Financial Accounting Chapter 6 Notes
Financial Accounting Chapter 6 Notes ACC-142
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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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