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Hello ok for you folks at home we just took a quiz here in class and why don't you just
go ahead and show that quiz up on the screen for the folks at home and I encourage you
all to do is let me back that out a little bit. What I encourage for you folks at home
is to just pause this get out a piece of paper and take the quiz juts as if it were a real
life quiz situation obviously I can't pick it up or give you points, but see if you can
do this ok and you can just push play when you're done with it. Now we are going to grade
this in class you're going to find that there is five total journal entries we are going
to grade for the face to face people we are going to do it two points each so it's a ten
point quiz like all quizzes and it's all or nothing so if you get the number right or
the accounts wrong you don't get any points, if you get the accounts right but the numbers
are wrong you don't get any points. So let's look at it real quick Robert's company purchased
merchandise from Karle Inc. with an invoice price of sixty five thousand and credit terms
of two fifteen net forty five. The merchandise had cost Karle Inc. an amount of forty nine
thousand. Roberts Company paid within the discount period. Assume that both the buyer
and seller use the perpetual inventory system. Ok we can do that ok let's go ahead and take
a look at this right? Well first of all lets shift into the mode of buyer first ok now
who is the buyer? Roberts ok so let's do the buyer journal entries ok when they purchased
the merchandise they debit merchandise inventory and credit accounts payable for sixty five thousand dollars right? So that's
worth two points when they pay do they pay within the discount period? Yes they do now
they do not have to pay cash of sixty five thousand do they? They only have to pay cash
of ninety eight percent of six five thousand alright? Which if I did it on my handy dandy
calculator I get sixty three seven hundred. So they pay out cash of sixty three seven
hundred the entire accounts payable is decreased because its satisfied and then where does
that extra fifteen hundred go? A credit to merchandise inventory so this is worth two
points this is worth two point ok. Now any questions on that? Now let's do the seller
now who is the seller in this situation? What's the name of the company? Karle ok now when
they sell the merchandise they debit accounts receivable and credit sales for sixty five
thousand right? Now they also have a second journal entry they have to make that day right?
And that is to debit cost of goods sold and credit merchandise inventory for how much?
Forty nine so those two journal entries are made on the date of sale correct? Now they were paid within
the discount period so they did not receive sixty five thousand did they? How much did
they receive? Sixty three seven hundred is that right? Yeah the entire accounts receivable
is decreased and then where does that entire sixteen hundred go? Sales discounts, sales
discounts ok so that's worth two point that's worth two points that's worth two points.
So at the very top of it put how many they got right. Like plus ten if they got it perfect
ok and then why don't you hand it back to whoever did it ok. Alright how did you folks
at home during all this commotion how did you folks at home do on this I hope you did
well. You have a question Anna? "yeah I can't tell what you wrote right there what number
is this? I just can't read his hand writing right there?" I don't thinks that's right
let me see. It's not sixty three seven hundred "yeah I just couldn't read it right there."
Yeah its not sixty three hundred ok alright. Do you know why I do; do you know why I write
these quizzes for you? "because you love us?" because I love you guys and I want what is
best for you someday you'll thank me but more specifically the reason I do this is because
a lot of times students don't realize that they don't understand something until they're
in a point situation a situation where they receive points. Does that make sense? They
do their homework they get it wrong but then they see the answers ok I got it now and they
really genuinely think they understand it but then they take a quiz and then they bomb
it and then they go maybe I don't understand it. I would rather have that realization happen
that you maybe don't know it I'd rather have that happen on a quiz than a test you see
what I'm saying. So that's why I'm doing these quizzes because I love you guys. So why don't
you take a look at what you got why don't you hand them to your left hope you folks
at home did this. I love you guys too it's just a faraway love do these quizzes when
we do them see how you do grade yourself and assess whether you understand this material
because we have this lecture we have another lecture and then it's test time you with me?
We have this lecture one more lecture and then test over chapter five and six. Cool
alright ok let's shift oh any question comments anything? Ok for you folks at home you guys
know the dates when your tests are due make sure you don't wait till the last minute.
I've already had several people give me an email from face to facers they send me an
email the day of the test they send me an email a frantic email the day of the test
and say oh something came up and I can't take it today don't put it off to the last day
or that's going to have to be the test that you drop ok or every day late that you take
the test for you media people for every day you take the test late its fifteen points
off regardless of the reason. Ok let's go ahead, and go to chapter six homework last
class period I had concluded the discussion the weighted average and the specific identifications
methods right? And I had asked you to finish up new technique and to do exercise six points
there is that correct? Ok I want to show you something real quick before we go over that
homework take a look back at the SpongeBob answers, take a look back at the SpongeBob
answers ok remember when we did this with SpongeBob? Remember how much fun we had ok?
I want to show you something here I don't know if anybody notice this? But if I add
up let me back that up a little bit the top line is FIFO the bottom line if LIFO if I
add one o three plus eighty one what's the number I get? One eighty four right If I add
up one seventeen and sixty seven what's the number I get? One eighty four and that's not
a coincidence and if I ever ask a question in this manner you can use this to check your
answers ok. Now if you're curious why this works is because if you go back to that original
equation that I taught you beginning inventory plus purchases equals merchandise available
for sale and then that either has to become ending inventory or cost of goods sold right?
Remember that? Cause we can say that merchandise available minus ending inventory equals cost
of goods sold or you could say minus cost of goods sold equals ending inventory ok.
So when we look at these number that one eighty four in this specific example that actually
equals the merchandise available for sale in this situation the beginning inventory
plus the purchases. Ok and it either has to become cost of goods sold or the ending inventory
so the sum of these two answers is going to equal the same number ok. Now that being said
take a look real quick get your calculators out and look at your answers on new technique.
And add those two numbers up and see if they equal the same sum for each of your methods
FIFO LIFO and weighted average ok do that real quick you folks at home can do that too.
(11:30-11:55) ok while they are finishing that up I'm going to show the answers then
ill show you how we compute them. (12:05-12:20) ok what do those numbers add up if you got
them correct what do those numbers add up somebody tell me? Two fifty ok I think what
they add up to if you add any of those is sixteen two one two fifty did anybody else
get that? ok now you didn't use that to check your homework because I hadn't taught you
yet. But looking at it now did the sum of each method equal that number for you all.
Ok it's a great way to test if you got something wrong ok so use that if you like. Now it does
not work it doesn't work if I ask the question In a manner like I did on BB's and I'll show
that real quick remember when we did BB's doesn't work like that but it does work if
ask for the ending inventory at the end of the period and the cost of goods sold at the
end of that period. Ok alright well once again there are the answers for new technique take
a look at those and I will show you the detail of how we do this. It's a little challenging
because the size of the screen. But let me do that ok, ok now this if I this is the whole
answer right here but that's pretty hard to read so I'm actually going to concentrate
the right most columns so take a look at that can you see that in the back Kara? So that is how I got the FIFO
for new technique you can see the cost of goods sold at ten thousand down there at seven
hundred and the inventory balance of five, five one hundred one two point five-o. ok
alright any questions on that? Somebody's phone just rang? Don't we have a brownie rule
for that? Let's take a look at LIFO there's the answers for LIFO for again this is for new technique again I'm just showing you the two right most columns
ok any questions on that? It not let's look at the weighted average for new technique
ok let's see if I can zoom in a little more on that ok did you all get that? If you folks
at home for whatever reason can't see the answers to these shoot me an email and I'll
figure out how to send those answers to you maybe I'll just email them to you ok. But
hopefully you're getting the answers so you already have the answers. How did you guys
do on that one did any of you get all those right? Ok some yes some no if you didn't get
them right did you see where you made your mistake? Alright any questions on new technique
if not we also did exercise six point there is that correct? Ok so let's go ahead and
do that one. And this gave you some information and it wanted you to figure out the info for
each method correct? Let's turn to exercise real quickly. Alright exercise six three on
page two five eight they use a perpetual inventory system they give you some information and
they want you to use each method ok. Now let's go ahead and do the specific ID method first
the specific ID first now you might have sued your inventory sheets on these you can on
specific ID but this is the way that they did it they actually figured out what the
ending inventory is worth and then they recognize from the other answer that the sum of other
ending inventory plus the cost of goods sold should equal twenty eight twenty. And they
got their cost of goods sold at fifteen-o-five alright? So that is how they got specific
ID and again in specific Identification method they have to tell you exactly how much were
sold how much were not sold and then you back into the other one. Ok so that's about really
the only example we did on specific identification, but are there any questions on that any questions
on specific ID? Some of you are still writing so I'll leave that up there for another minute
or so. Ok alright any questions on specific ID so what does ending inventory plus cost
of goods sold equal if we add those together twenty eight twenty is that correct? Two thousand
eight hundred and twenty is that correct? Now let's take a look at the answer for weighted
average now they I wish they wouldn't have don't this but they did they had a rounding
situation here didn't they? Did you all figure that out that they had a rounding situation?
Really wish they wouldn't have done that wish they would have picked numbers that didn't
involve rounding but I always say round to two decimal places. Now if your answers are
different by a dollar or two your fine and you won't miss any points. Now what is the
total for the weighted average what's the total of the cost of goods sold plus the ending
inventory once again its two thousand eight hundred and twenty dollars isn't it? You see
that so you can use that to check your answers if you would like we only need to figure out
the weighted average cost right before we make a sale. Ok so that's the answer to the
weighted average perpetual or weighted on exercise six point three. Any questions on
that did you guys get that? Marlin? "So at the very end after you make your very last
sale and you still have inventory left and you make another purchase would you do weighted
average again?" yes yeah you're going to do weighted average before every sale now les
take a look at this situation. Let's just go down layer by layer ok right here they
had one layer right so the average cost was pretty easy wasn't it? But so here they purchased
another layer they purchased these two twenty at six so now they have to figure out the
average cost. Ok it's different than last time right? Ok when they sell those they say
that that's what they sold it at ok they took it to three decimal places you can take it
to just two. Now they purchase another layer and there's not another sale, but if there
were another sale after this that's the average cost they would use they're recomputed this
right before they make every sale. And this might seem really tough to do but can you
see with computers that this could not be that cumbersome. Ok them computers are smart
aren't they? Ok so that they could just this could just happen as far as kind of a computer
situation but your right Marlin it would be recomputed. Yes Kara you have a question?
"for the average do you add up the sixty and twenty and divide that or how do they get
the six point two one four?" ok good question the way they got that how they got this was they took their total
inventory cost of seventeen forty and how many units are in ending inventory? Two hundred
and eighty and that's how they got six point one four. Does that make sense? Ok good question
any other questions on the weighted average. Again the answers add up to be twenty eight
twenty. Now lets take a look at the FIFO method ok let's take a look at FIFO method back that
up a little bit. The answers are fifteen sixty, twelve sixty once again that adds up to be
twenty eight twenty. So we can use that to check our answer take a look at that detail
see if you got it right. Ok did you guys get FIFO right? Once again though on the test
folks if you have time do these problems twice because you can make one little multiplication
error one little fat finger calculator error and that's all your points. Ok so you want
to make sure that you get that you recheck them that you use these mechanisms to check
your answers if it's after that manner but you don't want to miss points just by some
little calculator error. I always hate it when students miss points and I realize that
that students left ten minutes before they even needed to, and I'm like gosh if they
would've stayed here and just work through this again they might have caught those errors.
Alright let's take a look at the LIFO situation and that's at the bottom. Ok so leave that
up there if you would cameras. Ok the LIFO ok the cost of goods sold is fifteen hundred
the inventory balance is fifteen twenty those add up to twenty eight twenty correct? A good
way to check your answer alright any questions on that? Ok let me ask you all how many got all those right all four
methods right? How many of you got three out of the four right? Ok well have any of you
done enough of these that where you are starting to realize there is sometimes shortcuts? Has
anybody realize that especially like with FIFO? Ok here's my philosophy and this will
sound very Kung-Fu panda-ish. There are some shortcuts to doing this but I don't teach
you the shortcuts because when you're ready for the shortcut the shortcut will appear
ok alright. But if you do enough of these you start to see some patterns especially
in FIFO ok. Now we are not going to really work through any more of these in class but
you are going to do a on your connect assignment you'll do another of these and I'll tell you
folks after class when that connect assignments is due for you folks at home always check
what I have sent via email to know when those connect assignments are due or what's posted
on angel if I've done it that way, but you do have another chapter six connect assignment
where you will do another one of these. The other thing I wanted to urge you all to do
is how many of you are using those practice tests and looking at your practice test answers
that I have posted on angel? Have you? Ok those are really good I've got some really
good problems in this in the practice test for chapters five and six that I would encourage
you to do and the practice test is out there and the practice test answers are out there
right? So I have another inventory one you can practice if you want a little bit more
experience doing this. ok you think I'm going to ask this on the test? Uh huh I am and you
will have inventory sheets if you use those some people don't use them alright any questions
I think that's all the homework I assigned any questions? Ok good lets go to lets take
a look at man we haven't been to the slide for a long time in this chapter haven't we?
But let's go over there to the slides let me bring this up real quick and you can see
on those slide they walk you through a complete set of FIFO LIFO don't they? Now I didn't
go over those in class but if you want to see more examples of FIFO and LIFO and how
its calculated you can certainly use that in class I like to do it the way we did it
as far as the handout. Now let's take a look at oh we are not there yet I'll tell you when
we're there. Ok take a look at this slide right here its pretty far along in your slides.
What this is they have done a little income statement that would be prepared for each
one of the methods if it were used. So they did an income statement if a specific id were
used they did a income statement for if FIFO were used they did an income statement if
LIFO was used and then they did for a weighted average method, and then down here they separately
listed let me go ahead and use my pen. They separately listed what the inventory would
be on the balance sheet the ending inventory. At the end of august thirty first of course
we know that the inventory is not on the inventory statement ok you know that by now. But so
what they are doing is saying hey look the method of inventory costing that you choose
is going to be a pretty important decision right? It's going to look the cost of goods
sold is different for each one of those methods the net income is different for each one of
those methods. The balance sheet inventory is different for each one of those methods.
So which ever method we decide to use it's going to be an important decision in regards
to our income statement and our balance sheet isn't it? Right now let me ask you a question
real quick do over time generally speaking do prices rise or do prices fall generally
speaking prices rise over time so generally speaking there is inflation correct? You pay
more for milk than you paid ten years ago a lot more now than we paid twenty years ago.
You paid more for a movie ticket now versus ten fifteen years ago. Generally speaking
do you pay more for college than you would've ten years ago? Yes ok generally speaking prices
rise over time. Now looking back at this example I had on the screen this if you look back
at the slides before prices indeed rose as well so let me go ahead and write that you
wouldn't be able to know that unless you looked at the slides before or unless I told you
like I'm doing now. So prices have risen ok now that being said keep this up on the screen
please and tell me why one might choose different methods if prices rise over time which is
generally the case why might somebody choose the LIFO method? "They get the most profit?"
No they get the least profit with LIFO look at the net income under LIFO its only six
hundred and nine dollars that's the least amount of income when prices rise LIFO gives
you the lowest income, because cost of goods sold is higher because you are using those
higher priced items that go to cost of goods sold. Why would anyone use LIFO when prices
rise? Look at that income tax expense line who's got the lowest income tax expense when prices rise? LIFO do you guys like to
pay taxes? Companies don't like to pay taxes too. Now do you see why some companies might
choose to use LIFO? When prices are rising or in an inflationary environment LIFO results
in the lowest income tax paid. Ok look back at that again LIFO is the lowest income tax
what is the highest income tax paid? FIFO wouldn't that make sense? And wouldn't that
make sense that weighted average is kind of in the middle of FIFO and LIFO because it
kind of smooth's up the changes you with me? Does that make sense folks? Now we talked
about why people might choose these methods. Now remember one thing that I have said the
method that you choose does not have to reflect what reality is. A grocery store could choose
to use LIFO even if their product didn't move in a LIFO manner. But the advantage of some
of these methods looking at this slide the weighted average kind of smooth's out price
changes kid of smooth things out. Now the FIFO method the first in first out last in
still here means that the ending inventory more mirrors the current replacement costs
because the last in the latest purchases are still in inventory they are the most recent
purchases does that make sense? Sometimes you kind of have to think through these. The
last in first out method the last in first out that means the latest purchases are out
the door with cost of goods sold thus cost of goods sold is matched let me say that a
little differently some people say that there is a better match with cost of goods sold
and revenues on the LIFO method because the cost of goods sold is the most recent purchases,
but we also know that when prices go up last in first out gives the lowest income tax expense.
Now what if prices had gone down which do you think would give the lowest income tax
expense? FIFO ok if prices go up LIFO results in the lowest income tax expense if prices
are going down for some reason then FIFO would follow that, and you can read that in your
book as well. Now to further complicate things you can actually use one method for books
and a different method for your taxes now that seems illegal doesn't it? But you can
choose one method to keep track of your books and your financial statements and a different
method for your taxes you can do that if you want, most companies don't, but you can if
you want to. The only thing that they say is if you use LIFO for your tax purposes then
you also have to use it for your financial purposes. For most companies and most industries
prices rise over time people would probably wish they could use LIFO for tax and have
the lowest net income tax and have the lowest income tax expense and FIFO for their books
and report a high net income and make the people who look at their financial statements
happy. But if you use LIFO for tax then you have to use LIFO for your books or for the
financial statements any other combination you can use. Now my experience is that most
companies use just one method for both they don't want the hassle ok. Now sometimes people
say well seems what you should do is if prices are going up you should use LIFO and if prices
go down you should switch over to FIFO. Well I like that you're thinking that because it
means you understand it but there's something called the consistency principle and that
requires a company to use the same method form one period to the next ok. Generally
accepted accounting principles and the powers that be they don't like you to try to fool
the readers they want financial statements form this year to be comparable to financial
statements of the previous year comparable to the financial statements even before that.
So they want you to pick a method and stick with it they want you to be consistent and
that's what the consistency principle states now does that mean you can never switch? No
it does not mean you can never switch, but if you switch a lot they might require you
to restate your financial statements from the previous year or previous years which
nobody likes to do. Ok so you can't just switch methods depending on the way prices are moving
ok. Alright any questions? Alright let's talk about what I want you all to do for homework
ok what I want you to of for homework let me check my notes real quick. I want you to
do a little reading I want you to read I want you to read pages well you know you should read the whole chapter oh thank you
very much can't see what I'm doing why don't you read page two thirty six to page I want
you to read about lower cost of market I want you to read about what happens if you understate
or overstate ending inventory and I want you to read about the inventory turnover ratio
so go ahead and read page two thirty six to page two forty two ok and then what I want
you to do for homework is I want you to try or not try I want you to do quick study six
point nine ok and then I want you to do quick study six point twelve and then I want you
to do exercise six ten alright. Ok so that's what I want for all you to do so were going to have one
more class period the one class period and then we're going to have the test so start
studying for that ok? Cool alright guys well see you later.