Inventory Systems; Costing Methods - Intermediate Accounting I - L5 - Professor Bloch

Intermediate Accounting I Lecture 5: Inventory Systems & Costing Methods by Rebecca Bloch In this lecture, the professor first gives a quick review of the different types of companies, the difference between service and merchandising, merchandising sales, gross profit, inventory, and cost of goods sold. The professor also discusses the types of inventory systems and inventory costing methods. The professor uses exercises and examples to reinforce the lecture topics. There are two general types of companies. Service companies sell services (such as filing taxes, cleaning your house, etc). Merchandising companies sell products (like games and toys, computers, and phones). Service companies collect fees for services (service fees revenue). A primary expense is employee salaries and wages. Merchandising companies sell products (thus sales revenue) and maintain an inventory of those products. They can manufacture their inventory themselves or buy it from a wholesaler. When merchandising companies make sales (i.e. selling their inventory), two things occur: (1) they earn sales revenue and (2) they incur an expense for the inventory that has been sold called cost of goods sold. For a merchandising company, sales minus cost of goods sold equals gross profit. Gross profit is the profit on the markup of the product. Note that only merchandising companies measure cost of goods sold and gross profit. Gross profit is important because it shows the expenses that are directly related to the merchandise sold. It is presented separately on a multiple-step income statement. Maintaining detail of every item in inventory can be very cumbersome and implementing inventory systems that maintain high detail can be very expensive. An inventory system that maintains detail on a transaction per transaction basis would be called a perpetual inventory system. Business owners, however, don't always want to invest in these systems. They might choose to maintain a periodic inventory system instead. A perpetual inventory system records every item in the inventory account, and as each item is sold, it is taken out of inventory. Cost of goods sold is recorded for each item. Places like Home Depot, Stop & Shop, BB&B, and Walmart have a perpetual inventory system. Periodic inventory systems maintain no detailed record of inventory throughout the period. Purchases of inventory during the period are recorded in the purchases account. Instead, the inventory account is updated and counted at the end of the period. The disadvantage of a periodic system is that the difference between goods available for sale and ending inventory may not be due to cost of goods sold alone, but also other factors like spoilage or even theft. Performing a physical inventory count will highlight differences in perpetual inventory systems (since the amount sold may not account for all missing products since some may have been stolen or have spoiled). Thus, the differences need to be adjusted to cost of goods sold. Sometimes, these differences are reported in "other revenue and gains" or "other expenses and losses." To avoid over-purchasing or running out of stock, companies need some information about levels of inventory. A modified perpetual inventory system will track quantity (but NOT cash). It will also help with the preparation of financial reports. The physical goods that should be included in inventory include: FOB (free on board) shipping point, which changes hands at point of shipment. FOB destination, which changes hands when goods arrive at destination. ** NOTE: Lost Audio from 44:38 to end Class Starts Valuation of Inventories (A Cost-Basis Approach): 0:06 Different Types of Companies: 4:51 Service vs. Merchandising: 7:11 Merchandising Sales: 10:50 Gross Profit: 15:09 --- Why does gross profit matter?: 16:29 Inventory and Cost of Goods Sold: 21:23 Inventory can consist of...: 25:55 Example, continued: 26:25 Brief Exercise 8-2: 32:13 Types of Inventory Systems: 33:00 Perpetual vs. Periodic Inventory: 33:44 Summary: Inventory Systems: 35:55 Periodic Inventory System Example: 37:34 Disadvantage of a periodic system: 45:01 Periodic Inventory System Example/Exercise: 45:16 Highlighting differences: Perpetual vs. Periodic Inventory: 49:52 Inventory Over and Short: 52:08 Modified Perpetual Inventory System: 53:41 Other Inventory Items: 55:12 Exercise 8-8 Letter A: 1:11:17 Net Method: 1:16:18 Exercise 8-8 Letter C: 1:18:11 Exercise 8-8 Letter B: 1:20:16 Net Method Example: 1:22:06 Inventory Cost Flow Assumption and Methods: 1:23:48 Inventory Costing Methods: 1:25:59 US GAAP vs. IFRS: 1:26:55 Specific Identification: 1:28:10 Inventory Flow Example: 1:33:10 Average Cost - Periodic: 1:36:24 Advantages and Disadvantages - FIFO: 1:38:02 LIFO: 1:38:25 --- Periodic: 1:39:56 --- Perpetual: 1:40:24