INVENTORIES

1
INVENTORIES Chapter 6

• Valuing ending inv. And COS.
• Different types of inventory.

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BEST BUY

• Best Buy
• Target inventory to its customers
• Manages inventory for customer needs
• Balances costs to hold inventory such as
  obsolescence, financing storage costs

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LEARNING GOALS
1
Identify types of inventory used.
4
TYPES OF INVENTORY
LG 1

• Inventories differ between merchandisers and
  manufacturers
• Merchandisers
• Hold inventory for resale
• Do not make goods

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MANUFACTURING INVENTORIES
LG 2

• __________ inventory
• Raw material used to make product
• _________________ inventory
• Cost of partially completed products
• _________________ inventory
• Total costs of completed goods
• Materials
• Labor
• Factory overhead

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LEARNING GOALS
2
Summarize control procedures for inventory.
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INVENTORY CONTROL
LG 2
2 Objectives ___________ing Reporting
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SAFEGUARDING
LG 2

• Safeguarding measures to prevent damage, theft
• ________________
• ______________
• __________ (radio frequency tags)

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REPORTING
LG 2

• Aids to reporting accuracy
• Perpetual inventory
• Subsidiary ledgers
• Physical inventory counts

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LEARNING GOALS
3
Describe 3 inventory cost flow assumptions
financial statement impact.
11
COST FLOW ASSUMPTIONS
LG 3

• 3 methods to calculate cost
• First-in-first-out (FIFO)
• Last-in-last-out (LIFO)
• Average

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FIFO
LG 3
Under FIFO, the _____ goods ______ased are
assumed to be the _____ goods _______
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FIFO CALCULATION
LG 3
During May, 3 units purchased, 1 unit sold.
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FIFO STATEMENTS
LG 3
Income Statement Sales20 CMS.. 9 Gross
Profit.11
Balance Sheet Inventory27
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EXERCISE 6-10a
LG 3
Ending inventory is 11 units.
(8x33) (3x32)
____ __ _______
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LIFO
LG 3
Under LIFO, the ___ goods ____ased are assumed to
be the ___ goods _______
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LIFO CALCULATION
LG 3
During May, 3 units purchased, 1 unit sold.
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LIFO STATEMENTS
LG 3
Income Statement Sales20 CMS. 14 Gross
Profit. 6
Balance Sheet Inventory22
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EXERCISE 6-10b
LG 3
Ending inventory is 11 units.
(6x28) (5x30)
____ ____ ________
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AVERAGE
LG 3
With Average cost, the weighted ____age purchase
cost is cost of merchandise sold and ending
inventory.
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AVERAGE CALCULATION
LG 3
During May, 3 units purchased, 1 unit sold.
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AVERAGE STATEMENTS
LG 3
Income Statement Sales20 CMS. 12 Gross
Profit. 8
Balance Sheet 2x12 Inventory24
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EXERCISE 6-10b
LG 3
Ending inventory is 11 units.
Average cost ________ ___
Ending inventory 11 x __ ________
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Compare methods
LG 3
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LEARNING GOALS
7
Determine lower-of-cost-or-market for inventory.
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INVENTORY VALUATIONOther Than Cost
LG 7
Used to ensure inventory not reported at a cost
higher than its replacement cost
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LOWER-OF-COST-OR MARKET (Slide 1 of 3)
LG 7
Basic Information
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LOWER-OF-COST-OR MARKET (Slide 2 of 3)
LG 7
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LOWER-OF-COST-OR MARKET (Slide 3 of 3)

• Calculation
• 3,800 2,700 4,650 3,920
• Ending Inventory 15,070

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LEARNING GOALS
8
Describe quick response for inventory.
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QUICK RESPONSE
LG 8

• To optimize inventory levels using
• Least amount of inventory on hand
• Internet ordering

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LEARNING GOALS
9
Interpret inventory turnover ratio, days sales in
inventory.
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INVENTORY RATIOS

• Measures efficiency, effectiveness of inventory
  level
• Inventory turnover
• Days sales in inventory

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INVENTORY RATIOSFormulas

• Inventory turnover
• _________________________________
• Days sales in inventory
• __________________________ or
• 365/TO

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INVENTORY TURNOVER
Measures number of times inventory turns over
during year.
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ANALYSIS Inventory Turnover
Best Buy turns its inventory almost 8 times in a
year Circuit City turns its inventory slightly
more than 5 times in a year
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DAYS IN SALES
Measures number of days inventory stays on
shelves OR days to turn over inventory.
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ANALYSIS Days in Sales

• Best Buy sells through its inventory every 46.6
  days on average
• Circuit City sells through its inventory every
  68.7 days on average

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ANALYSIS

• If Best Buy could turn its inventory in 45.6
  days rather than 46.6, how much could they save
  in investment in
• Inventory?
• ______ Million