This document provides an overview of chapter 6 on inventories from the textbook "Financial Accounting, IFRS Edition". It outlines 6 study objectives related to determining inventory quantities, accounting for inventories using different cost flow methods, the financial effects of cost flow assumptions, the lower-of-cost-or-net realizable value basis, effects of inventory errors, and analyzing inventories using turnover ratios. The document contains slides with explanations, examples, and review questions to explain key inventory accounting concepts.
This document discusses accounting for inventories. It covers classifying inventory into raw materials, work in process and finished goods for manufacturing companies. It also discusses valuing inventory under the periodic and perpetual inventory systems. The document explains the basic issues in inventory valuation including determining ownership, costs included, and cost flow assumptions like specific identification, FIFO and average cost. It provides examples of applying inventory cost flow methods.
This document outlines key concepts related to inventory accounting. It begins by describing the steps involved in determining inventory quantities, which include taking a physical inventory count, determining ownership of goods in transit, and accounting for consigned goods. It then explains different inventory cost flow methods including specific identification, FIFO, LIFO, and average cost. It discusses the financial statement and tax effects of each cost flow method. The document also covers the lower-of-cost-or-market principle and calculating and interpreting the inventory turnover ratio. It concludes by demonstrating how to apply cost flow methods to perpetual inventory records.
2023 Chapter one accounting for inventory.pdfHaftomYitbarek
This document discusses inventory valuation methods. It covers perpetual and periodic inventory systems, as well as classifications like raw materials, work in process, and finished goods. Cost flow methods like FIFO, average cost, and specific identification are explained. The document also discusses lower of cost or market, inventory errors, and presentation of inventory balances. Alternative methods for estimating inventory balances like the gross profit method and retail inventory method are presented through examples.
This document discusses key concepts related to inventory accounting, including determining inventory quantities through physical counts and assessing ownership, accounting for inventory using different cost flow methods like FIFO and LIFO, and understanding the financial statement and tax effects of different cost flow assumptions. The objectives are to explain steps to determine inventory quantities, apply cost flow methods, and analyze the impacts of assumptions on financial reporting and taxes.
1) The document provides an overview of accounting for inventories including classifying inventory, determining inventory quantities, inventory cost flow methods, the lower-of-cost-or-market principle, effects of inventory errors, and computing inventory turnover.
2) Key learning objectives are determining how to classify inventory, explaining the accounting for inventories using cost flow methods, explaining the financial effects of cost flow assumptions, and computing and interpreting inventory turnover.
3) The document contains illustrations and examples to explain inventory costing concepts.
The document discusses inventory cost flow methods and their financial statement effects. It provides an example of computing cost of goods sold and ending inventory under FIFO, LIFO, and average cost assuming a perpetual inventory system. Specifically, it gives inventory quantities and costs for each period and walks through the calculations for each method. Understanding how to apply different cost flow methods is important for determining inventory values and costs and their impact on financial statements.
This chapter discusses accounting for inventories. It covers determining inventory quantities through physical counts and ownership considerations. Cost flow methods like FIFO, LIFO, and average costing are explained along with their financial statement effects. The chapter also discusses inventory errors and their impact on income statement and balance sheet. Lower-of-cost-or-market principle for inventory valuation is explained as well as analyzing inventory through turnover ratios.
This document discusses accounting for inventories. It covers classifying inventory, determining inventory quantities through physical counts and ownership rules, inventory costing methods including specific identification, FIFO, LIFO, and average cost, and the financial statement effects of using different cost flow assumptions. The key points are determining inventory ownership, applying cost flow assumptions like FIFO and LIFO to value ending inventory balances, and how the choice of assumptions like LIFO can impact reported income during inflationary periods by reducing taxable income.
This document discusses accounting for inventories. It covers classifying inventory into raw materials, work in process and finished goods for manufacturing companies. It also discusses valuing inventory under the periodic and perpetual inventory systems. The document explains the basic issues in inventory valuation including determining ownership, costs included, and cost flow assumptions like specific identification, FIFO and average cost. It provides examples of applying inventory cost flow methods.
This document outlines key concepts related to inventory accounting. It begins by describing the steps involved in determining inventory quantities, which include taking a physical inventory count, determining ownership of goods in transit, and accounting for consigned goods. It then explains different inventory cost flow methods including specific identification, FIFO, LIFO, and average cost. It discusses the financial statement and tax effects of each cost flow method. The document also covers the lower-of-cost-or-market principle and calculating and interpreting the inventory turnover ratio. It concludes by demonstrating how to apply cost flow methods to perpetual inventory records.
2023 Chapter one accounting for inventory.pdfHaftomYitbarek
This document discusses inventory valuation methods. It covers perpetual and periodic inventory systems, as well as classifications like raw materials, work in process, and finished goods. Cost flow methods like FIFO, average cost, and specific identification are explained. The document also discusses lower of cost or market, inventory errors, and presentation of inventory balances. Alternative methods for estimating inventory balances like the gross profit method and retail inventory method are presented through examples.
This document discusses key concepts related to inventory accounting, including determining inventory quantities through physical counts and assessing ownership, accounting for inventory using different cost flow methods like FIFO and LIFO, and understanding the financial statement and tax effects of different cost flow assumptions. The objectives are to explain steps to determine inventory quantities, apply cost flow methods, and analyze the impacts of assumptions on financial reporting and taxes.
1) The document provides an overview of accounting for inventories including classifying inventory, determining inventory quantities, inventory cost flow methods, the lower-of-cost-or-market principle, effects of inventory errors, and computing inventory turnover.
2) Key learning objectives are determining how to classify inventory, explaining the accounting for inventories using cost flow methods, explaining the financial effects of cost flow assumptions, and computing and interpreting inventory turnover.
3) The document contains illustrations and examples to explain inventory costing concepts.
The document discusses inventory cost flow methods and their financial statement effects. It provides an example of computing cost of goods sold and ending inventory under FIFO, LIFO, and average cost assuming a perpetual inventory system. Specifically, it gives inventory quantities and costs for each period and walks through the calculations for each method. Understanding how to apply different cost flow methods is important for determining inventory values and costs and their impact on financial statements.
This chapter discusses accounting for inventories. It covers determining inventory quantities through physical counts and ownership considerations. Cost flow methods like FIFO, LIFO, and average costing are explained along with their financial statement effects. The chapter also discusses inventory errors and their impact on income statement and balance sheet. Lower-of-cost-or-market principle for inventory valuation is explained as well as analyzing inventory through turnover ratios.
This document discusses accounting for inventories. It covers classifying inventory, determining inventory quantities through physical counts and ownership rules, inventory costing methods including specific identification, FIFO, LIFO, and average cost, and the financial statement effects of using different cost flow assumptions. The key points are determining inventory ownership, applying cost flow assumptions like FIFO and LIFO to value ending inventory balances, and how the choice of assumptions like LIFO can impact reported income during inflationary periods by reducing taxable income.
This document provides an overview of Chapter 6 from the textbook Financial Accounting IFRS 3rd Edition. The chapter covers several key topics related to inventories:
1. It outlines six learning objectives for the chapter, which include how to classify inventory, apply inventory cost flow methods, understand the effects of cost flow assumptions, apply the lower-of-cost-or-net realizable value principle, address inventory errors, and present and analyze inventory.
2. It provides examples and illustrations of inventory costing methods like specific identification, FIFO, average cost, and LIFO. It also discusses how inventory errors impact financial statements.
3. Appendices at the end cover additional topics like applying cost flow
1) The document discusses inventory classification, costing methods, and financial statement presentation and analysis. It provides examples of how to classify inventory, determine ownership of goods in transit, and apply the FIFO, LIFO, and average cost inventory costing methods.
2) The effects of inventory errors on the income statement and balance sheet are explained. Errors in ending inventory affect cost of goods sold and net income in the current and future periods but net income is correct over the long run.
3) Inventory is presented as a current asset on the balance sheet. The income statement shows cost of goods sold which is determined using one of the inventory costing methods. Key inventory disclosures include classifications, costing basis,
This document discusses inventory classification and costing methods. It begins by explaining how companies classify inventory into raw materials, work in process, and finished goods. The document then discusses how companies determine inventory quantities by taking physical counts and considering goods in transit. It also explains different inventory cost flow methods like FIFO, LIFO, and average costing and their effects on financial statements. Finally, it discusses how inventory errors can affect income statements and balance sheets in both the current and subsequent periods.
6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docxtroutmanboris
6-‹#›
Reporting and Analyzing Inventory
Kimmel ● Weygandt ● Kieso
Financial Accounting, Eighth Edition
6
6-‹#›
CHAPTER OUTLINE
Discuss how to classify and determine
inventory.
1
Apply inventory cost flow methods and discuss their financial effects.
2
LEARNING OBJECTIVES
Explain the statement presentation and analysis of inventory.
3
6-‹#›
One Classification:
Merchandise Inventory
Three Classifications:
Raw Materials
Work in Process
Finished Goods
Merchandising Company
Manufacturing Company
▼ HELPFUL HINT Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.
LEARNING OBJECTIVE
Discuss how to classify and determine inventory.
1
LO 1
6-‹#›
ACCOUNTING ACROSS THE ORGANIZATION
A Big Hiccup
JIT can save a company a lot of money, but it isn’t without risk. An unexpected disruption in the supply chain can cost a company a lot of money. Japanese automakers experienced just such a disruption when a 6.8-magnitude earthquake caused major damage to the company that produces 50% of their piston rings. The rings themselves cost only $1.50, but you cannot make a car without them. As a result, the automakers were forced to shut down production for a few days—a loss of tens of thousands of cars. Similarly, a major snowstorm halted production at the Canadian plants of Ford. A Ford spokesperson said, “Because the plants run with just-in-time inventory, we don’t have large stockpiles of parts sitting around. When you have a somewhat significant disruption, you can pretty quickly run out of parts.”
Sources: Amy Chozick, “A Key Strategy of Japan’s Car Makers Backfires,” Wall Street Journal (July 20, 2007); and Kate Linebaugh, “Canada Military Evacuates Motorists Stranded by Snow,” Wall Street Journal (December 15, 2010).
LO 1
6-‹#›
Physical Inventory taken for two reasons:
Perpetual System
Check accuracy of inventory records.
Determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft.
Periodic System
Determine the inventory on hand.
Determine the cost of goods sold for the period.
DETERMINING INVENTORY QUANTITIES
LO 1
6-‹#›
Involves counting, weighing, or measuring each kind of inventory on hand.
Taken,
when the business is closed or business is slow.
at the end of the accounting period.
Taking a Physical Inventory
LO 1
6-‹#›
ETHICS INSIGHT
Falsifying Inventory to Boost Income
Managers at women’s apparel maker Leslie Fay were convicted of falsifying inventory records to boost net income in an attempt to increase management bonuses. In another case, executives at Craig Consumer Electronics were accused of defrauding lenders by manipulating inventory records. The indictment said the company classified “defective goods as new or refurbished” and claimed that it owned certain shipments “from overseas suppliers” when, in fact, Craig either did not own the shipments or the shipments did not exist.
Leslie Fay
LO 1
6-‹#›
GOODS IN TRANSIT
Purch.
This document discusses accounting for merchandising operations under a perpetual inventory system. It provides examples of recording purchases, sales, returns and allowances, discounts, and the flow of costs. Purchases are recorded by debiting merchandise inventory and crediting accounts payable. Sales are recorded by debiting cost of goods sold and crediting merchandise inventory, and by crediting sales revenue and debiting accounts receivable. Returns are handled through contra accounts like sales returns and allowances that are debited. Discounts are also treated as contra revenue accounts. The document explains the key steps in the accounting cycle for a merchandising business.
This document provides an overview of inventory valuation methods. It begins with learning objectives related to identifying inventory classifications, distinguishing perpetual and periodic inventory systems, and understanding the treatment of inventory costs. The document then discusses the major classifications of inventory, physical goods included in inventory, and costs that make up inventory value. It also explains specific identification, average costing, FIFO, and LIFO inventory cost flow assumptions. The document concludes by comparing inventory valuation methods and explaining why companies select different methods.
This chapter discusses inventory valuation and classification. It covers the following key points:
1. There are two main types of businesses - merchandising and manufacturing companies. Merchandising companies have one inventory account while manufacturing companies have multiple inventory accounts for raw materials, work in process, and finished goods.
2. There are two main inventory systems - perpetual and periodic. The perpetual system continuously updates inventory balances while the periodic system relies on a physical count at the end of the period.
3. Inventory includes goods owned by the company as well as some goods on consignment or sold with a right of return. Inventory errors can misstate financial statements in the current or subsequent periods depending on the type of
The document discusses inventory accounting. It defines inventory as raw materials, work-in-process, and finished goods that are part of a business's assets ready for sale. It outlines the steps to determine inventory quantities, which include taking a physical count and determining ownership. It also explains different inventory costing methods like specific identification, FIFO, LIFO, and average cost, and how they assign unit costs to inventory quantities.
1) The document discusses accounting for inventories, including classifying inventory, determining inventory quantities, inventory costing methods, and ownership of goods.
2) It describes steps to determine inventory quantities such as taking a physical count and outlines cost flow assumptions methods like FIFO and average cost.
3) Examples are provided to illustrate inventory costing methods and determining ownership of goods in transit.
This document discusses inventory valuation methods and cost flow assumptions. It provides an example of a company, Young & Crazy Company, that makes three inventory purchases throughout a month. Using this example, it illustrates the calculation of ending inventory and cost of goods sold under the FIFO, LIFO, average cost, and specific identification cost flow assumptions. For each method, it shows the impact on the company's income statement. Comparing the results demonstrates how the different cost flow assumptions can lead to different reports of financial performance.
Valuation of Inventories: A Cost-Basis Approachreskino1
Describe inventory classifications and different inventory systems.
Identify the goods and costs included in inventory.
Compare the cost flow assumptions used to account for inventories.
Determine the effects of inventory errors on the financial statements.
This chapter discusses approaches to valuing inventories using a cost basis. It identifies major classifications of inventory for merchandisers and manufacturers. Companies use either a perpetual or periodic inventory system to maintain inventory records. The chapter also examines the effects of inventory errors, what costs should be included in inventory, and methods for pricing inventories such as specific identification, average cost, and FIFO. Worked examples illustrate the application of these concepts.
The document discusses inventory valuation methods, including:
1) Perpetual and periodic inventory systems, with the perpetual system providing continuous inventory records and the periodic system using physical counts.
2) Cost flow assumptions like FIFO, average cost, and specific identification, which can impact ending inventory balances and cost of goods sold.
3) Effects of inventory errors, which may misstate the financial statements in a given year but offset in later years.
4) Items included in inventory costs, such as product costs directly connected to goods, and treatment of purchase discounts.
This document provides an overview and learning objectives for a chapter on additional inventory valuation issues. The chapter will cover the lower-of-cost-or-net realizable value rule, situations where net realizable value is used, and accounting for agricultural assets and commodities held by broker-traders. Students will learn how to apply these valuation methods and account for inventory write-downs, recoveries, and special situations. The chapter also addresses determining ending inventory using the gross profit and retail inventory methods, and reporting and analyzing inventory balances.
This document summarizes five major topics related to inventories:
1) Lower of cost or market, which values inventories at the lower of historical cost or net realizable value.
2) Gross profit method, which estimates ending inventory for interim reporting.
3) Retail inventory method, which converts ending retail inventory to ending cost inventory for retailers.
4) Dollar value LIFO retail method, which applies the LIFO method to retail inventories.
5) Changes in inventory methods, which discusses how to account for changes between methods and errors in beginning or ending inventory balances.
This document summarizes five major topics related to inventories:
1) Lower of cost or market, which values inventories at the lower of historical cost or net realizable value.
2) Gross profit method, which estimates ending inventory for interim reporting.
3) Retail inventory method, which converts ending retail inventory to ending cost inventory for retailers.
4) Dollar value LIFO retail method, which applies the LIFO method to retail inventories.
5) Changes in inventory methods, which discusses how to account for changes and errors in inventory methods.
This document provides an overview and learning objectives for a chapter on accounting for merchandising operations. It discusses key differences between service and merchandising companies, including that merchandising companies buy and sell goods while service companies do not include cost of goods sold in their financial statements. It also covers recording purchases and sales under a perpetual inventory system, including entries for purchases, freight costs, returns, discounts, and sales.
The document provides an overview of adjusting entries and the adjusted trial balance process. It begins by explaining key concepts like the time period assumption and accrual basis of accounting. It then discusses the reasons for adjusting entries, which are to ensure revenues are recorded in the earned period and expenses are recorded in the incurred period. The major types of adjusting entries are identified as prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. The document provides examples of adjusting entries for deferrals, which include prepaid expenses and unearned revenues. It shows entries to adjust accounts like advertising supplies, prepaid insurance, and accumulated depreciation. The overall purpose is to explain the adjusting entry process that is needed to prepare accurate
1) The document provides an overview of accounting for inventory under a periodic inventory system according to IFRS and compares it to U.S. GAAP.
2) Key differences between IFRS and GAAP include IFRS allowing classification of expenses by nature or function, permitting revaluation of certain assets, and requiring two years of income statements rather than three.
3) The IASB and FASB are working on changes to financial statement presentation that would classify items similarly to the statement of cash flows and provide more detail on functional and natural line items.
Corporations generally invest in debt or share securities for three main reasons: (1) to manage excess cash, (2) generate investment income, and (3) for strategic reasons. The accounting for investments depends on the type and ownership level. For debt investments and share investments where ownership is less than 20%, companies record investments at cost and recognize gains/losses upon sale. For share investments where ownership is 20-50%, companies use the equity method to adjust the investment balance for the investor's share of earnings and dividends. For share investments over 50% ownership, consolidated financial statements are prepared to combine the parent and subsidiary.
This document provides an overview of Chapter 6 from the textbook Financial Accounting IFRS 3rd Edition. The chapter covers several key topics related to inventories:
1. It outlines six learning objectives for the chapter, which include how to classify inventory, apply inventory cost flow methods, understand the effects of cost flow assumptions, apply the lower-of-cost-or-net realizable value principle, address inventory errors, and present and analyze inventory.
2. It provides examples and illustrations of inventory costing methods like specific identification, FIFO, average cost, and LIFO. It also discusses how inventory errors impact financial statements.
3. Appendices at the end cover additional topics like applying cost flow
1) The document discusses inventory classification, costing methods, and financial statement presentation and analysis. It provides examples of how to classify inventory, determine ownership of goods in transit, and apply the FIFO, LIFO, and average cost inventory costing methods.
2) The effects of inventory errors on the income statement and balance sheet are explained. Errors in ending inventory affect cost of goods sold and net income in the current and future periods but net income is correct over the long run.
3) Inventory is presented as a current asset on the balance sheet. The income statement shows cost of goods sold which is determined using one of the inventory costing methods. Key inventory disclosures include classifications, costing basis,
This document discusses inventory classification and costing methods. It begins by explaining how companies classify inventory into raw materials, work in process, and finished goods. The document then discusses how companies determine inventory quantities by taking physical counts and considering goods in transit. It also explains different inventory cost flow methods like FIFO, LIFO, and average costing and their effects on financial statements. Finally, it discusses how inventory errors can affect income statements and balance sheets in both the current and subsequent periods.
6-‹#›Reporting and Analyzing InventoryKimmel ● Wey.docxtroutmanboris
6-‹#›
Reporting and Analyzing Inventory
Kimmel ● Weygandt ● Kieso
Financial Accounting, Eighth Edition
6
6-‹#›
CHAPTER OUTLINE
Discuss how to classify and determine
inventory.
1
Apply inventory cost flow methods and discuss their financial effects.
2
LEARNING OBJECTIVES
Explain the statement presentation and analysis of inventory.
3
6-‹#›
One Classification:
Merchandise Inventory
Three Classifications:
Raw Materials
Work in Process
Finished Goods
Merchandising Company
Manufacturing Company
▼ HELPFUL HINT Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.
LEARNING OBJECTIVE
Discuss how to classify and determine inventory.
1
LO 1
6-‹#›
ACCOUNTING ACROSS THE ORGANIZATION
A Big Hiccup
JIT can save a company a lot of money, but it isn’t without risk. An unexpected disruption in the supply chain can cost a company a lot of money. Japanese automakers experienced just such a disruption when a 6.8-magnitude earthquake caused major damage to the company that produces 50% of their piston rings. The rings themselves cost only $1.50, but you cannot make a car without them. As a result, the automakers were forced to shut down production for a few days—a loss of tens of thousands of cars. Similarly, a major snowstorm halted production at the Canadian plants of Ford. A Ford spokesperson said, “Because the plants run with just-in-time inventory, we don’t have large stockpiles of parts sitting around. When you have a somewhat significant disruption, you can pretty quickly run out of parts.”
Sources: Amy Chozick, “A Key Strategy of Japan’s Car Makers Backfires,” Wall Street Journal (July 20, 2007); and Kate Linebaugh, “Canada Military Evacuates Motorists Stranded by Snow,” Wall Street Journal (December 15, 2010).
LO 1
6-‹#›
Physical Inventory taken for two reasons:
Perpetual System
Check accuracy of inventory records.
Determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft.
Periodic System
Determine the inventory on hand.
Determine the cost of goods sold for the period.
DETERMINING INVENTORY QUANTITIES
LO 1
6-‹#›
Involves counting, weighing, or measuring each kind of inventory on hand.
Taken,
when the business is closed or business is slow.
at the end of the accounting period.
Taking a Physical Inventory
LO 1
6-‹#›
ETHICS INSIGHT
Falsifying Inventory to Boost Income
Managers at women’s apparel maker Leslie Fay were convicted of falsifying inventory records to boost net income in an attempt to increase management bonuses. In another case, executives at Craig Consumer Electronics were accused of defrauding lenders by manipulating inventory records. The indictment said the company classified “defective goods as new or refurbished” and claimed that it owned certain shipments “from overseas suppliers” when, in fact, Craig either did not own the shipments or the shipments did not exist.
Leslie Fay
LO 1
6-‹#›
GOODS IN TRANSIT
Purch.
This document discusses accounting for merchandising operations under a perpetual inventory system. It provides examples of recording purchases, sales, returns and allowances, discounts, and the flow of costs. Purchases are recorded by debiting merchandise inventory and crediting accounts payable. Sales are recorded by debiting cost of goods sold and crediting merchandise inventory, and by crediting sales revenue and debiting accounts receivable. Returns are handled through contra accounts like sales returns and allowances that are debited. Discounts are also treated as contra revenue accounts. The document explains the key steps in the accounting cycle for a merchandising business.
This document provides an overview of inventory valuation methods. It begins with learning objectives related to identifying inventory classifications, distinguishing perpetual and periodic inventory systems, and understanding the treatment of inventory costs. The document then discusses the major classifications of inventory, physical goods included in inventory, and costs that make up inventory value. It also explains specific identification, average costing, FIFO, and LIFO inventory cost flow assumptions. The document concludes by comparing inventory valuation methods and explaining why companies select different methods.
This chapter discusses inventory valuation and classification. It covers the following key points:
1. There are two main types of businesses - merchandising and manufacturing companies. Merchandising companies have one inventory account while manufacturing companies have multiple inventory accounts for raw materials, work in process, and finished goods.
2. There are two main inventory systems - perpetual and periodic. The perpetual system continuously updates inventory balances while the periodic system relies on a physical count at the end of the period.
3. Inventory includes goods owned by the company as well as some goods on consignment or sold with a right of return. Inventory errors can misstate financial statements in the current or subsequent periods depending on the type of
The document discusses inventory accounting. It defines inventory as raw materials, work-in-process, and finished goods that are part of a business's assets ready for sale. It outlines the steps to determine inventory quantities, which include taking a physical count and determining ownership. It also explains different inventory costing methods like specific identification, FIFO, LIFO, and average cost, and how they assign unit costs to inventory quantities.
1) The document discusses accounting for inventories, including classifying inventory, determining inventory quantities, inventory costing methods, and ownership of goods.
2) It describes steps to determine inventory quantities such as taking a physical count and outlines cost flow assumptions methods like FIFO and average cost.
3) Examples are provided to illustrate inventory costing methods and determining ownership of goods in transit.
This document discusses inventory valuation methods and cost flow assumptions. It provides an example of a company, Young & Crazy Company, that makes three inventory purchases throughout a month. Using this example, it illustrates the calculation of ending inventory and cost of goods sold under the FIFO, LIFO, average cost, and specific identification cost flow assumptions. For each method, it shows the impact on the company's income statement. Comparing the results demonstrates how the different cost flow assumptions can lead to different reports of financial performance.
Valuation of Inventories: A Cost-Basis Approachreskino1
Describe inventory classifications and different inventory systems.
Identify the goods and costs included in inventory.
Compare the cost flow assumptions used to account for inventories.
Determine the effects of inventory errors on the financial statements.
This chapter discusses approaches to valuing inventories using a cost basis. It identifies major classifications of inventory for merchandisers and manufacturers. Companies use either a perpetual or periodic inventory system to maintain inventory records. The chapter also examines the effects of inventory errors, what costs should be included in inventory, and methods for pricing inventories such as specific identification, average cost, and FIFO. Worked examples illustrate the application of these concepts.
The document discusses inventory valuation methods, including:
1) Perpetual and periodic inventory systems, with the perpetual system providing continuous inventory records and the periodic system using physical counts.
2) Cost flow assumptions like FIFO, average cost, and specific identification, which can impact ending inventory balances and cost of goods sold.
3) Effects of inventory errors, which may misstate the financial statements in a given year but offset in later years.
4) Items included in inventory costs, such as product costs directly connected to goods, and treatment of purchase discounts.
This document provides an overview and learning objectives for a chapter on additional inventory valuation issues. The chapter will cover the lower-of-cost-or-net realizable value rule, situations where net realizable value is used, and accounting for agricultural assets and commodities held by broker-traders. Students will learn how to apply these valuation methods and account for inventory write-downs, recoveries, and special situations. The chapter also addresses determining ending inventory using the gross profit and retail inventory methods, and reporting and analyzing inventory balances.
This document summarizes five major topics related to inventories:
1) Lower of cost or market, which values inventories at the lower of historical cost or net realizable value.
2) Gross profit method, which estimates ending inventory for interim reporting.
3) Retail inventory method, which converts ending retail inventory to ending cost inventory for retailers.
4) Dollar value LIFO retail method, which applies the LIFO method to retail inventories.
5) Changes in inventory methods, which discusses how to account for changes between methods and errors in beginning or ending inventory balances.
This document summarizes five major topics related to inventories:
1) Lower of cost or market, which values inventories at the lower of historical cost or net realizable value.
2) Gross profit method, which estimates ending inventory for interim reporting.
3) Retail inventory method, which converts ending retail inventory to ending cost inventory for retailers.
4) Dollar value LIFO retail method, which applies the LIFO method to retail inventories.
5) Changes in inventory methods, which discusses how to account for changes and errors in inventory methods.
This document provides an overview and learning objectives for a chapter on accounting for merchandising operations. It discusses key differences between service and merchandising companies, including that merchandising companies buy and sell goods while service companies do not include cost of goods sold in their financial statements. It also covers recording purchases and sales under a perpetual inventory system, including entries for purchases, freight costs, returns, discounts, and sales.
The document provides an overview of adjusting entries and the adjusted trial balance process. It begins by explaining key concepts like the time period assumption and accrual basis of accounting. It then discusses the reasons for adjusting entries, which are to ensure revenues are recorded in the earned period and expenses are recorded in the incurred period. The major types of adjusting entries are identified as prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. The document provides examples of adjusting entries for deferrals, which include prepaid expenses and unearned revenues. It shows entries to adjust accounts like advertising supplies, prepaid insurance, and accumulated depreciation. The overall purpose is to explain the adjusting entry process that is needed to prepare accurate
1) The document provides an overview of accounting for inventory under a periodic inventory system according to IFRS and compares it to U.S. GAAP.
2) Key differences between IFRS and GAAP include IFRS allowing classification of expenses by nature or function, permitting revaluation of certain assets, and requiring two years of income statements rather than three.
3) The IASB and FASB are working on changes to financial statement presentation that would classify items similarly to the statement of cash flows and provide more detail on functional and natural line items.
Similar to Financial_Accounting_chapter_06.ppt (20)
Corporations generally invest in debt or share securities for three main reasons: (1) to manage excess cash, (2) generate investment income, and (3) for strategic reasons. The accounting for investments depends on the type and ownership level. For debt investments and share investments where ownership is less than 20%, companies record investments at cost and recognize gains/losses upon sale. For share investments where ownership is 20-50%, companies use the equity method to adjust the investment balance for the investor's share of earnings and dividends. For share investments over 50% ownership, consolidated financial statements are prepared to combine the parent and subsidiary.
This document is an introduction to human resource management (HRM) that covers key topics in several chapters. It defines HRM as the process of acquiring, training, appraising, and compensating employees while also attending to labor relations, health and safety, and fairness concerns. The role of HRM and skills needed for HRM professionals are discussed. Common challenges in HRM like containing costs and adapting to technological innovation are also reviewed. The document uses presentations and activities to engage the reader on these HRM concepts.
- Data flow diagrams (DFDs) graphically describe the flow of data within an organization using four basic elements: data sources and destinations, data flows, transformation processes, and data stores. DFDs are subdivided into lower levels to provide more detail. The highest-level DFD is called the context diagram.
- Flowcharts are used to describe business processes and document flows using standard symbols divided into four categories: input/output, processing, storage, and miscellaneous. Types of flowcharts include program, system, document, and internal control flowcharts.
- Business process diagrams visually describe the steps in a business process.
This document summarizes chapters from an accounting textbook. Chapter 1 discusses accounting for merchandising operations, including the recording of purchases and sales under a perpetual inventory system and the steps in the accounting cycle. Chapter 2 covers determining inventory quantities, cost flow assumptions, the lower-of-cost-or-market valuation method, and the inventory turnover ratio. Chapter 3 addresses cash controls, including controls over cash receipts, disbursements, bank reconciliations, and the presentation of cash on the balance sheet.
This document discusses the accounting treatment for savings accounts. It begins by defining savings accounts as accounts meant for non-trading customers to save money with limited transactions. The key steps in accounting for savings accounts are: 1) Open a savings account by depositing funds from cash or a checking account, 2) Withdraw funds from the savings account to cash or a checking account, and 3) Compute and record monthly interest earned on the minimum balance in the account. Interest is calculated using the minimum monthly balance and is recorded initially as an accrued interest account before being added to the savings account periodically. An example is provided to demonstrate computing minimum balances and recording deposits, withdrawals, and monthly interest for three months.
This chapter discusses the conceptual framework that underlies financial accounting. The conceptual framework is a coherent system of objectives and concepts that prescribe the nature, function and limits of financial reporting. It aims to increase users' understanding and confidence in financial reporting and enhance comparability. The FASB has issued several statements that relate to the conceptual framework and cover objectives of financial reporting, qualitative characteristics of accounting information, elements of financial statements, and recognition and measurement concepts. The conceptual framework also describes basic assumptions like economic entity, going concern, monetary unit and periodicity. It explains principles like historical cost, revenue recognition, matching and full disclosure. Constraints like cost-benefit relationship and materiality must also be considered in financial reporting.
The document describes three types of business activities:
1) Service businesses that provide services to customers and have no goods inventory, with a shorter operating cycle.
2) Merchandising businesses that buy and sell goods, having only finished goods inventory and a longer operating cycle.
3) Industrial businesses that transform raw materials into finished goods, having raw materials, work-in-process, and finished goods inventory, with restaurants and bakeries as examples. The type of activity relies primarily on the business's main source of revenue.
This chapter discusses the fundamentals of accounting including its nature, functions, users, principles, and key concepts. Accounting identifies, records, and communicates the financial events of a business. It provides information to internal users like managers and external users like investors and creditors. Companies follow generally accepted accounting principles to prepare four main financial statements - the income statement, balance sheet, statement of owner's equity, and statement of cash flows. The accounting equation forms the basis of recording transactions and showing a company's assets, liabilities, and owner's equity.
Accounting is the system that records and reports financial information about a business. It identifies, records, and communicates economic events to users. The chapter outlines key accounting concepts like the accounting equation, direct and indirect costs, fixed and variable costs, and the difference between inventoriable and period costs. It explains the four main financial statements - income statement, balance sheet, statement of owner's equity, and statement of cash flows - and how they are used to report on a business's financial performance and position.
This document provides information about accounting principles related to inventory, receivables, and property, plant, and equipment for Almarai, a Saudi dairy company. It discusses the perpetual and periodic inventory systems, methods for calculating cost of goods sold and inventory turnover. It also addresses calculating account receivable turnover and defines property, plant and equipment. Almarai uses an average cost method for inventory and the declining balance method for depreciating fixed assets.
This document provides an overview and analysis of balance sheet and cash flow statements for Suez Cement Company. It defines a balance sheet as a financial statement showing a company's assets, liabilities, and equity at a given date. Balance sheets are useful for computing return rates, evaluating capital structure, and assessing risk and future cash flows, though they have limitations like reporting historical costs and using estimates. The document also defines a cash flow statement as recording cash inflows and outflows during a period, including operating, investing, and financing activities. Operating activities reflect cash from providing products/services, while investing activities reflect long-term asset acquisitions and disposals. Financing activities reflect cash from investors, issuing/buying back shares
This document provides information about accounting principles related to inventory, receivables, and property, plant, and equipment for Almarai, a Saudi dairy company. It discusses the perpetual and periodic inventory systems, methods for calculating cost of inventory including average cost, inventory turnover metrics for 2023, types and calculation of accounts receivable turnover, and defines property, plant and equipment along with depreciation methods used by Almarai.
This document summarizes key concepts from Principles of Accounting 2. It discusses Walmart's operations, perpetual inventory systems, cost of goods sold calculations using FIFO and LIFO. It also summarizes chapters on inventories, receivables, property and equipment. Specifics include Walmart's multiple income statements, inventory turnover ratios, accounts receivable aging and allowance for doubtful accounts. Finally, it provides the team members who prepared the document.
This document provides an overview of a project on accounting principles for Deraya University. It discusses chapters on accounting information and the recording process, adjusting accounts, and completing the accounting cycle. It also describes the accounting system of Ottimo Restaurant, including key financial statements, reports, users, and accounts in its general ledger.
This document provides an overview and analysis of key financial statements for Suez Cement Company, including the income statement, balance sheet, and cash flow statement. The income statement measures a company's performance over a period of time and can be used to evaluate past performance and predict future performance. The balance sheet shows a company's assets, liabilities, and equity at a point in time and can be used to compute rates of return, evaluate capital structure, and assess risk. The cash flow statement records cash inflows and outflows during a period across operating, investing, and financing activities.
This document provides summaries of key financial statements including the cash flow statement and statement of financial position. It discusses that the cash flow statement shows cash inflows and outflows from operating, investing, and financing activities over a period of time. It also explains that the statement of financial position presents the assets, liabilities, and equity of a company at a point in time. The purpose and usefulness of the statement of financial position is described along with some limitations.
Apple is an American technology company headquartered in California. It is the world's largest technology company by revenue, with over $200 billion in annual sales. Apple uses a perpetual inventory system to continuously update inventory records with each sale and purchase. It applies the first-in, first-out (FIFO) cost flow assumption. In 2020, Apple's net sales were $209.8 billion with gross profit of $80.3 billion. Net income was $44.7 billion and earnings per share increased to $10.25. Inventory turnover was 10.3 times with average days in inventory of 35 days. Property, plant and equipment totaled $103.5 billion in 2020, with accumulated depreciation of
This document discusses an accounting project for Nike company. It provides details on Nike's background, products, use of the perpetual inventory system and weighted average cost method. It also discusses plant assets and calculating ratios like inventory turnover and asset turnover for Nike. Plant assets are depreciated on a straight-line basis over 2-40 years for different asset types at Nike.
- Apple is an American technology company headquartered in California that sells consumer electronics like iPhones, iPads, AirPods, and Macs.
- Apple uses a perpetual inventory system to continuously update inventory records for costs of goods purchased and sold. They apply the FIFO cost flow assumption.
- In 2020, Apple had net sales of $209.8 billion, gross profit of $80.3 billion, operating income of $51.5 billion, and net income of $44.7 billion.
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3. Slide
6-3
1. Describe the steps in determining inventory quantities.
2. Explain the accounting for inventories and apply the
inventory cost flow methods.
3. Explain the financial effects of the inventory cost flow
assumptions.
4. Explain the lower-of-cost-or-net realizable value basis of
accounting for inventories.
5. Indicate the effects of inventory errors on the financial
statements.
6. Compute and interpret the inventory turnover ratio.
Study Objectives
4. Slide
6-4
Statement
Presentation
and Analysis
Inventories
Taking a
physical
inventory
Determining
ownership of
goods
Classifying
Inventory
Determining
Inventory
Quantities
Inventory
Costing
Inventory
Errors
Finished
goods
Work in
process
Raw materials
Specific
identification
Cost flow
assumptions
Financial
statement and
tax effects
Consistent use
Lower-of-cost-
or-net
realizable value
Income
statement
effects
Statement of
financial
position
effects
Presentation
Analysis using
inventory
turnover
5. Slide
6-5
Classifying Inventory
One Classification:
Merchandise Inventory
Three Classifications:
Raw Materials
Work in Process
Finished Goods
Merchandising
Company
Manufacturing
Company
Regardless of the classification, companies report all inventories
under Current Assets on the statement of financial position.
7. Slide
6-7
Physical Inventory taken for two reasons:
Perpetual System
1. Check accuracy of inventory records.
2. Determine amount of inventory lost (wasted raw
materials, shoplifting, or employee theft).
Periodic System
1. Determine the inventory on hand
2. Determine the cost of goods sold for the period.
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.
8. Slide
6-8
Involves counting, weighing, or measuring each kind of
inventory on hand.
Taken,
when the business is closed or when business is
slow.
at end of the accounting period.
Taking a Physical Inventory
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.
9. Slide
6-9
Goods in Transit
Purchased goods not yet received.
Sold goods not yet delivered.
Determining Ownership of Goods
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.
Goods in transit should be included in the inventory of the
company that has legal title to the goods. Legal title is
determined by the terms of sale.
10. Slide
6-10
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.
Illustration 6-1
Ownership of the goods
passes to the buyer when
the public carrier accepts
the goods from the seller.
Ownership of the goods
remains with the seller until
the goods reach the buyer.
Goods in Transit
11. Slide
6-11
Goods in transit should be included in the inventory of
the buyer when the:
a. public carrier accepts the goods from the seller.
b. goods reach the buyer.
c. terms of sale are FOB destination.
d. terms of sale are FOB shipping point.
Review Question
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.
12. Slide
6-12
Consigned Goods
In some lines of business, it is common to hold the
goods of other parties and try to sell the goods for
them for a fee, but without taking ownership of
goods.
These are called consigned goods.
Determining Ownership of Goods
Determining Inventory Quantities
SO 1 Describe the steps in determining inventory quantities.
13. Slide
6-13
Unit costs can be applied to quantities on hand
using the following costing methods:
Specific Identification
First-in, first-out (FIFO)
Average-cost
Inventory Costing
Cost Flow
Assumptions
SO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
14. Slide
6-14
An actual physical flow costing method in which items
still in inventory are specifically costed to arrive at the
total cost of the ending inventory.
Practice is relatively rare.
Most companies make assumptions (Cost Flow
Assumptions) about which units were sold.
Specific Identification Method
Inventory Costing
SO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
15. Slide
6-15
Illustration: Assume that Crivitz TV Company purchases
three identical 46-inch TVs on different dates at costs of
$700, $750, and $800. During the year Crivitz sold two sets
at $1,200 each.
Inventory Costing
Illustration 6-2
SO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
16. Slide
6-16
Illustration: If Crivitz sold the TVs it purchased on February
3 and May 22, then its cost of goods sold is $1,500 ($700
$800), and its ending inventory is $750.
Inventory Costing
Illustration 6-3
SO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
17. Slide
6-17
Inventory Costing
Ishikawa uses a periodic inventory system.
Physical inventory determined that Ishikawa sold 550 units and
had 450 units in inventory at December 31.
Illustration 6-4
SO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Cost Flow Assumptions
18. Slide
6-18
Earliest goods purchased are first to be sold.
Often parallels actual physical flow of merchandise.
Generally good business practice to sell oldest units
first.
“First-In-First-Out (FIFO)”
Inventory Costing
SO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
21. Slide
6-21
Allocates cost of goods available for sale on the
basis of weighted average unit cost incurred.
Assumes goods are similar in nature.
Applies weighted average unit cost to the units on
hand to determine cost of the ending inventory.
“Average-Cost”
Inventory Costing
SO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
23. Slide
6-23
SO 2 Explain the accounting for inventories and
apply the inventory cost flow methods.
Inventory Costing
“Average Cost”
Illustration 6-8
24. Slide
6-24
SO 3 Explain the financial effects of the inventory cost flow assumptions.
Inventory Costing
Illustration 6-9
Financial Statement and Tax Effects
Income
Statement
Effects
25. Slide
6-25
SO 3 Explain the financial effects of the inventory cost flow assumptions.
Inventory Costing
Statement of Financial Statement Effects
A major advantage of the FIFO method is that in a period
of inflation, the costs allocated to ending inventory will
approximate their current cost.
A shortcoming of the average-cost method is that in a
period of inflation, the costs allocated to ending inventory
may be understated in terms of current cost.
26. Slide
6-26
SO 3 Explain the financial effects of the inventory cost flow assumptions.
Inventory Costing
Tax Effects
In a period of inflation:
FIFO - inventory and net income higher.
AVERAGE Cost - lower income taxes.
27. Slide
6-27
In a period of rising prices, average cost will produce:
a. higher net income than FIFO.
b. the same net income as FIFO.
c. lower net income than FIFO.
d. net income is equal to the specific identification
method.
Review Question
Inventory Costing
SO 3 Explain the financial effects of the inventory cost flow assumptions.
28. Slide
6-28
Using Cost Flow Methods Consistently
Inventory Costing
Method should be used consistently, enhances
comparability.
Although consistency is preferred, a company may
change its inventory costing method.
SO 3 Explain the financial effects of the inventory cost flow assumptions.
30. Slide
6-30
Lower-of-Cost-or-Net Realizable Value
Inventory Costing
SO 4 Explain the lower-of-cost-or-net realizable
value basis of accounting for inventories.
When the value of inventory is lower than its cost
Companies can “write down” the inventory to its net
realizable value in the period in which the price decline
occurs.
Net realizable value refers to the net amount that a
company expects to realize (receive) from the sale of
inventory.
31. Slide
6-31
Inventory Costing
Illustration: Assume that Ken Tuckie TV has the following
lines of merchandise with costs and market values as
indicated.
Illustration 6-10
Lower-of-Cost-or-Net Realizable Value
SO 4 Explain the lower-of-cost-or-net realizable
value basis of accounting for inventories.
32. Slide
6-32
Inventory Errors
SO 5 Indicate the effects of inventory errors on the financial statements.
Common Cause:
Failure to count or price inventory correctly.
Not properly recognizing the transfer of legal title to
goods in transit.
Errors affect both the income statement and
statement of financial position.
33. Slide
6-33
Inventory Errors
SO 5 Indicate the effects of inventory errors on the financial statements.
Inventory errors affect the computation of cost of goods sold
and net income.
Income Statement Effects
Illustration 6-12
Illustration 6-11
34. Slide
6-34
Inventory Errors
SO 5 Indicate the effects of inventory errors on the financial statements.
Inventory errors affect the computation of cost of goods sold
and net income in two periods.
An error in ending inventory of the current period will
have a reverse effect on net income of the next
accounting period.
Over the two years, the total net income is correct
because the errors offset each other.
The ending inventory depends entirely on the accuracy
of taking and costing the inventory.
Income Statement Effects
35. Slide
6-35
Inventory Errors
SO 5 Indicate the effects of inventory errors on the financial statements.
Incorrect Correct Incorrect Correct
Sales 80,000
$ 80,000
$ 90,000
$ 90,000
$
Beginning inventory 20,000 20,000 12,000 15,000
Cost of goods purchased 40,000 40,000 68,000 68,000
Cost of goods available 60,000 60,000 80,000 83,000
Ending inventory 12,000 15,000 23,000 23,000
Cost of good sold 48,000 45,000 57,000 60,000
Gross profit 32,000 35,000 33,000 30,000
Operating expenses 10,000 10,000 20,000 20,000
Net income 22,000
$ 25,000
$ 13,000
$ 10,000
$
2011 2012
($3,000)
Net Income
understated
$3,000
Net Income
overstated
Combined income for 2-
year period is correct.
Illustration 6-13
36. Slide
6-36
Understating ending inventory will overstate:
a. assets.
b. cost of goods sold.
c. net income.
d. equity.
Review Question
Inventory Errors
SO 5 Indicate the effects of inventory errors on the financial statements.
37. Slide
6-37
Inventory Errors
SO 5 Indicate the effects of inventory errors on the financial statements.
Effect of inventory errors on the statement of financial
position is determined by using the accounting equation:
Statement of Financial Position Effects
Illustration 6-11
Illustration 6-14
38. Slide
6-38
Statement Presentation and Analysis
Statement of Financial Position - Inventory classified as
current asset.
Income Statement - Cost of goods sold.
There also should be disclosure of
1) major inventory classifications,
2) basis of accounting (cost, or lower-of-cost-or-net
realizable value), and
3) Cost method (specific identification, FIFO, or average-
cost).
Presentation
39. Slide
6-39
Statement Presentation and Analysis
Inventory management is a double-edged sword
1. High Inventory Levels - may incur high carrying
costs (e.g., investment, storage, insurance,
obsolescence, and damage).
2. Low Inventory Levels – may lead to stockouts and
lost sales.
Analysis Using Inventory Turnover
SO 6 Compute and interpret the inventory turnover ratio.
40. Slide
6-40
Inventory turnover measures the number of times on
average the inventory is sold during the period.
Cost of Goods Sold
Average Inventory
Inventory
Turnover
=
Statement Presentation and Analysis
Days in inventory measures the average number of
days inventory is held.
Days in Year (365)
Inventory Turnover
Days in
Inventory
=
SO 6 Compute and interpret the inventory turnover ratio.
41. Slide
6-41
Days in Inventory: Inventory turnover of 5.4 times divided into
365 is approximately 68 days. This is the approximate time that it
takes a company to sell the inventory.
Illustration: Esprit Holdings reported in its 2009 annual report a
beginning inventory of HK$3,170 million, an ending inventory of
HK$2,997 million, and cost of goods sold for the year ended June
30, 2009, of HK$16,523 million. The inventory turnover formula and
computation for Esprit Holdings are shown below.
Statement Presentation and Analysis
SO 6 Compute and interpret the inventory turnover ratio.
Illustration 6-16
Answer on
notes page
42. Slide
6-42
Both GAAP and IFRS permit the specific identification method
where appropriate. IFRS requires that the specific identification
method must be used where the inventory items are not
interchangeable (i.e., can be specifically identified). If the
inventory items are not specifically identifiable, a cost flow
assumption is used. GAAP does not specify situations that
require its use.
GAAP permits the use of the last-in, first-out (LIFO) cost flow
assumption for inventory valuation. IFRS prohibits its use. LIFO
is frequently used by U.S. companies for tax purposes. U.S.
regulations require that if LIFO is used for taxes, it must also be
used for financial reporting. (See Appendix 6C.)
Understanding U.S. GAAP
Key Differences Inventories
43. Slide
6-43
IFRS requires companies to use the same cost flow assumption
for all goods of a similar nature. GAAP has no specific
requirement in this area.
When testing to see if the value of inventory has fallen below
its cost, IFRS defines market value as net realizable value. Net
realizable value is the estimated selling price in the ordinary
course of business, less the estimated costs of completion
and estimated selling expenses. In other words, net realizable
value is the best estimate of the net amounts that inventories
are expected to realize (receive). GAAP, on the other hand,
defines market as essentially replacement cost.
Understanding U.S. GAAP
Key Differences Inventories
44. Slide
6-44
In GAAP, if inventory is written down under the lower-of-cost-
or-market valuation, the new basis is now considered its cost.
As a result, the inventory may not be written back up to its
original cost in a subsequent period. Under IFRS, the write-
down may be reversed in a subsequent period up to the
amount of the previous write-down.
Inventories
Understanding U.S. GAAP
Key Differences
45. Slide
6-45
Looking to the Future
Understanding U.S. GAAP
One convergence issue between GAAP and IFRS that will be
difficult to resolve relates to the use of the LIFO cost flow
assumption. As indicated, IFRS specifically prohibits its use.
Conversely, the LIFO cost flow assumption is widely used in the
United States because of its favorable tax advantages. In addition,
many argue that LIFO, from a financial reporting point of view,
provides a better matching of current costs against revenue and
therefore enables companies to compute a more realistic income.
With a new conceptual framework now being developed as this
material is written, it is highly probable that the use of the GAAP
concept of conservatism, which is the basis of the lower-of-cost-or-
market valuation, will be eliminated. Similarly, the concept of
prudence in the IASB literature will also be eliminated.
Inventories
46. Slide
6-46
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual inventory records.
Assuming the Perpetual Inventory System, compute Cost of Goods Sold
and Ending Inventory under FIFO and Average cost.
Appendix 6A Illustration 6A-1
47. Slide
6-47
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual inventory records.
“First-In-First-Out (FIFO)”
Cost of Goods
Sold
Ending Inventory
Illustration 6A-2
Answer on
notes page
48. Slide
6-48
Cost Flow Methods in Perpetual Systems
SO 7 Apply the inventory cost flow methods to perpetual inventory records.
“Average Cost” (Moving-Average System)
Illustration 6A-3
Cost of Goods
Sold
Ending Inventory
Answer on
notes page
49. Slide
6-49
Estimating Inventories
The gross profit method estimates the cost of ending
inventory by applying a gross profit rate to net sales.
Gross Profit Method
SO 8 Describe the two methods of estimating inventories.
Illustration 6B-1
Appendix 6B
50. Slide
6-50
Estimating Inventories
Illustration: Kishwaukee Company’s records for January show net
sales of $200,000, beginning inventory $40,000, and cost of goods
purchased $120,000. The company expects to earn a 30% gross
profit rate. Compute the estimated cost of the ending inventory at
January 31 under the gross profit method.
SO 8 Describe the two methods of estimating inventories.
Illustration 6B-2
51. Slide
6-51
Estimating Inventories
Company applies the cost-to-retail percentage to ending
inventory at retail prices to determine inventory at cost.
Retail Inventory Method
SO 8 Describe the two methods of estimating inventories.
Illustration 6B-3
52. Slide
6-52
Estimating Inventories
SO 8 Describe the two methods of estimating inventories.
Note that it is not necessary to take a physical inventory to determine
the estimated cost of goods on hand at any given time.
Illustration 6B-4
Illustration:
53. Slide
6-53
Latest goods purchased are first to be sold.
Seldom coincides with actual physical flow of
merchandise.
Exceptions include goods stored in piles, such as
coal or hay.
Under IFRS, LIFO is not permitted for financial
reporting purposes.
“Last-In-First-Out (LIFO)”
LIFO Inventory Method
SO 9 Apply the LIFO inventory costing method.
Appendix 6C
54. Slide
6-54
Ishikawa uses a periodic inventory system.
Physical inventory determined that Ishikawa sold 550 units and
had 450 units in inventory at December 31.
Illustration 6-4
Illustration
LIFO Inventory Method
SO 9 Apply the LIFO inventory costing method.
p. 251 How Wal-Mart Tracks Inventory
Q: Why is inventory control important to managers such as those at Wal-Mart and Best Buy?
A: In the very competitive environment of discount retailing, where Wal-Mart is the major player, small differences in price matter to the customer.Wal-Mart sells a high volume of inventory at a low gross profit rate. When operating in a high-volume, low-margin environment, small cost savings can mean the difference between being profitable or going out of business. The same holds true for Best Buy.
p. 260 Is LIFO Fair?
Q: What are the arguments for and against the use of LIFO?
A: Proponents of LIFO argue that it is conceptually superior because it matches the most recent cost with the most recent selling price. Critics contend that it artificially understates the company’s net income and consequently reduces tax payments. Also, because most foreign companies are not allowed to use LIFO, its use by U.S. companies reduces the ability of investors to compare results across companies.