Accounting

Sheet (3)
Tegara English 2021
First year
Edited by/ Dr. magdy kamel
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Tel/ 01273949660

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Merchandising Company
 They are owned by the company
 They are in a form ready for sale to customers in the ordinary course of
business

One Classification:
 Merchandise Inventory

Manufacturing Company
 Some inventory may not yet be ready for sale

Three Classifications:
 Raw Materials
 Work in Process
 Finished Goods

companies report all inventories under Current Assets on the balance sheet

Determining Inventory Quantities

Physical Inventory taken for two reasons:

Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost (wasted raw materials, shoplifting,
or employee theft).

Periodic System
1. Determine the inventory on hand (ending inventory)
2. Determine the cost of goods sold for the period

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Determining Inventory Quantities
Taking a Physical Inventory Involves counting, weighing, or
measuring each kind of inventory on hand.
Companies often Take inventory ,
 when the business is closed or when business is slow.
 Companies take the physical inventory at end of the accounting
period.

Determining Ownership of Goods

1. Goods in Transit
 company may have Purchased goods that have not yet received.
 It may have Sold goods that have not yet delivered.
→ Goods in transit should be included in the inventory of the company
that has legal title to the goods.
→ Legal title is determined by the terms of sale.

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2. Consigned Goods
In some lines of business, it is common to hold the goods of other
parties and try to sell the goods for them for a fee, but without taking
ownership of goods.
These are called consigned goods.

MCQ
1. Goods in transit should be included in the inventory of the buyer when the
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.

2. If goods in transit are shipped FOB destination

a. the seller has legal title to the goods until they are delivered.
b. the buyer has legal title to the goods until they are delivered.
c. the transportation company has legal title to the goods while the goods
are in transit.
d. no one has legal title to the goods until they are delivered.

3. Under a consignment arrangement, the

a. consignor has ownership until goods are sold to a customer.
b. consignor has ownership until goods are shipped to the consignee.
c. consignee has ownership when the goods are in the consignee's possession.
d. consigned goods are included in the inventory of the consignee

4. In a manufacturing business, inventory that is ready for sale is called

a. raw materials inventory.
b. work in process inventory.
c. finished goods inventory.
d. store supplies inventory.

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Inventory Costing
Unit costs can be applied to quantities on hand
using the following costing methods:
1. Specific Identification
2. First-in, first-out (FIFO)
3. Last- in, first – out (LIFO)
4. Average-cost

1. Specific Identification Method

An actual physical flow costing method in which items still in inventory are
specifically costed to arrive at the total cost of the ending inventory.
 Practice is relatively rare.
 Most companies make assumptions (Cost Flow Assumptions) about which
units were sold.

2. First in first out

 The first goods purchased are first to be sold.
 Often parallels actual physical flow of merchandise.
 Generally good business practice to sell oldest units first.
 Ending inventory is based on the prices of the most recent units purchased

3. Last in first out

 The latest goods purchased are the first to be sold
 The latest goods purchased are the first to be recognized in determining
cost of goods sold.

4. Average cost
 Allocates cost of goods available for sale on the basis of weighted average
unit cost incurred.
 Assumes goods are similar in nature.
 Applies weighted average unit cost to the units on hand to determine cost
of the ending inventory.
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Example:
Houston electronics Company uses the periodic inventory system to account for
inventories. Information related
to Company inventory at October 31 is given below:

Date explanation units unit cost total cost

October 1 Beginning inventory 100 units $10 $ 1,000
8 Purchase 200 units $11 2,200
16 Purchase 300 units $12 3,600
24 Purchase 400 units $13 5,200
Total units and cost 1,000 units $12,000

A Physical inventory determined that Houston sold 550 units and had 450 units
in inventory at Oct 31. Determine the cost of goods sold and ending inventory
1. FIFO 2. LIFO 3. Weighted average cost
Solution
1. Under using FIFO:
Step (1): Ending Inventory = 400 × 13 = 5,200
+ 50 × 12 = 600
5,800
Step (2): Cost of goods sold:
Cost of goods available for sale 12,000
Less: ending inventory (5,800)
Cost of goods sold 6,200

2. under using LIFO

Step (1): Ending Inventory = 100 × 10 = 5,200
+ 200 × 11 = 600
+ 150 × 12 = 1,800
5,000
Step (2): Cost of goods sold:
Cost of goods available for sale 12,000
Less: ending inventory (5,000)
Cost of goods sold 7,000

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3. under using average cost

total cost 12 000

Cost per unit = total unit = 1 000 = 12 per unit

Ending inventory = 450 × 12 = 5,400

Cost of goods sold = 550 × 12 = 6,600

Notes that

If the price increase,

 Under FIFO Method: lowest COGS. with highest net income.
 Under LIFO Method: highest COGS with lowest net income.

IF the price decrease,

 Under FIFO Method: highest COGS with lowest net income.
 Under LIFO Method: lowest net income with highest COGS.

Statement presentation and analysis

Inventory turnover
 measures the number of times on average the inventory is sold during the
period.

cost of goods sold

Inventory turnover = Average inventory

Average inventory = (beginning inventory + ending inventory)/2

The average number of days in inventory

 measures the average number of days inventory is held.

365
Average number of days in inventory = inventory turnover

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Example:
The following information is available for Manning Company:
 Beginning inventory $ 60,000
 Cost of goods sold 600,000
 Ending inventory 100,000
 Sales 750,000
Instructions
Compute each of the following:
(a) Inventory turnover.
(b) Days in inventory.

Solution
600 000 600 000
(a) Inventory turnover = (60 000 + 100 000) / 2 = 80 000 = 7.5
365
(b) Days in inventory = 7.5 = 48.7 days

MCQ

1. Inventory items on an assembly line in various stages of production are classified as

a. Finished goods.
b. Work in process.
c. Raw materials.
d. Merchandise inventory

2. Rudolf Diesel Company's inventory records show the following data:

Units Unit Cost
Inventory, January 15,000 $9.00
Purchases: June 18 4,500 8.00
November 8 3,000 7.00
A physical inventory on December 31 shows 3,000 units on hand. Under the FIFO
method, the December 31 inventory is
a. $21,000.
b. $21,750.
c. $24,000.
d. $27,000

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3. The inventory turnover ratio is computed by dividing cost of goods sold by
a. beginning inventory.
b. ending inventory.
c. average inventory.
d. 365 days

Use the following information for questions 4–5.

The following information was available for Carton Company at December 31, 2008:
beginning inventory $90,000; ending inventory $70,000; cost of goods sold $660,000; and
sales $900,000.

4. Carton’s inventory turnover ratio in 2008 was

a. 9.4 times.
b. 8.3 times.
c. 7.3 times.
d. 6.0 times.

5. Carton’s days in inventory in 2008 was

a 38.8 days.
b. 44.0 days.
c. 50.0 days.
d. 60.8 days

6. Inventory turnover is calculated by dividing cost of goods sold by

a. beginning inventory.
b. ending inventory.
c. average inventory.
d. 365 days.

7. The following information is available for Knot Company at December 31, 2008:
beginning inventory $80,000; ending inventory $120,000; cost of goods sold $900,000; and
sales $1,200,000. Knot’s inventory turnover in 2008 is
a. 12 times.
b. 11.3 times.
c. 9 times.
d. 7.5 times.

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Use the following information for questions 8–11.
Nov. 1 Inventory 15 units @ $8.00
8 Purchase 60 units @ $8.60
17 Purchase 30 units @ $8.40
25 Purchase 45 units @ $8.80
A physical count of merchandise inventory on November 30 reveals that there are 50 units
on hand. Assume a periodic inventory system is used.
8. Cost of goods sold under the average-cost method is
a. $860.
b. $856.
c. $845.
d. $800.

9. Ending inventory under FIFO is

a. $438.
b. $846.
c. $421.
d. $863.

10. Ending inventory under LIFO is

a. $438.
b. $421.
c. $846.
d. $863.

11. Assuming that the specific identification method is used and that ending inventory
consists of 15 units from each of the three purchases and 5 units from the November 1
inventory, cost of goods sold is
a. $427.
b. $857.
c. $854.
d. $836.

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Use the following inventory information for questions 12–14.
July 1 Beginning Inventory 20 units at $19 $ 380
7 Purchases 70 units at $20 1,400
22 Purchases 10 units at $22 220
$2,000
A physical count of merchandise inventory on July 31 reveals that there are 30 units on
hand.

12. Using the average-cost method, the value of ending inventory is

a. $580.
b. $600.
c. $610.
d. $620.

13. Using the FIFO inventory method, the amount allocated to cost of goods sold for July is
a. $580.
b. $620.
c. $1,380.
d. $1,420.

14. Using the LIFO inventory method, the amount allocated to cost of goods sold for July is
a. $580.
b. $620.
c. $1,380.
d. $1,420

11 | Page Dr. Magdy Kamel