Chapter 6 Inventory Costing PDF

Copyright John Wiley & Sons Canada, Ltd. 1 WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 6 Inventory Costing...

Copyright John Wiley & Sons Canada, Ltd. 1 WEYGANDT. KIESO. KIMMEL. TRENHOLM. KINNEAR. BARLOW. ATKINS PRINCIPLES OF FINANCIAL ACCOUNTING CANADIAN EDITION Chapter 6 Inventory Costing Prepared by: Debbie Musil Kwantlen Polytechnic University 2  Learning Goals Let’s turn the following into students friendly learning goals……….. compare the characteristics of the periodic and perpetual inventory systems; describe and apply different methods of inventory valuation, including average cost; first-in, first-out; and specific identification; explain the effects of each method of inventory valuation on financial statements; Copyright John Wiley & Sons Canada, Ltd. 3  Inventory Costing Determining inventory quantities – Taking physical inventory – Determining ownership of goods Inventory cost determination methods – Specific identification – Cost formulas: FIFO and average Financial Statement Effects – Choice of cost determination method – Inventory errors Copyright John Wiley & Sons Canada, Ltd. 4  Chapter 6: Success Criteria I will be successful when I can………….. 1. Describe the steps in determining inventory quantities. 2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and average methods of cost determination. 3. Explain the financial statement effects of inventory cost determination methods. 4. Determine the financial statement effects of inventory errors. Copyright John Wiley & Sons Canada, Ltd. 5  Determining Inventory Quantities All companies count their inventory at least once a year – Must determine amount and value of inventory to prepare accurate financial statements The determination of inventory quantities involves – Taking a physical inventory of goods on hand – Determining the ownership of the goods Copyright John Wiley & Sons Canada, Ltd. 6  Chapter 6: Success Criteria I will be successful when I can………….. 1. Describe the steps in determining inventory quantities. 2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and average methods of cost determination. 3. Explain the financial statement effects of inventory cost determination methods. 4. Determine the financial statement effects of inventory errors. Copyright John Wiley & Sons Canada, Ltd. 7  Inventory Cost Determination Specific Identification – Tracks the actual physical flow of goods – Each inventory item is marked with its cost – Used where goods are not ordinarily interchangeable Cost Formulas – Specific identification not always suitable – A cost formula is used instead: First-in, first-out (FIFO) Average – Flow of costs may not match physical flow Copyright John Wiley & Sons Canada, Ltd. 8 Inventory Costing in a Perpetual Inventory System FIFO: – FIFO rule is applied at the time of each sale – FIFO (First-in, first-out) Average: – New average cost per unit is calculated after each purchase Copyright John Wiley & Sons Canada, Ltd. 9  Perpetual Inventory System: First-in, First-out (FIFO) FIFO assumes earliest goods are sold first Costing: – Costs of oldest goods purchased are first to be recognized as Cost of Goods Sold – Costs of most recent goods purchased are recognized as the ending inventory Often reflects the actual physical flow of merchandise Copyright John Wiley & Sons Canada, Ltd. 10  Perpetual System Inventory Costing: FIFO Ending inventory and cost of goods sold under FIFO is the same for perpetual and periodic systems Copyright John Wiley & Sons Canada, Ltd. 11  Perpetual Inventory System: Average Assumes that it is not practical to measure specific physical flow of inventory – Therefore better to use an average price Uses a weighted average unit cost Applied when goods are sold: – to units sold to determine cost of goods sold – to units on hand to determine ending inventory Copyright John Wiley & Sons Canada, Ltd. 12  Perpetual System Inventory Costing: Average (Continued) Under a perpetual inventory system, a new weighted average is calculated after each purchase. This average is then applied to: – Units sold, to determine cost of goods sold – Remaining units on hand, to determine ending inventory Copyright John Wiley & Sons Canada, Ltd. 13  Textbook Questions Let’s work on BYGO on Page 266 together Copyright John Wiley & Sons Canada, Ltd. 14  Textbook Questions Work on BE6-5, 6, 7, page 291-292 Copyright John Wiley & Sons Canada, Ltd. 15  Chapter 6: Success Criteria I will be successful when I can………….. 1. Describe the steps in determining inventory quantities. 2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and average methods of cost determination. 3. Explain the financial statement effects of inventory cost determination methods. 4. Determine the financial statement effects of inventory errors. Copyright John Wiley & Sons Canada, Ltd. 16  Financial Statement Effects Income statement effect: – When prices rising, FIFO produces higher profit – When prices falling, opposite is true Balance sheet effect: – FIFO provides the most current valuation of inventory – More closely approximates replacement cost Cost formula should be used consistently – Enhances comparability of statements over time – Choose the method that best corresponds with actual physical flow – Make sure method aligns with accounting standards and practices Copyright John Wiley & Sons Canada, Ltd. 17  Textbook Questions Work on BE6-9, 10, page 292 Copyright John Wiley & Sons Canada, Ltd. 18  Chapter 6: Success Criteria I will be successful when I can………….. 1. Describe the steps in determining inventory quantities. 2. Calculate cost of goods sold and ending inventory in a perpetual inventory system using the specific identification, FIFO, and average methods of cost determination. 3. Explain the financial statement effects of inventory cost determination methods. 4. Determine the financial statement effects of inventory errors. Copyright John Wiley & Sons Canada, Ltd. 19  Inventory Errors Errors in inventory affect both income statement and balance sheet – Through the calculation of cost of goods sold Ending inventory of one period becomes beginning inventory of the next period – Errors in ending inventory carry over to the following period Copyright John Wiley & Sons Canada, Ltd. 20  Income Statement Effects Effect of inventory errors on the current year’s income statement: An error in ending inventory of one period will have the reverse effect on profit of the next period Copyright John Wiley & Sons Canada, Ltd. 21  Balance Sheet Errors Effect can be determined by using the basic accounting equation: Assets = Liabilities + Owner’s Equity An error in ending inventory in one period will cause an error in beginning inventory in the next period Copyright John Wiley & Sons Canada, Ltd. 22  Textbook Questions Work on BE6-12, pg292 Copyright John Wiley & Sons Canada, Ltd. 23  Group Work Questions In groups you will work on: Group 1: E6-6 FIFO (Anshu, Amy) Group 2: E6-6 Avg. Cost (Pritish, Priyanshu) Group 3: E6-7 FIFO (Adrian, Famie) Group 4 E6-7 Avg. Cost (Jiho, Elmeri) Copyright John Wiley & Sons Canada, Ltd. 24  Copyright Copyright © 2014 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein. Copyright John Wiley & Sons Canada, Ltd. 25  Pop Quiz E6-7 b) and c) pg295 Copyright John Wiley & Sons Canada, Ltd. 26  Pop Quiz Work on E6-7 Copyright John Wiley & Sons Canada, Ltd. 27