Classnotes 9 & 10 Flashcards
Production Inventory Process
Purchases -> Raw Materials Inventory -> WIP Inventory -> Finished Goods Inventory -> Cost of Goods Sold
Work in Progress?
The cost of inventory of partially completed goods.
Usually a driver is identified that helps allocate the cost of production labor (# of hours, and how a worker allocates his time)
Raw materials?
The cost of parts and materials purchased from suppliers for use in the production process.
Journal entries to reflect inventory flows Within the Balance Sheet
Dr. Raw materials - Inventory XX
Cr. Accounts payable XX
Dr. Work-in-process - Inventory XX
Cr. Raw materials - Inventory XX
Dr. Finished goods - Inventory XX
Cr. Work-in-process - Inventory XX
Journal entries to reflect inventory flows When inventory is sold – to the income statement
Dr. Cost of goods sold XX
Cr. Finished goods - Inventory XX
(and corresponding sales/accounts receivable entry)
Inventory Lower of Cost or Market
In such a case, the firm must write-down the inventory to its lower, market value
Dr. Loss on inventory write-down (expense) XX
Cr. Inventory (or Inventory Valuation-contra account) XX
Inventory Cost Flow
Beginning inventory + net purchases – cost of goods sold = ending inventory
FIFO
(first in – first out): costs of earliest units acquired are assigned to COGS and costs of most recently acquired units remain in inventory
LIFO
(last in – first out): costs of most recently acquired units are assigned to COGS and costs of earliest unites acquired remain in inventory
Weighted Average:
inventory and COGS based on average costs that existed across time periods in which firm purchased units.
Specific identification:
units and associated costs are specifically identified – e.g., specific cars at a Ford dealer
At the beginning of the current period. Chen carried 1,000 units of its product with a unit cost of $20. A summary of purchases during the current period follows:
Beginning Inventory: Units/Unit Cost/Cost = 1,000/$20/$20,000
Purachses#1: Units/Unit Cost/Cost = 1,800/$22/$39,600
Purachses#2: Units/Unit Cost/Cost = 800/26/20,800
Purchases#3: Units/Unit Cost/Cost = 1,200/29/ 34,800
During the current period, Chen sold 2,800 units.
Assume that Chen uses the FIFO method. Compute its cost of goods sold for the current period and the ending inventory balance.
Beg. Inv. + Purchases – COGS = End. Inv.
rearrange and get…
Ending Inventory = Beg. Inv. + Purchases - COGS
COGS = Beg. Inv. + Purchases – End. Inv.
FIFO
Sold 2,800 units:
COGS = 1000@$20 + 1800@$22 = $59,600
End Inv = 800@$26 + 1200@$29 = $55,600
At the beginning of the current period. Chen carried 1,000 units of its product with a unit cost of $20. A summary of purchases during the current period follows:
Beginning Inventory: Units/Unit Cost/Cost = 1,000/$20/$20,000
Purachses#1: Units/Unit Cost/Cost = 1,800/$22/$39,600
Purachses#2: Units/Unit Cost/Cost = 800/26/20,800
Purchases#3: Units/Unit Cost/Cost = 1,200/29/ 34,800
Assume that Chen uses the LIFO method. Compute its cost of goods sold for the current period and the ending inventory balance.
Beg. Inv. + Purchases – COGS = End. Inv.
rearrange and get…
Ending Inventory = Beg. Inv. + Purchases - COGS
COGS = Beg. Inv. + Purchases – End. Inv.
LIFO
Sold 2,800 units:
COGS = 1200@$29 + 800@$26 + 800@$22 = $73,200
End Inv = 1000@$20 + 1000@$22 = $42,000
Differences between FIFO and LIFO
Both LIFO and FIFO are historical cost methods
Allocate historical costs of inventory differently (all costs are accounted for, but in different ways)
The differences between LIFO and FIFO arise when the costs of inventory change over time.
Inventory Turnover
= Cost of Goods Sold / Average Inventory