The 4 Inventory Cost Systems
1. Specific identification - used for non-interchangeable items.
2. FIFO - assumes that the i...
Effects of Inventory Costs
on Ratios
 Inventory turnover ratio will be higher under the LIFO
 Days of inventory on hand ...
LIFO Reserve, LIFO liquidation
LIFO Reserve – used to convert Financial statements prepared
under LIFO to FIFO
LIFO liquid...
Converting Financial Statements
from LIFO to FIFO
Formula(s) :

Study Session 5, Reading 17
Implications of Valuing Inventory
at Net Realizable Value
Inventory valuation methods - used to determine the carrying
amo...
Analysis and Comparison of
Financial Statements and Ratios
Between Companies
LIFO often results in a higher cost of goods...
Issues Concerning Inventory
Disclosures
IFRS and GAAP require companies to include disclosures about

the carrying value ...
Capitalizing vs Expensing Costs
Capitalization increases the profits of the company
Higher profits result in higher reta...
Depreciation Methods
depreciation - allocation of the cost of the asset over its useful life.
 Straight Line Method - all...
Impairment and Revaluation
on Assets
Impairment on Assets
If the carrying amount of the asset is less than the recoverabl...
Disclosure about Long Lived Assets
Expenses can be categorized:
 according to nature
 according to function
Formula: Dep...
Leasing vs Purchasing Assets
lease - contractual agreement between two parties to use an asset
Leases reduce the risk of ...
Finance and Operating Leases
Leases can be classified as either Finance Leases or Operating

Leases.
Have different fina...
Finance and Operating Leases
Leases can be classified as either Finance Leases or Operating

Leases.
Have different fina...
Upcoming SlideShare
Loading in …5
×

L2 flash cards financial reporting - SS 5

733 views

Published on

Published in: Economy & Finance, Business
0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total views
733
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
21
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

L2 flash cards financial reporting - SS 5

  1. 1. The 4 Inventory Cost Systems 1. Specific identification - used for non-interchangeable items. 2. FIFO - assumes that the items bought first are sold first. 3. LIFO - assumes that the items bought most recently are sold first 4. weighted average cost method - takes the average inventory cost and applies it to each sale. Study Session 5, Reading 17
  2. 2. Effects of Inventory Costs on Ratios  Inventory turnover ratio will be higher under the LIFO  Days of inventory on hand is lower under LIFO  The gross profit margin and net profit margin are lower under LIFO  Lower net income also results in lower return on assets  Lower inventory values result in a lower current ratio.  Total liabilities to equity ratio is higher under LIFO Study Session 5, Reading 17
  3. 3. LIFO Reserve, LIFO liquidation LIFO Reserve – used to convert Financial statements prepared under LIFO to FIFO LIFO liquidation - occurs when a company using the LIFO (Last In, First Out) method of inventory costing liquidates their older LIFO inventory Formula(s) used in LIFO Reserve: Study Session 5, Reading 17
  4. 4. Converting Financial Statements from LIFO to FIFO Formula(s) : Study Session 5, Reading 17
  5. 5. Implications of Valuing Inventory at Net Realizable Value Inventory valuation methods - used to determine the carrying amount on the balance sheet Formula: Net Realizable Value of inventory  If NRV is less than carrying value, the book value of inventory is written down and the loss is recognized in the income statement. Study Session 5, Reading 17
  6. 6. Analysis and Comparison of Financial Statements and Ratios Between Companies LIFO often results in a higher cost of goods sold reported compared to FIFO. Higher COGS result in lower gross profit and lower operating income for the companies using LIFO. Companies using LIFO have lower tax expense vs companies using FIFO. Study Session 5, Reading 17
  7. 7. Issues Concerning Inventory Disclosures IFRS and GAAP require companies to include disclosures about the carrying value of inventory in the financial statements. Industry news and the Management Discussion and Analysis section can also give information about inventory and future sales. Study Session 5, Reading 17
  8. 8. Capitalizing vs Expensing Costs Capitalization increases the profits of the company Higher profits result in higher retained earnings and increases owner’s equity Assets and owner’s equity will be higher when capitalizing Due to lower cash outflow from operations, capitalization results in higher operating cash flows. An asset is recorded on the balance sheet under capitalisation, but no asset is recorded on the balance sheet under expensing Study Session 5, Reading 17
  9. 9. Depreciation Methods depreciation - allocation of the cost of the asset over its useful life.  Straight Line Method - allocates the cost evenly over the life of the asset Formula:  Accelerated Depreciation - charge higher depreciation in the early years and lower in subsequent years Formula:  Units of Production Method - Based on the usage of the asset Formula: Study Session 5, Reading 17
  10. 10. Impairment and Revaluation on Assets Impairment on Assets If the carrying amount of the asset is less than the recoverable amount, an impairment loss can be recognized. Companies need to assess the assets for impairment at least once a year. Revaluation of Assets - used to report the assets at fair value revaluation surplus - the value of the asset is more than the carrying value, then the gain goes straight to the other comprehensive income Study Session 5, Reading 18
  11. 11. Disclosure about Long Lived Assets Expenses can be categorized:  according to nature  according to function Formula: Depreciable Life Study Session 5, Reading 18
  12. 12. Leasing vs Purchasing Assets lease - contractual agreement between two parties to use an asset Leases reduce the risk of obsolescence Leases result in a tax reporting advantage Lease sometimes have easier provisions than borrowing Under a finance lease, the lessee effectively buys the asset Under a finance lease, the asset is reported on the balance sheet Higher profits are achieved in early years through leasing rather than purchasing Study Session 5, Reading 18
  13. 13. Finance and Operating Leases Leases can be classified as either Finance Leases or Operating Leases. Have different financial statement implications for lessee and lessor in both types of lease. Operating lease allows the company to avoid a balance sheet liability. Finance lease appears as a liability on the balance sheet of the lessee. Study Session 5, Reading 18
  14. 14. Finance and Operating Leases Leases can be classified as either Finance Leases or Operating Leases. Have different financial statement implications for lessee and lessor in both types of lease. Operating lease allows the company to avoid a balance sheet liability. Finance lease appears as a liability on the balance sheet of the lessee. Study Session 5, Reading 18

×