Kế toán, kiểm toán - Chapter 8: Appendix a & b: inventory

CHAPTER 8Appendix A & B:INVENTORY2Chapter 8: InventoryAfter studying Appendices 8A and 8B you should be able to: Apply the retail method of estimating inventory. Identify other primary sources of GAAP for inventory.3Appendix 8A – Retail Inventory MethodAccounting for inventory in a retail operation presents several challenges:It is difficult to use specific identification for high volume productsIt is difficult to determine the cost of each saleIt is difficult to change codes to reflect declines in value of the merchandiseAn alternative is to estimate inventory cost when necessary by takin a physical inventory at retail pricesPeriodic inventory counts are taken to capture lost or stolen itemsDifferences between the records and the physical counts require an adjustment4Appendix 8A – Retail Inventory MethodThe retail inventory method can be used make the records agree with the physical countThe retail inventory method requires: The total cost and retail value of the goods purchasedThe total cost and retail value of the goods available for sale, andThe sales for the periodThe retail method has been approved by various retail associations, and the accounting profession under ASPE, IFRS and the CRA. 5Appendix 8A – Retail Inventory MethodOne advantage is that the inventory balance can be approximated without a physical count. Makes the method useful for interim reportsUsed to estimate losses by insurance companiesActs as a control deviceSpeeds up physical inventory count at the end of the year6Appendix 8A – Retail Inventory MethodTerminologyMarkup: means an increase in the price above the original sales priceMarkup Cancellations: are decreases in merchandise prices that had been marked up above the original sales priceNet Markups: refer to markups less markup cancellationsMarkdowns: are reductions in price below the original selling priceMarkdown Cancellations: Occur when the markdowns are later offset by increases in the prices of goods that had been marked down, such as after a one-day saleNet Markdowns: Markdowns less markdown cancellations7Appendix 8A – Retail Inventory MethodThe retail inventory method becomes more complicated when such items as freight-in, purchase returns and allowances and purchase discounts are involved. We treat these items as follows: Freight Costs are treated as a part of the purchase costPurchase returns are ordinarily considered a reduction of the cost price and retail pricePurchase allowances are considered a reduction of the purchase cost column only unless normal selling prices are adjusted because of the allowancePurchase discounts are usually considered a reduction of the purchase cost onlyTreatment for the items affecting the cost column of the retail inventory approach follows the calculation of cost of goods available for sale8Appendix 8A – Retail Inventory MethodThe retail inventory method of calculating inventory is used for these reasons: To permit the calculation of net income without a physical count of inventoryAs a control measure in determining inventory shortagesTo control quantities of merchandise on handAs a source of information for insurance and tax purposes9Appendix 8B – Accounting Guidance for Specific Inventory10