Estimate COGS & End inv (AC 300: Ch 9: Obj. 2 to Obj. 5)

Average Cost Retail Method Estimated ending inventory

@ retail Goods available for sale @ retail - net sales @ cost Estimated end inv @ retail * Cost-to-retail %

Conventional Retail Method Estimated ending inventory

@ retail Goods available for sale including Markdowns @ retail = Goods Available for sale @ retail - Markdowns = Goods available for sale @ retail - net sales @ cost = Estimated end inv @ retail * Cost-to-retail %

LIFO Retail Method Estimated ending inventory

@ retail Goods available for sale including beg inv @ retail - net sales @ Cost Layer 1 + Layer 2 Layer 1: Beg Inv * 1st inv cost-to-retail % Layer 2: Estimated ending @ retail * 2nd inv cost-to-retail %

LIFO Retail method Review: LIFO = assumes that units sold are those most recently acquired. When using this method, assume that the retail prices of goods remained stable during the period.

Compared the ending inventory (at retail) with the beginning inventory (at retail) to see if inventory had increased. If the dollar amount of ending inventory exceeded the beginning amount, we assumed a new LIFO layer had been added. Assume no more than one inventory layer is added per period if inventory increases. Each layer will carry its own cost-to-retail %. To estimate ending inventory, we need to determine the inventory layer added during the period.

When there's a net increase in inventory quantity during a period, the use of LIFO results in ending inventory that includes the beginning inventory as well as one or more additional layers added during the period. When there's a net decrease in inventory quantity, LIFO layer(s) are liquidated. LIFO liquidation is...

Older, low cost inventory is sold resulting in a lower cost of goods sold, higher net income, and higher taxes.

For Calculating cost-to-retail % Cost Amount

Purchase return = deducted Abnormal shortage (spoilage, breakage, theft) = deducted Freight-in = added Purchase discount taken (if using the gross method) = deducted

For Calculating cost-to-retail % Retail Amount

Purchase return = deducted Abnormal shortage (spoilage, breakage, theft) = deducted Net Markup = Added Net markdowns = deducted - Note: Net Markdown is not included in the calculation of Cost-to-Retail % in the Conventional Method

Net Purchases definition

Purchases less purchase returns and allowances less purchase discounts. = Purchases amount - Purchases returns and Allowances - Purchase discount

Average Cost Retail Method

Review Average Cost Inventory method: assumes that cost of goods sold and ending inventory each consist of a mixture of all the goods available for sale. The cost-to-retail percentage should be based on the weighted averages of the costs and retail amounts for all goods available for sale.

Conventional Retail Method Cost-to-retail %

Cost-to-retail % = Goods available for sale @ cost/Goods available for sale @ retail Goods available for sale = beg. inv. + net purchases + net markups Exclude markdowns when calculate cost-to-retail %

Average Cost Retail Method Cost-to-retail %

Cost-to-retail % = Goods available for sale @ cost/Goods available for sale @ retail Goods available for sale = beg. inv. + net purchases + net markups - net markdowns

Disadvantages of Gross profit method

(1) It is an estimate. The key to obtaining good estimates is the reliability of the gross profit ratio (2) It generally relies on the historic gross profit percentages in determining the markup. (3) Suspected theft or spoilage would require an adjustment to estimates obtained using the gross profit method (4) The company's cost flow assumption should be implicitly considered when estimating the gross profit ratio.

Gross Profit Vs. Retail Inventory

gross profit method - Uses Historical gross profit ratio - not super accurate Retail inventory method - Uses Current Gross profit ratio - more accurate Similarities: can be used to estimate the cost of inventory lost, stolen, or destroyed (just needs adjustments)

Cost of Goods Sold

the total cost of merchandise sold during the period Net sales - Gross profit = cost of goods sold Net sales = the sum of a company's gross sales minus its returns, allowances, and discounts Gross profit = the financial gain of a company after deduction of the costs necessary to manufacture and distribute its goods or services

gross profit method (or called gross margin method) definition

useful in situations where estimates of inventory are desirable.

Average Cost vs Conventional

The Conventional retail's cost-to-retail % is lower than Average cost Retail. In the conventional method... - This always will be the case when markdowns exist. - Markdowns are excluded to recognize this decline in utility in the period it occurs. Similarities: The ending inventory at retail is the same using both approaches because in all approaches this amount reflects the ending inventory at current retail prices.

Retail Method Advantage:

(1) physical count of inventory is not required (2) only need to track purchases during the year at their cost and retail prices (3) more accurate estimate than the gross profit method Explanation: This is because the Retail inventory method is based on the current relation between cost and selling prices rather than the historical gross profit ratio. (4) different cost flow methods can be explicitly incorporated into the estimation technique. Ex. Average Cost Retail Method, LIFO Retail Method, Dollar LIFO Retail Method (5) can be used to estimate the cost of inventory lost, stolen, or destroyed

Retail inventory method

- Used by High-volume retailers selling many different items at low unit prices - In the context of the Retail Inventory method: Cost refers to purchase cost, while retail refers to current selling prices. A method of estimating inventory cost that is based on the relationship of gross profit to sales. Note: If I need more practice on retail terms. It would be in the Ch 9 Definition quizlet.

periodic inventory system definion

- periodically adjusts for purchases and sales of inventory at the end of the reporting period - does NOT update continuously like perpetual inventory system - based on a physical count of inventory on hand

Here's the difference from the LIFO Retail Method: The real increase is found by... deflating the ending inventory amount to beginning of the year prices before comparing beginning and ending amounts. We did this with the dollar-value LIFO technique.

1st calculate amount reinstated: Amount reinstated = Estimated End Inv @ Retail/price index Price index is given Layer 1 = Base year * price index * cost-to-retail % Base Year = beg inv Price index = always start with 1 Layer 2 = 2nd year * price index * cost-to-retail % 2nd year = Amount reinstated - beg inv @ retail Price index = given Calculate end inv @ cost = layer 1 + layer 2

Dollar value LIFO Retail Method Same Process as LIFO Retail Method So far.. - Layer calculation is the same. - Estimated ending inventory @ retail is the same.

Beginning (1st) inventory layer consist of cost-to-retail % = Beg inv. at cost/ beg inv. at retail 2nd layer consist of Cost-to-retail % = Goods Available for sale excluding beg inv @ cost/Goods Available for sale excluding beg inv @ retail Estimated ending inventory @ retail = Goods available for sale including beg inv @ retail - net sales

LIFO Retail Method Layers

Beginning (1st) inventory layer consist of... cost-to-retail % = Beg inv. at cost/ beg inv. at retail 2nd layer consist of... Cost-to-retail % = Goods Available for sale excluding beg inv @ cost/Goods Available for sale excluding beg inv @ retail

Gross Profit Method COGS and End. Inv. Calculation Ex. Records: Beg. Inv. = 600,000 Net purchases = 1,500,000 Net Sales = 2,000,000 Estimated Gross profit % of net sales = 40% Estimated COGS = ? Estimated End. Inv. = ?

Explanation: Calculate Estimated COGS: Estimated COGS = Net Sales - Gross profit There is enough information to go ahead and calculate COGS. Gross profit = 2,000,000 * 0.4 = 800,000 Estimated COGS = 2,000,000 - 800,000 = 1,200,000 Calculate Estimated End. Inv. Estimated End. Inv. = Goods available for sale - estimated COGS Calculate the goods available for sale. Goods available for sale = beg. inv. + net purchases Goods available for sale = 600,000 + 1,500,000 = 2,100,000 Estimated End. Inv. = 2,100,000 - 1,200,000 = 900,000

Gross Profit Method COGS and End. Inv. Calculation: End. Inv. = Unknown, can only be estimated COGS = Unknown, can only be estimated

Goods available for sale = Beg. inv. + net purchase Goods available for sale - cost of goods sold estimated = ending inventory estimated Use Retail methods to calculate the estimate of COGS and estimated End inv: - Retail Inventory Method - Average Cost Retail method - Conventional Cost Retail Method - LIFO Retail Method - Dollar Value Retail Method

Periodic Inventory System COGS and End. Inv. Calculation: End. Inv. = Known from physical count COGS = Unknown

Goods available for sale = Beg. inv. + net purchase Goods available for sale - end. Inv.(from physical count) = COGS

Conventional Retail Method Estimated COGS

Goods available for sale @ cost - Estimated End Inv @ cost

Average Cost Retail Method Estimated COGS

Goods available for sale @ cost - Estimated end inv @ cost

LIFO Retail Method Estimated COGS

Goods available for sale including beg inv @ cost - Estimated end Inv @ cost

Uses Layers to estimate COGS & End Inv

LIFO Retail Method $ LIFO Retail Method

$ LIFO Retail Method Estimated COGS

The same as the LIFO Retail Method Goods available for sale including beg inv @ cost - Estimated end Inv @ cost

Conventional retail method

To approximate the lower of average cost and net realizable value, markdowns are not included in the calculation of the cost-to-retail percentage - Markdowns are only included in calculating ending inventory @ retail. - The Conventional retail's cost-to-retail % is lower than Average cost Retail. This always will be the case when markdowns exist. Explanation: Markdowns are excluded to recognize this decline in utility in the period it occurs.

Review LIFO Retail Method: If the dollar amount of ending inventory exceeded the beginning amount, we assumed a new LIFO layer had been added. But this isn't necessarily true. It may be that the dollar amount of ending inventory exceeded the beginning amount simply because prices increased, without an actual change in the quantity of goods. To see if it is a real increase in inventory, we use the dollar-value LIFO retail method. Dollar value LIFO Retail Method is...

a method of estimating the cost of ending inventory by calculating the dollar increase in retail inventory layers with price indexes