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Lec 3 Invetory & Notes Recievables

This document discusses inventory classification, cost determination, and inventory cost flow methods including specific identification, FIFO, LIFO, and average cost. It also covers notes receivable including honoring, dishonoring, and discounting notes.

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58 views25 pages

Lec 3 Invetory & Notes Recievables

This document discusses inventory classification, cost determination, and inventory cost flow methods including specific identification, FIFO, LIFO, and average cost. It also covers notes receivable including honoring, dishonoring, and discounting notes.

Uploaded by

bolaemil20
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Fundamental Accounting Principles – Financial Accounting II

3 Inventories
Learning Objectives
1 Discuss how to classify and determine inventory.

2 Apply inventory cost flow methods

1
Fundamental Accounting Principles – Financial Accounting I

Learning Objective

LO.1:
Discuss how to classify and
determine inventory.
Fundamental Accounting Principles – Financial Accounting II

A) Classifying Inventory
Merchandising Manufacturing
Company Company

One Classification: Three Classifications:

◆ Inventory ◆ Raw Materials

◆ Work in Process

◆ Finished Goods

Helpful Hint
Regardless of the classification, companies report all inventories under
Current Assets on the balance sheet.

3
Fundamental Accounting Principles – Financial Accounting II

B) Goods in Transit Ownership


Goods in transit are purchased goods that have not yet been
received or sold goods that have not yet been delivered.

▪ The goods in transit are part of ▪ The goods in transit are part of
the buyer’s inventory . the seller’s yrotnevni .

C) Goods on Consignment
Consigned goods are the goods owned by other parties (Consignor)
that the company (Consignee) hold and try to sell on behalf of
them for a fee, but without taking ownership of the goods.
4
Fundamental Accounting Principles – Financial Accounting II

D) Determining Inventory Costs


Include all expenditures necessary to bring an item
to a salable condition and location.

Minus Invoice Plus


Discounts and Shipping
Allowances Cost

Plus Plus
Insurance Storage

5
Fundamental Accounting Principles – Financial Accounting II

DO IT! 1 Classifying and determining inventory


Hasbeen Company completed its inventory count. It arrived at a total inventory value of
$200,000. You have been given the information listed below. Discuss how this information
affects the reported cost of inventory.
1. Hasbeen included in the inventory goods held on consignment for Falls Co., costing
$15,000.
2. The company did not include in the count purchased goods of $10,000, which
were in transit (terms: FOB shipping point).
3. The company did not include in the count inventory that had been sold with a cost of
$12,000, which was in transit (terms: FOB shipping point).

Solution
1. Goods of $15,000 held on consignment should be deducted from the inventory
count.
2. The goods of $10,000 purchased FOB shipping point should be added to the
inventory count.
3. Item 3 was treated correctly. Inventory should be $195,000
($200,000 - $15,000 + $10,000).
6
Fundamental Accounting Principles – Financial Accounting I

Learning Objective

LO.2:
Apply inventory cost flow
methods
Fundamental Accounting Principles – Financial Accounting II

Inventory Cost Flow


◆ After a company has determined the quantity of units of
inventory, it applies unit costs to the quantities to compute the
total cost of the cost of goods sold and the inventory. This
process can be complicated if a company has purchased
inventory items at different times and at different prices.

Cost of goods sold might be


$1,470 ($720 + $750), or
$1,520 ($720 + $800), or
$1,550 ($750 + $800).

8 ◆ There are alternative costing methods available


Fundamental Accounting Principles – Financial Accounting II

Inventory Cost Flow Method


◆ Unit costs are applied to quantities to compute the total
cost of the inventory and the cost of goods sold using the
following costing methods:
►Specific identification
►First-in, first-out (FIFO)
►Last-in, first-out (LIFO) Cost Flow
Assumptions
►Average-cost

9
Fundamental Accounting Principles – Financial Accounting II

Specific Identification
◆ The company can identify which particular units it sold

If the company sold the


TVs it purchased on
February 3 and May 22,
then :

◆ Practice is relatively rare (impractical).


◆ Most companies make assumptions (cost flow assumptions)
about which units were sold.
Fundamental Accounting Principles – Financial Accounting II

Cost Flow Assumptions


◆ There are three assumed cost flow methods:

According to these methods costs may be unrelated to the


11
physical flow of goods
Fundamental Accounting Principles – Financial Accounting II

Cost Flow Assumptions – Periodic system


Illustration: Data for Houston Electronics’ Astro condensers.

Knowing that the company uses periodic system, calculate :


1- Cost of Goods Available for Sales
2- Cost of Ending inventory
3- Cost of goods Sold
Fundamental Accounting Principles – Financial Accounting II
FIRST-IN, FIRST-OUT (FIFO)
Oldest Costs Cost of Goods Sold

Recent Costs Ending Inventory


FIRST-IN, FIRST-OUT (FIFO)

Helpful Hint Another way of


thinking about the calculation
of FIFO ending inventory is the
LISH assumption—last in still here.
6-14 LO 2
Fundamental Accounting Principles – Financial Accounting II
LAST-IN, FIRST-OUT (LIFO)
Recent Costs Cost of Goods Sold

Oldest Costs Ending Inventory


LAST-IN, FIRST-OUT (LIFO)

Helpful Hint Another way of


thinking about the calculation
of LIFO ending inventory is the
FISH assumption—first in still here.
6-16 LO 2
Fundamental Accounting Principles – Financial Accounting II
AVERAGE-COST
When a unit is sold, the average cost of each unit in
inventory is assigned to cost of goods sold.
Cost of Goods Available Units on hand on the date of
÷
for Sale sale
AVERAGE-COST

Illustration 6-11

6-18 LO 2
Fundamental Accounting Principles – Financial Accounting II

DO IT! 2 Cost flow assumption – periodic

6-19 LO 2
Cost Flow Assumptions

Question
The cost flow method that often parallels the actual
physical flow of merchandise is the:
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.

6-20 LO 2
Cost Flow Assumptions

Question
In a period of inflation, the cost flow method that results
in the lowest income taxes is the:
a. FIFO method.
b. LIFO method.
c. average cost method.
d. gross profit method.

6-21 LO 2
Fundamental Accounting Principles – Financial Accounting II

4 Notes Receivable

22
Fundamental Accounting Principles – Financial Accounting II

Honor of notes receivable


A note is honored when its maker pays in full at its maturity date.

Assume that Wonder Co. lends Halen Co. $10,000 on June 1,


accepting a five-month, 12% interest note.

The interest = 10,000 × 12% × 5/12 = 500


The maturity value = 10,000 + 500 = 10,500

Cash 10,500
Notes Receivable 10,000
Interest Revenues 500
Fundamental Accounting Principles – Financial Accounting II

Dishonor of notes receivable


A dishonored (defaulted) note is a note that is not paid in full at
maturity.

assume that Halen Co. on November 1 indicates that it cannot pay


at the present time.

Accounts Receivable 10,500


Notes Receivable 10,000
Interest Revenues 500
Fundamental Accounting Principles – Financial Accounting II

Discounting note receivable


Discounting means selling a customer's notes receivable to the
bank at some point prior to the note's maturity date.

Assume that a L.E 10,000, 120-day, 15 % note is discounted at the


bank after 30 days have elapsed. The bank discount rate is 20 %.
Prepare the journal entry at the time of discounting.
• The Interest on the note = 10,000 × 15% × 120/360 = 500
• The maturity value = 10,000 + 500 = 10,500
• The bank discount charge = 10,500 × 20% × 90/360 = 525
• The net proceeds = 10,500 – 525 = 9,975

Cash 9,975
Interest expense 25
Note Receivable 10,000

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