chapter 6 inventories - myweb

Chapter 6Inventories

高立翰

Preview of Chapter 6

會計學(一) http://ppt.cc/mJFq 2

Study Objectives1. Describe the steps in determining inventory quantities.

2. Explain the accounting for inventories and apply the inventory cost flow methods.

3. Explain the financial effects of the inventory cost flow assumptions.

4. Explain the lower-of-cost-or-net realizable value basis of accounting for inventories.

5. Indicate the effects of inventory errors on the financial statements.

6. Compute and interpret the inventory turnover ratio.


Classifying Inventory


One Classification:

Merchandise Inventory

Three Classifications:

Raw Materials (原料)

Work in Process (在製品)

Finished Goods (製成品)

Merchandising Company

Manufacturing Company

Regardless of the classification, companies report all inventories under Current Assets on the statement of financial position.

Determining Inventory Quantities (1/5)

Physical Inventory taken for two reasons:Perpetual System

– Check accuracy of inventory records. (確認存貨記錄的正確性)

– Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft).

Periodic System– Determine the inventory on hand. (確認期末存貨數量)– Determine the cost of goods sold for the period. (確認銷貨成本金額)



Taking a Physical InventoryInvolves counting, weighing, or measuring each kind of inventory on hand.

Companies often “take inventory”

when the business is closed or when business is slow. (清算或辨認營運狀況)at end of the accounting period. (期末盤點)



Determining Ownership of GoodsGoods in Transit (在途存貨)

Purchased goods not yet received.Sold goods 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.


Goods in Transit


Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. (起運點交貨)

Ownership of the goods remains with the seller until the goods reach the buyer. (目的地交貨)

Q6‐1.


Determining Ownership of GoodsConsigned Goods (寄銷品)

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.


Inventory CostingCost includes all expenditures necessary to

acquire goods and place them in a condition ready for sale. (達到可供銷貨的狀態所需的一切支出)

Unit costs can be applied to quantities on hand using the following costing methods:

Specific Identification (個別認定法)

First-in, first-out (FIFO) (先進先出法)

Average-cost (平均成本法)


Cost Flow Assumptions(成本流動假設)

Inventory Costing IllustrationCrivitz TV Company purchases three

identical 50-inch TVs on different dates at costs of £700, £750, and £800. During the year Crivitz sold two sets at £1,200 each. These facts are summarized below.


Illustration 6-3Data for inventory costing example

Specific Identification MethodAn actual physical flow costing method in

which items still in inventory are specifically costed to arrive at the total cost of the ending inventory. (稀有或貴重的商品才會採用)

Practice is relatively rare. Most companies make assumptions (Cost Flow Assumptions) about which units were sold.


Illustrations Illustration (1): Assume that Crivitz TV Company purchases three

identical 46-inch TVs on different dates at costs of $700, $750, and $800. During the year Crivitz sold two sets at $1,200 each.

Illustration (2): If Crivitz sold the TVs it purchased on February 3 and May 22, then its cost of goods sold is $1,500 ($700 $800), and its ending inventory is $750


Illustration 6-3

Illustration 6-4

Cost Flow Assumptions There are two assumed cost flow methods:

First-in, first-out (FIFO)Average-cost

Cost flow does not need be consistent with the physical movement of the goods.

Data for Lin Electronics’ Astro condensers


(Beginning Inventory + Purchases) - Ending Inventory = Cost of Goods Sold期初存貨+本期進貨+(運費-進貨退回與折讓-進貨折扣)-期末存貨=銷貨成本

Q6‐2.

First-In-First-Out (FIFO) (1/2) First-In-First-Out (FIFO) (先進先出法)

Costs of the earliest goods purchased are the first to be recognized in determining cost of goods sold.Often parallels actual physical flow of merchandise.Companies obtain the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed. (從最後進貨的項目往前推算存貨價值）


Illustration 6-6

First-In-First-Out (FIFO) (2/2)


• HELPFUL HINTAnother way of thinking about the calculation of FIFO ending inventory is the LISH assumption—last in still here.

先進先出法釋例

Periodic Inventory System


12/1買進 1,000個@$15

12/10買進 500個@$17

12/20買進 750個@$18

Cost of goods available for sale:1,000*$15+500*$17+750*$18=$37,000

2,250個商品可供銷售

12/31盤點後，剩餘950個

12/20買進的剩 750個@$18

12/10買進的剩200個@$17

12/8賣出1,000個@$15

12/19賣出300個@$17

Cost of goods sold:1,000*$15+300*$17=$20,100Ending Inventory:200*$17+750*$18=$16,900

剩950個商品可供銷售

Average-Cost (1/2) Average-Cost (平均成本法)

Allocates cost of goods available for sale on the basis of weighted average unit cost incurred.Assumes goods are similar in nature. (產品性質相似)Applies weighted average unit cost to the units on hand to determine cost of the ending inventory.


Illustration 6-9

Average-Cost (2/2)

1. 計算每單位平均成本2. 盤點期末存貨3. 計算銷貨成本


Choice of Cost Flow MethodsEither of the two cost flow assumptions is

acceptable for use. For example, adidas (DEU) and Lenovo (CHN) use the average-cost method, whereasSyngenta Group (CHE) and Nokia (FIN) use FIFO.

A recent survey of IFRS companies, approximately

60% use the average-cost method,40% use FIFO, and23% use both for different parts of their inventory.


Financial Statement and Tax Effects (1/2)

Income Statement Effects (假設物價成長的情況)


Illustration 6-10

Financial Statement and Tax Effects (2/2) Statement of Financial Position Effects

A major advantage of the FIFO method is that in a period of inflation, the costs allocated to ending inventory will approximate their current cost. A shortcoming of the average-cost method is that in a period of inflation, the costs allocated to ending inventory may be understated in terms of current cost.

Tax EffectsIn a period of inflation:

– FIFO - inventory and net income higher.– AVERAGE Cost - lower income taxes.

Using Cost Flow Methods ConsistentlyMethod should be used consistently, enhances comparability.Although consistency is preferred, a company may change its inventory costing method.


Q6‐3.

Ending Inventory: FIFO vs. Average Cost


12/1買進 1,000個@$15

12/10買進 500個@$17

12/20買進 750個@$18

Cost of goods available for sale:1,000*$15+500*$17+750*$18=$37,000

Average cost per unit:$37,000 / 2,250 = $16.44

2,250個商品可供銷售

12/20買進的剩 750個@$18

12/10買進的剩200個@$17

12/8賣出1,000個@$15

12/19賣出300個@$17

FIFO下的期末存貨成本(價值):200*$17+750*$18 = $16,900

Average Cost下的期末存貨成本(價值):950*$16.44 = $15,618

剩950個商品可供銷售

Lower-of-Cost-or-Net Realizable Value

Lower-of-Cost-or-Net Realizable Value (成本與淨變現價值孰低)

When the value of inventory is lower than its costCompanies can “write down” (減值) the inventory to its net realizable value in the period in which the price decline occurs.Net realizable value refers to the net amount that a company expects to realize (receive) from the sale of inventory.

IllustrationAssume that Gao TV has the following lines of merchandise with costs and market values as indicated.


Illustration 6-11

Inventory Errors (1/5)Common Causes:

Failure to count or price inventory correctly.– 盤點錯誤

Not properly recognizing the transfer of legal title to goods in transit.

– 所有權歸屬錯誤

Errors affect both the income statement and statement of financial position.


Inventory Errors (2/5) Income Statement Effects

Inventory errors affect the computation of cost of goods sold and net income.


Illustration 6-12

Illustration 6-13

Inventory Errors (3/5) Income Statement Effects

Inventory errors affect the computation of cost of goods sold and net income in two periods.

An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period.Over the two years, the total net income is correct because the errors offset each other.The ending inventory depends entirely on the accuracy of taking and costing the inventory.


Incorrect Correct Incorrect Correct

Sales € 80,000 € 80,000 € 90,000 € 90,000Beginning inventory 20,000 20,000 12,000 15,000 Cost of goods purchased 40,000 40,000 68,000 68,000 Cost of goods available 60,000 60,000 80,000 83,000 Ending inventory 12,000 15,000 23,000 23,000 Cost of good sold 48,000 45,000 57,000 60,000 Gross profit 32,000 35,000 33,000 30,000 Operating expenses 10,000 10,000 20,000 20,000 Net income € 22,000 € 25,000 € 13,000 € 10,000

2016 2017

Inventory Errors (4/5)


($3,000)Net Income understated

$3,000Net Income overstated

Combined income for 2-year period is correct.

Illustration 6-14

存貨錯誤的釋例


Sales 80,000$ 90,000$ Beginning Inventory 20,000$ 12,000$ Purchases 40,000 68,000 Ending Inventory 12,000 23,000 Cost of Good Sold 48,000 57,000

Gross Profit 32,000 33,000 Operating Expenses 10,000 20,000 Net Income 22,000$ 13,000$

Net Income computed by Incorrect Inventory 22,000 13,000Net Income computed by correct Inventory 25,000 10,000Differences (3,000) 3,000

2016 2017

Inventory Errors (5/5)Statement of Financial Position Effects

Effect of inventory errors on the statement of financial position is determined by using the basic accounting equation: Assets = Liabilities + Equity.

Errors in the ending inventory have the following effects.


Illustration 6-15

Q6‐4.

Statement Presentation and AnalysisPresentation

Statement of Financial Position - Inventory classified as current assetIncome Statement - Cost of goods sold.

There also should be disclosure of major inventory classifications,basis of accounting (cost, or lower-of-cost-or-net realizable value), andCost method (specific identification, FIFO, or average-cost).

Analysis Using Inventory Turnover (p.293 不上)會計學(一) http://ppt.cc/mJFq 31

Appx. 6A: Perpetual Systems (1/3)

Assuming the Perpetual Inventory System, compute Cost of Goods Sold and Ending Inventory under FIFO and Average cost


Illustration 6A-1


First-In-First-Out (FIFO)


Illustration 6A-2

Cost of Goods Sold Ending Inventory


Average Cost (Moving-Average System)


Illustration 6A-3

Cost of Goods Sold Ending Inventory

Q6‐5.

1/1: $1,000÷10 = $1004/15: ($1,000+$2,200) ÷30 = $106.678/24: ($3,200+$3,600) ÷60 = $113.33

Appx. 6B: Estimating Inventories (1/4)Gross Profit Method (毛利率法)

The gross profit method estimates the cost of ending inventory by applying a gross profit rate to net sales.


Illustration 6B-1

Appx. 6B: Estimating Inventories (2/4) Illustration

Kishwaukee Company’s records for January show net sales of $200,000, beginning inventory $40,000, and cost of goods purchased $120,000. The company expects to earn a 30% gross profit rate. Compute the estimated cost of the ending inventory at January 31 under the gross profit method.


Illustration 6B-2

Appx. 6B: Estimating Inventories (3/4)Retail Inventory Method (零售價法)

Company applies the cost-to-retail percentage to ending inventory at retail prices to determine inventory at cost.


Illustration 6B-3

Appx. 6B: Estimating Inventories (4/4) Illustration

Note that it is not necessary to take a physical inventory to determine the estimated cost of goods on hand at any given time


Illustration 6B-4

Appx. 6C: LIFO Inventory Method (1/3)

Last-In, First-Out (LIFO) (後進先出法)Under IFRS, LIFO is not permitted for financial reporting purposes.

Assumes latest goods purchased are first to be sold.

Seldom coincides with actual physical flow of merchandise, except for goods stored in piles, such as coal or hay.



Last-In-First-Out (LIFO)


Illustration 6C-1



Illustration 6C-2Proof of COGS

Illustration 6C-1Allocation of costs—LIFO method

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