
Classifying Classifying
Inventory Inventory
Classifying Classifying
Inventory Inventory
Determining Determining
Inventory Inventory
Quantities Quantities
Determining Determining
Inventory Inventory
Quantities Quantities
Inventory Inventory
Costing Costing
Inventory Inventory
Costing Costing
Inventory Inventory
Errors Errors
Inventory Inventory
Errors Errors
(inished (inished
goods goods
)or' in )or' in
process process
*aw materials *aw materials
+pecific +pecific
identification identification
%ost flow %ost flow
assumptions assumptions
(inancial (inancial
statement and statement and
tax effects tax effects
%onsistent use %onsistent use
,ower!of!cost! ,ower!of!cost!
or!net or!net
reali"able value reali"able value
Income Income
statement statement
effects effects
+tatement of +tatement of
financial financial
position position
effects effects
-resentation -resentation
.nalysis using .nalysis using
inventory inventory
turnover turnover
Slide
6-
Classifying Inventory
Classifying Inventory
Classifying Inventory
Classifying Inventory
/ne %lassification0
1erchandise Inventory
&hree %lassifications0
*aw 1aterials
)or' in -rocess
(inished 2oods
!er"#andising
Com$any
!anufa"turing
Com$any
*egardless of the classification3 companies report all inventories
under %urrent .ssets on the statement of financial position.
Slide
6-6
.nswer on notes page
Slide
6-%
-hysical Inventory ta'en for two reasons0
Per$etual System
1. %hec' accuracy of inventory records.
2. Determine amount of inventory lost 4wasted raw materials3
shoplifting3 or employee theft5.
Periodi" System
1. Determine the inventory on hand
2. Determine the cost of goods sold for the period.
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities.
Slide
6-&
Involves counting3 weighing3 or measuring each 'ind of
inventory on hand.
&a'en3
when the business is closed or when business is
slow.
at end of the accounting period.
'a(ing a P#ysi"al Inventory
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities.
Slide
6-)
*oods in 'ransit
-urchased goods not yet received.
+old goods not yet delivered.
Determining +,ners#i$ of *oods
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities.
2oods in transit should be included in the inventory of the
company that has legal title to the goods. ,egal title is
determined by the terms of sale.
Slide
6-1-
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities.
Illustration 6-1
/wnership of the goods
passes to the buyer when
the public carrier accepts
the goods from the seller.
/wnership of the goods
remains with the seller until
the goods reach the buyer.
*oods in 'ransit
Slide
6-11
2oods in transit should be included in the inventory of
the buyer when the0
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are (/6 destination.
d. terms of sale are (/6 shipping point.
.evie, Question
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities.
Slide
6-12
Consigned *oods
In some lines of business3 it is common to hold the
goods of other parties and try to sell the goods for
them for a fee3 but without ta'ing ownership of
goods.
&hese are called "onsigned goods/
Determining +,ners#i$ of *oods
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities.
Slide
6-13
0nit "osts "an 1e a$$lied to 2uantities on #and
using t#e follo,ing "osting met#ods3
+pecific Identification
(irst!in3 first!out 4(I(/5
.verage!cost
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
Cost 4lo,
Assum$tions
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Slide
6-14
.n actual $#ysi"al flo, "osting met#od in which items
still in inventory are specifically costed to arrive at the
total cost of the ending inventory.
-ractice is relatively rare.
1ost companies ma'e assumptions 4Cost 4lo,
Assum$tions5 about which units were sold.
S$e"ifi" Identifi"ation !et#od
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Slide
6-1
Illustration3 .ssume that %rivit" &7 %ompany purchases
three identical $!inch &7s on different dates at costs of
89::3 89#:3 and 8;::. During the year %rivit" sold two sets
at 8132:: each.
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
Illustration 6-2
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Slide
6-16
Illustration3 If %rivit" sold the &7s it purchased on (ebruary
3 and 1ay 223 then its cost of goods sold is 813#:: 489::
8;::53 and its ending inventory is 89#:.
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
Illustration 6-3
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Slide
6-1%
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
Ishi'awa uses a periodic inventory system.
-hysical inventory determined that Ishi'awa sold ##: units and
had #: units in inventory at December 31.
Illustration 6-4
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Cost 4lo, Assum$tions
Slide
6-1&
Earliest goods purchased are first to be sold.
/ften parallels actual physical flow of merchandise.
2enerally good business practice to sell oldest units
first.
54irst-In-4irst-+ut 64I4+78
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Slide
6-1)
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
54irst-In-4irst-+ut 64I4+78
Illustration 6-
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
.nswer on
notes page
Slide
6-2-
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
54irst-In-4irst-+ut 64I4+78
Illustration 6-
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Slide
6-21
.llocates cost of goods available for sale on the
basis of ,eig#ted average unit "ost incurred.
.ssumes goods are similar in nature.
.pplies weighted average unit cost to the units on
hand to determine cost of the ending inventory.
5Average-Cost8
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Slide
6-22
5Average Cost8
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
Illustration 6-&
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
.nswer on
notes page
Slide
6-23
SO !"plain the accounting for inventories and SO !"plain the accounting for inventories and
apply the inventory cost flo# methods. apply the inventory cost flo# methods.
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
5Average Cost8
Illustration 6-&
Slide
6-24
SO $ !"plain the financial effects of the inventory cost flo# assumptions. SO $ !"plain the financial effects of the inventory cost flo# assumptions.
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
Illustration 6-)
4inan"ial Statement and 'a9 Effe"ts
In"ome
Statement
Effe"ts
Slide
6-2
SO $ !"plain the financial effects of the inventory cost flo# assumptions. SO $ !"plain the financial effects of the inventory cost flo# assumptions.
Inventory Costing
Inventory Costing
Inventory Costing
Inventory Costing
Statement of 4inan"ial Statement Effe"ts