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Financial Accounting Chapter 6 Notes

by: bauer47 Notetaker

Financial Accounting Chapter 6 Notes ACC-142

Marketplace > Iowa Central Community College > Accounting > ACC-142 > Financial Accounting Chapter 6 Notes
bauer47 Notetaker

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These notes cover merchandise inventory and other inventory methods.
Financial Accounting
DawnA. Humburg
Class Notes
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This 2 page Class Notes was uploaded by bauer47 Notetaker on Wednesday March 2, 2016. The Class Notes belongs to ACC-142 at Iowa Central Community College taught by DawnA. Humburg in Fall 2015. Since its upload, it has received 20 views. For similar materials see Financial Accounting in Accounting at Iowa Central Community College.


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Date Created: 03/02/16
Chapter 6 Merchandise Inventory Let’s review: Ch. 5 > what are the two types of inventory systems? Perpetual and periodic; perpetual  characteristics > use of computers with scanners and bar codes, we know the inventory  count and cost at all times; periodic characteristics > have to count our inventory before  we know what we have (don’t use computers) If our inventory count is different than the computer, what is this called? Inventory  shrinkage Ch. 6 > types of inventory methods (ways to calculate inventory cost) 1) Perpetual methods: a. FIFO > first­in, first­out; most logical cost flow; visual representation of  FIFO would be re­stocked pop, etc. from the back and selling from the  front; like a funnel; Campbell’s soup (like a chute) b. LIFO > last­in, first­out; opposite of FIFO; visual representation of LIFO  would be selling grass seed in bulk (big bin) > when we stock it goes on  the top, when we sell, it comes from the top, after a period of time our  grass seed on the bottom will be old and nasty, bugs, maggots c. Weighted average > cost will be between FIFO and LIFO; the unit cost will change every time we purchase more units d. Specific identification (not really a perpetual method) > very expensive for  a business; we carry the invoice cost with the sale; for example: cars,  artwork, yachts I will finish the notes for you and upload on document sharing. On Thursday, you will  have a workday in class.  2) LCM > Lower of cost or market; this is an accounting rule that follows the  GAAP concept of conservatism (don’t overstate your assets or understate  your liabilities); see journal entry on page 383 3) Two ratios for this chapter: a. Inventory turnover > tells us the number of times we purchased and sold  inventory; COGS/Average mer. Inv. b. Days’ sales in inventory > given the inventory turnover, tells us how many  days it took to buy and sell our inventory; 365/inventory turnover Appendix 6A Merchandise inventory under a periodic inventory system 1) Inventory methods under a periodic inventory system: a. All three methods require the computation of COGAS (cost of goods  available for sale) first; we also need to have access to the inventory  record i. COGAS = Beg. Inventory + Purchases OR Ending Inventory +  COGS 1. COGAS – EI (**) = COGS ** EI differs depending upon whether we are using  FIFO, LIFO or weighted­average **EI under FIFO > pull the most recent purchases **EI under LIFO > pull from the beginning inventory  then the oldest purchases **EI under weighted­average > COGAS/# of units  available Appendix 6B Estimating ending inventory 1) First of all, why would we even want or need to estimate our ending inventory?  Perhaps we cannot count our inventory because of theft, flooding, fire, etc. a. Two methods to estimate: i. Gross profit method > uses the GP percentage (GP/Sales); see  page 394 1. Step one > calculate COGAS (Binv. + Pur.) 2. Step two > Estimate COGS: Multiply Net sales X COGS  percentage (complement percentage of GP percentage) 3. Step three > subtract estimated COGS from COGAS 4. Step four > arrive at estimated ending inventory  ii. Retail method > uses the relationship between cost and retail 1. Step one > calculate COGAS at both cost and retail 2. Step two > subtract net sales from COGAS at retail = ending inventory at retail 3. Step three > COGAS at Cost/COGAS at retail to determine  the percentage of cost to retail 4. Step four > multiply ending inventory at retail (step two)  times the percentage from step three to arrive at ending  inventory at cost  


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