American International University – Bangladesh

Accounting for Managers

Spring 2019 – 2020

Online lecture 2
 Financial Statements

E3
IS BS
 
  Dr. (E) Cr. (I) Dr. (A) Cr. (L)
Cash     $3,500  
Supplies     $750  
Prepaid Insurance     $2,090  
Land     $12,000  
Lodge     $60,000  
Furniture     $15,000  
Accounts Payable       $4,800
Unearned Rent       $1,100
Mortgage Payable       $35,000
Kevin Henry, Capital       $46,380
Rent Revenue   12,500    
Advertising Expense 600      
Salaries Expense 4050      
Utilities Expense 900      
Insurance expense 190      
Supplies expense 1450      
Depreciation expense 475      
Acc. Dep. - Lodge       250
Acc. Dep. - Furniture       225
Interest expense 350      
Interest payable       350
Salaries payable       750
  $8,015 $12,500 $93,340 $88,855
Net profit $4,485 $4,485
$12,500 $12,500 $93,340 $93,340
 Multiple Step Income Statement

XYZ Company
Income Statement
For the year ended December 31, 2019
Amount Amount Beginning Inventory XX From end of prior period
Net Sales   XXX Add: Net Purchase  XX  
Less: Cost of Goods Sold   XXX Goods Available for Sale XX  
Gross Profit   XXX Less: Ending Inventory XX From physical count
Less: Operating Expenses   XXX  Cost of Goods Sold XXX  
Profit Before Taxes   XXX
Less: Taxes   XXX
Net Profit   XXX 
If XYZ purchased 100 cars @ $1 each, and sold 80 cars
@ $2 each during 2019, how much is XYZ’s profit from
sale of cars? [Purchase total $100, Sales total $160]

$80
INVENTORY VALUATION
 INVENTORY VALUATION

Inventory Costing - Periodic

1. Determine quantity of units of inventory
2. Apply unit costs to the quantities
3. Determine total cost of inventory
4. Determine cost of goods sold

Process is complicated if units are purchased

at different prices!
 INVENTORY VALUATION

Illustrative Data – Crivitz TV Co.

Purchases
February 3 1 set $ 700
March 5 1 set $ 750
May 22 1 set $ 800
Sales
June 1 2 sets $2,400

What is the cost of goods sold?

 INVENTORY VALUATION

Illustrative Data – Crivitz TV Co.

Purchases
February 3 1 set $ 700
March 5 1 set $ 750
May 22 1 set $ 800
Sales
June 1 2 sets $2,400

What is the cost of goods sold? 1450

 INVENTORY VALUATION

Illustrative Data – Crivitz TV Co.

Purchases
February 3 1 set $ 700
March 5 1 set $ 750
May 22 1 set $ 800
Sales
June 1 2 sets $2,400

What is the cost of goods sold? 1500

 INVENTORY VALUATION

Illustrative Data – Crivitz TV Co.

Purchases
February 3 1 set $ 700
March 5 1 set $ 750
May 22 1 set $ 800
Sales
June 1 2 sets $2,400

What is the cost of goods sold? 1550

 INVENTORY VALUATION

Specific Identification
• Specific identification is practical when a company can
positively identify which particular units were sold and which
are still in ending inventory
• Works best with limited variety of high-unit items
• Must have records of original cost of each individual inventory
item
 INVENTORY VALUATION

Three Cost Flow Assumptions

• When items are indistinguishable from one another, management
may choose a cost flow method . . .
• FIFO - first-in, first-out
• LIFO - last-in, first out
• Average Cost
 INVENTORY VALUATION
Houston Electronics
Astro Condensers
Date Explanation Units Unit Cost Total Cost
1/1 Beg. Inventory 100 $10 $1,000
4/15 Purchase 200 $11 $2,200
8/24 Purchase 300 $12 $3,600
11/27 Purchase 400 $13 $5,200
Cost of
Units available 1,000 Goods Available $12,000
for sale for Sale
 INVENTORY VALUATION
Houston Electronics
Date Explanation Units Unit Cost Total Cost
1/1 Beg. Inventory 100 $10 $1,000
4/15 Purchase 200 $11 $2,200
8/24 Purchase 300 $12 $3,600
11/27 Purchase 400 $13 $5,200
1,000 $12,000

Dec. 31 physical inventory shows 450 in ending inventory, so how many were sold? 550 units
 INVENTORY VALUATION
FIFO Step 1: Ending Inventory
Work Backward to 450 units
Date Explanation Units Unit Cost Total Cost
1/1 Beg. Inventory 100 $10 $1,000
4/15 Purchase 200 $11 $2,200
8/24 Purchase 300 $12 $3,600
11/27 Purchase 400 $13 $5,200
1,000 $12,000
 INVENTORY VALUATION
FIFO Step 1: Ending Inventory
Work Backward to 450 units
Date Explanation Units Unit Cost Total Cost
1/1 Beg. Inventory 100 $10 $1,000
4/15 Purchase 200 $11 $2,200
8/24 Purchase 50 of 300 $12 $3,600
11/27 Purchase 400 $13 $5,200
1,000 $12,000
 INVENTORY VALUATION

FIFO Step 1: Ending Inventory

450 units
Date Explanation Units Unit Cost Total Cost
11/2 Purchase 400 $13 $5,200
7 Purchase
8/24 50 $12 600
450 $5,800
INVENTORY VALUATION

FIFO: Cost of goods sold

Cost of goods available for sale $12,000

Less ending inventory 5,800
Cost of Goods Sold $6,200
 INVENTORY VALUATION
LIFO: DO YOURSELF, ENDING INVENTORY and COGS
Date Explanation Units Unit Cost Total Cost
1/1 Beg. Inventory 100 $10 $1,000
4/15 Purchase 200 $11 $2,200
8/24 Purchase 300 $12 $3,600
11/27 Purchase 400 $13 $5,200
1,000 $12,000

Dec. 31 physical inventory shows 450 in ending inventory, so how many were sold? 550 units
 INVENTORY VALUATION
LIFO: DO YOURSELF, ENDING INVENTORY and COGS
 INVENTORY VALUATION

Average Cost Ending Inventory

• Allocates the cost of goods available for sale on the basis of the
weighted average unit cost incurred

• Assumes goods are similar in nature

 INVENTORY VALUATION

Average Cost Ending Inventory

Cost of Goods Available for Sale Weighted Average
=

Total Units Available for Sale Unit Cost

$ 12,000 = $12.00
1000 units
450 units in ending inventory
X 12.00 weighted average unit cost
$5,400 Total Average Cost Ending Inventory
 INVENTORY VALUATION

Average Cost Ending Inventory

 INVENTORY VALUATION

Factors Used in Selecting an

Inventory Cost Method
1. Income statement effects
2. Balance sheet effects
3. Tax effects
INVENTORY VALUATION

Income Statement Effects

INVENTORY VALUATION

Income Statement Effects

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INVENTORY VALUATION

Income Statement Effects

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INVENTORY VALUATION

Income Statement Effects

O G S
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INVENTORY VALUATION

Income Statement Effects

Gr diffe
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INVENTORY VALUATION

Income Statement Effects

Ne diffe
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 INVENTORY VALUATION

Income Statement Effects

• In periods of increasing prices
– FIFO reports the highest net income
– LIFO the lowest
– average cost falls in the middle.
• In periods of decreasing prices
– FIFO will report the lowest net income
– LIFO the highest
– average cost in the middle.
 INVENTORY VALUATION

Balance Sheet Effects

In a period of increasing prices, costs

allocated to ending inventory using:
• FIFO will approximate current costs
• LIFO will be significantly understated
 INVENTORY VALUATION

Why Do Companies Use LIFO?

• During periods of rising prices,
• Higher cost of goods sold
• Lower net income

Lower Income Taxes

 INVENTORY VALUATION
Income Statement Effects

Lo
ok
at
TA
XE
S
 REVIEW: INVENTORY VALUATION

Which inventory cost flow method produces the

highest net income in a period of rising prices?

a. Average cost.
b. LIFO.
c. FIFO.
d. Specific identification.
 REVIEW: INVENTORY VALUATION

Which inventory cost flow method produces the

highest net income in a period of rising prices?

a. Average cost.
b. LIFO.
c. FIFO.
d. Specific identification.
 REVIEW: INVENTORY VALUATION

Which inventory cost flow method produces the

lowest income taxes in a period of rising prices?

a. Average cost.
b. LIFO.
c. FIFO.
d. Specific identification.
 REVIEW: INVENTORY VALUATION

Which inventory cost flow method produces the

lowest income taxes in a period of rising prices?

a. Average cost.
b. LIFO.
c. FIFO.
d. Specific identification.
 REVIEW: INVENTORY VALUATION

Using the above data, assume there are 9,000 units on hand
at Dec. 31, what is the cost of ending inventory under FIFO?

a. $99,000 c. $113,000

b. $108,000 d. $100,000
 REVIEW: INVENTORY VALUATION

Using the above data, assume there are 9,000 units on hand
at Dec. 31, what is the cost of ending inventory under FIFO?

a. $99,000 c. $113,000

b. $108,000 d. $100,000
 REVIEW: INVENTORY VALUATION

Using the above data, assume there are 9,000 units on hand
at Dec. 31, what is the cost of ending inventory under LIFO?

a. $99,000 c. $113,000

b. $108,000 d. $100,000
 REVIEW: INVENTORY VALUATION

Using the above data, assume there are 9,000 units on hand
at Dec. 31, what is the cost of ending inventory under LIFO?

a. $99,000 c. $113,000

b. $108,000 d. $100,000