CHAPTER 6 - INVENTORIES

LECTURE NOTES
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 OVERVIEW OF CHAPTER 6
Input of
Inventory • Indentify Inventory items for different companies
(Accounting • Calculate the cost for Inventory ( u should
treatment when understand this is: INPUT COST) Giá gốc HTK= giá mua + chi phí mua - chiếu khấu
purchasing Inv)
Hàng tồn kho lúc mua về Đây là giả định của người kế toán
• Identify the output cost by Costing methods (or Cost
Output of Inv flow assumptions) (FIFO, WEIGHTED AVERAGE
(accounting COST, SPECIFIC IDENTIFICATION)
treatment when • You should clearly understand: Output cost ≠ Selling
selling Inv) price Phương pháp tính giá xuất kho ( FIFO nhập trước xuất trc, bình quân gia quyền, thực
tế đích danh)
• Physical flows ≠ Cost flows
Lúc bán hàng tồn kho đi

Ghi hàng hóa tồn kho cuối kỳ theo

At the end of the • Lower of cost or NRV
nguyên tắc giá thấp hơn giữa giá trị thuần period • Inventory adjustments
thưc hiện đc và giá gốc
(accounting (additional)
NRV= Net Realizable Value ( giá bán ước treatment for Inv
tính ròng)= Estimated Selling Price - Chi phí bán ước tính- chi phí • Estimating Inventories
hoàn thành ước tính ( nếu có ) left on hand)
(skipped with CA class)
Hàng tồn kho tồn cuối kỳ
06-C1: Determining Inventory
Items

6-3
 6-4

Determining Inventory Items

Merchandise inventory includes all goods that a
company owns and holds for sale, regardless of where
the goods are located when inventory is counted.
Items requiring special attention include:
Goods
Goods in
Damaged or
Transit Goods on Obsolete
Consignment

6-4
 6-5

Goods in Transit
FOB Shipping Point
Public
Carrier
Seller Buyer
Ownership passes
to the buyer here.

Public
Carrier
Seller FOB Destination Point Buyer
6-5
 6-6

Goods on Consignment
To hold the goods of other parties and try to sell the
goods for them for a fee, but without taking ownership of
the goods.

Merchandise is included in the inventory of the

consignor – the owner of the inventory, not the
consignee – the holder of the inventory.
CONSIGNORS CONSIGNEES
6-6
 6-7

Goods Damaged or Obsolete

Damaged or obsolete goods are not counted in
inventory if they cannot be sold.

Cost should be reduced to net realizable

value if they can be sold.

6-7
06-C2: Determining Inventory
Costs (input cost)

6-8
 6-9

Determining Inventory Costs

Include all expenditures necessary to bring an item
to a salable condition and location.
Minus Invoice Plus
Discounts and Insurance
Allowances Cost
Plus Import Plus
Duties Plus
Storage
Freight
6-9
06-C3: Inventory Costing
methods (output cost)

6-10
 6 - 11

Inventory Cost Flow Assumptions

Management decisions in accounting for inventory
involve the following:
1. Items included in inventory and their costs.
2. Costing method (specific identification, FIFO - first
in first out, or weighted average). Costing method =
Cost flow assumtions.
3. Inventory system (perpetual or periodic).

C2
6-11
 6 - 12

UNDERSTAND
Input cost
Output cost
For recording prime
entries in journals Selling price
For calculating
COGS and Ending For calculating Sales
Inventory revenue

12
 6 - 13

NOTES

Storekeeper Accountant
Physical controls Cost controls
flows /manages
flows /assumes

13
 6 - 14

Inventory Costing Illustration

• Here is information about the mountain bike inventory of Trekking for the
month of August. Calculate COGS, ending inventory under different
costing methods: FIFO/Weighted average/Specific indentification for
August under perpetual inventory systems. Prepare part of Income
statement till the gross profit.
Additional information:
• Trekking’s internal documents reveal the following specific unit sales
(the customers wants these inventory):
• August 14 Sold 8 bikes costing $91 each and 12 bikes costing $106 each
• August 31 Sold 2 bikes costing $91 each, 3 bikes costing $106 each, 15
bikes costing $115 each, and 3 bikes costing $119 each

14
 6 - 15

Inventory Costing Illustration

15
 6 - 16

Costing method - Specific Identification

• Specific identification: The accountant point
out what is the exact output.

16
 6 - 17

Costing method - Specific Identification

Date Goods purchased (inputs) Goods sold Ending inventory
(COGS/outputs) balance

INVENTORIES

17
 6 - 18

Costing method - Specific Identification

6-18
 6 - 19

Costing method - FIFO

• The accountant assumes that the product

came in first would be the product go out first
(First in first out)

19
 6 - 20

Costing method - FIFO

Date Goods purchased (inputs) Goods sold Ending inventory
(COGS/outputs) balance

INVENTORIES

20
 6 - 21

Costing method - FIFO

21
 6 - 22

Costing method - Weighted Average

The accountant assumes when a unit is sold, the
average cost of each unit in inventory is assigned to
cost of goods sold.

Cost of Goods Units on hand

Average
Available for ÷ on the date of
unit cost = Sale sale

6-22
 6 - 23

Costing method - WA
Date Goods purchased (inputs) Goods sold (COGS/outputs) Ending inventory balance

23
 6 - 24

Costing method - WA

24
 6 - 25

Part of Income statement

Income statement Specific identification FIFO WEIGHTED AVERAGE

Sales
COGS
Gross profit
…….

25
 6 - 26

Why so many different costing

methods?
• Diverse companies, dissimilar products with
distinct features  different costing methods.

26
COSTING METHODS FOR Periodic
system
Periodic inventory –
cost flows/costing method/ output price
 Specific identification
 FIFO
 Weighted average (ending average)
 Moving average applied for Perpetual inventory
system
Moving average: each time purchases, calculate
Average cost per unit
Ending average: until end of period, calculate ACPU.
 Inventory Costing Illustration – PERIODIC SYSTEM
 Here is information about the mountain bike inventory of Trekking for the month of
August. Calculate COGS, ending inventory under different costing methods:
FIFO/Weighted average/Specific indentification for August under periodic inventory
systems. Prepare part of Income statement till the gross profit.
Additional information:
 Trekking’s internal documents reveal the following specific unit sales:
 August 14 Sold 8 bikes costing $91 each and 12 bikes costing $106 each
 August 31 Sold 2 bikes costing $91 each, 3 bikes costing $106 each, 15 bikes costing
$115 each, and 3 bikes costing $119 each

29
Periodic inventory – cost flows
PERIODIC - RATIONALE
 WAIT UNTIL THE END OF PERIOD:
 STEP 1: CALCULATE NUMBER OF UNITS ON HAND
(QUANTITY) = A
 STEP 2: COMPUTE THE VALUE OF ENDING
INVENTORY = A X COST PER UNIT (FIFO/WAC/SI) = B
 STEP 3: COMPUTE THE COGS:
COGS = OPENING INV + PURCHASES – B
 STEP 4: COMPUTE GROSS PROFIT:
GROSS PROFIT = NET SALES - COGS
PERIODIC SYSTEM

 Calculation of Cost of Goods Sold:

Beginning inventory € 100,000

Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold € 775,000
LO 1
 06-C4: Inventory Adjustments and
Inventory Valuation at the end of the
period

6-33
 Internal Controls and Taking a Physical Count
 Most companies take a physical  When the physical count does
count of inventory at least once not match the Merchandise
each year. Inventory account, an
adjustment must be made.

Good internal controls over count include:

1. Pre-numbered inventory tickets.
2. Counters have no inventory responsibility.
3. Counts confirm existence, amount, and
quality of inventory item.
4. Second count is taken.
5. Manager confirms all items counted.
C2
6-34
 Lower-of-Cost-or-Net Realizable Value
When the value of inventory is lower than its cost
 companies must “write down” the inventory to its net
realizable value.

Net realizable value (NRV): Amount that a company

expects to realize (receive from the sale of inventory).
NRV = Estimated selling price – estimated cost of completion –
estimated costs necessary to make the sale.

6-35 LO 4
 NRV < COST. REASONS?
• A fall in selling price (e.g fashion garments)
• Physical deterioration of inventories (e.g. fruits and
vegetables)
• Product obsolescence (e.g. computers & electrical
equipments)
• An increase in the estimated costs of completion or the
estimated costs of making the sale (e.g. air-conditionaing
plants)
 Lower-of-Cost-or-Net Realizable Value
Illustration: Assume that Gao TV has the following lines of
merchandise with costs and market values as indicated.

DR COGS/INVENTORY LOSS
CR INVENTORY
6-37 LO 4
 Inventory Errors
Learning Objective 5
Indicate the effects of inventory
Common Causes: errors on the financial
statements.
 Failure to count or price inventory correctly.

 Not properly recognizing the transfer of legal title to

goods in transit.

 Errors affect both the income statement and statement

of financial position.

LO 5
Income Statement Effects
Inventory errors affect the computation of cost of goods
Illustration 6-12
sold and net income in two periods. Formula for cost of goods sold

Illustration 6-13
Effects of inventory errors on current year’s income statement
LO 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.

 Ending inventory depends entirely on the accuracy of taking

and costing the inventory.

LO 5
 Income Statement Effects Illustration 6-14
Effects of inventory errors on
two years’ income statements
2022 2023
Incorrect Correct Incorrect Correct
Sales € 80.000 € 80.000 € 90.000 € 90.000
Beginning 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

Combined income for (€3,000) €3,000

2-year period is correct. Net income Net income
understated overstated
LO 5