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 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.
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 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.
Bab 8 - Valuation of Inventories, a Cost-Basis Approachmsahuleka
This document discusses key concepts related to inventory valuation using a cost basis approach. It identifies major classifications of inventory, distinguishes between perpetual and periodic inventory systems, and describes how different cost flow assumptions like FIFO, LIFO, and average cost affect the valuation of inventory and calculation of cost of goods sold. The learning objectives cover inventory classification, the costs included in inventory valuation, LIFO reserves and liquidations, advantages and disadvantages of different methods, and why companies select certain valuation methods.
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.
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 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.
This document provides an overview of inventory accounting concepts. It describes how companies determine inventory quantities through physical counts, classify inventory for manufacturers, account for goods in transit, and use different inventory cost flow methods like FIFO, LIFO, and average cost. The key effects of these inventory cost flow methods on financial statements and taxes are also summarized.
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.
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 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.
Bab 8 - Valuation of Inventories, a Cost-Basis Approachmsahuleka
This document discusses key concepts related to inventory valuation using a cost basis approach. It identifies major classifications of inventory, distinguishes between perpetual and periodic inventory systems, and describes how different cost flow assumptions like FIFO, LIFO, and average cost affect the valuation of inventory and calculation of cost of goods sold. The learning objectives cover inventory classification, the costs included in inventory valuation, LIFO reserves and liquidations, advantages and disadvantages of different methods, and why companies select certain valuation methods.
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.
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 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.
This document provides an overview of inventory accounting concepts. It describes how companies determine inventory quantities through physical counts, classify inventory for manufacturers, account for goods in transit, and use different inventory cost flow methods like FIFO, LIFO, and average cost. The key effects of these inventory cost flow methods on financial statements and taxes are also summarized.
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 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
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.
The document discusses key concepts related to inventory costing and financial reporting. It covers the primary goals of inventory management, items included in inventory, costs included in inventory, and the flow of inventory costs. It then describes inventory costing methods like specific identification, FIFO, LIFO, and weighted average. It explains how these different methods can affect ending inventory valuations and cost of goods sold, and compares their impacts on financial statements and income taxes.
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 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.
The document discusses various topics related to maintaining assets and inventory, including complying with organizational procedures for asset acquisition, reconciling asset and inventory records, recognizing new assets, preparing reports, and recording the disposal of fixed assets. It provides definitions of key terms like assets, current vs non-current assets, tangible and intangible assets, and discusses inventory cost flows and different inventory valuation methods.
The document discusses several key accounting concepts related to financial statements including:
1) The revenue recognition principle which states revenue is recognized when earned through a four step process, not necessarily when cash is collected.
2) Basic inventory valuation methods including specific identification, FIFO, LIFO, and weighted average and how they affect ending inventory and cost of goods sold.
3) Calculation of earnings per share and how transactions like treasury stock purchases or stock splits can impact the number of shares outstanding and EPS.
This document provides an outline and overview of key concepts from Chapter 6 of the textbook "Accounting Principles" related to inventories. It discusses how to classify inventory for merchandising vs manufacturing companies, determine inventory quantities through physical counts and rules of ownership, and apply different inventory cost flow methods (FIFO, LIFO, average cost). The effects of these cost flow methods on the financial statements are also examined through an example comparing the income statement impacts of each method.
The document discusses inventory costing methods for merchandising companies. It covers topics such as taking a physical inventory, determining inventory quantities, cost flow assumptions under FIFO and average costing, and the effects of inventory errors on financial statements. Proper internal controls over physical inventory counts include segregating inventory custody and counting duties and verifying counts through independent verification.
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.
This document provides an overview of accounting for merchandising operations. It defines merchandising companies as those that buy and sell goods, with sales revenue as the primary source of income. It discusses the differences between merchandising and service companies, including that merchandising companies use an inventory account and calculate cost of goods sold. The document also covers perpetual and periodic inventory systems, recording purchases and sales, and purchase/sales returns, discounts, and allowances.
The document provides information on inventory accounting principles and methods. It defines inventory costing methods such as specific unit cost, FIFO, LIFO, and average cost. It demonstrates how to account for perpetual inventory using each of these three main costing methods. The effects of the different costing methods on ending inventory, cost of goods sold, and net income are compared. The document also discusses applying the lower-of-cost-or-market rule to inventory valuation and estimating ending inventory using the gross profit method.
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,
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.
This document discusses accounting concepts for merchandising businesses. It covers topics such as the nature of merchandising businesses compared to service businesses, accounting for inventory purchases using perpetual and periodic systems, purchases and sales discounts, transportation costs depending on FOB terms, analyzing financial statements including income statements, balance sheets, and calculating key ratios like net sales to assets. It also provides examples of class discussion questions about distinguishing merchandising from service businesses and interpreting financial information.
The document discusses inventory systems and accounting entries related to inventory. It covers two main inventory systems - perpetual and periodic. For the perpetual system, inventory balances are continuously updated as purchases and sales occur. For the periodic system, inventory is only adjusted at the end of an accounting period. The document also discusses inventory cost flow methods like FIFO, LIFO, and weighted average. It provides examples of journal entries for recording inventory purchases, sales, and returns under both systems. Finally, it covers topics like dollar value LIFO and required disclosures for using LIFO for financial reporting.
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 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
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.
The document discusses key concepts related to inventory costing and financial reporting. It covers the primary goals of inventory management, items included in inventory, costs included in inventory, and the flow of inventory costs. It then describes inventory costing methods like specific identification, FIFO, LIFO, and weighted average. It explains how these different methods can affect ending inventory valuations and cost of goods sold, and compares their impacts on financial statements and income taxes.
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 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.
The document discusses various topics related to maintaining assets and inventory, including complying with organizational procedures for asset acquisition, reconciling asset and inventory records, recognizing new assets, preparing reports, and recording the disposal of fixed assets. It provides definitions of key terms like assets, current vs non-current assets, tangible and intangible assets, and discusses inventory cost flows and different inventory valuation methods.
The document discusses several key accounting concepts related to financial statements including:
1) The revenue recognition principle which states revenue is recognized when earned through a four step process, not necessarily when cash is collected.
2) Basic inventory valuation methods including specific identification, FIFO, LIFO, and weighted average and how they affect ending inventory and cost of goods sold.
3) Calculation of earnings per share and how transactions like treasury stock purchases or stock splits can impact the number of shares outstanding and EPS.
This document provides an outline and overview of key concepts from Chapter 6 of the textbook "Accounting Principles" related to inventories. It discusses how to classify inventory for merchandising vs manufacturing companies, determine inventory quantities through physical counts and rules of ownership, and apply different inventory cost flow methods (FIFO, LIFO, average cost). The effects of these cost flow methods on the financial statements are also examined through an example comparing the income statement impacts of each method.
The document discusses inventory costing methods for merchandising companies. It covers topics such as taking a physical inventory, determining inventory quantities, cost flow assumptions under FIFO and average costing, and the effects of inventory errors on financial statements. Proper internal controls over physical inventory counts include segregating inventory custody and counting duties and verifying counts through independent verification.
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.
This document provides an overview of accounting for merchandising operations. It defines merchandising companies as those that buy and sell goods, with sales revenue as the primary source of income. It discusses the differences between merchandising and service companies, including that merchandising companies use an inventory account and calculate cost of goods sold. The document also covers perpetual and periodic inventory systems, recording purchases and sales, and purchase/sales returns, discounts, and allowances.
The document provides information on inventory accounting principles and methods. It defines inventory costing methods such as specific unit cost, FIFO, LIFO, and average cost. It demonstrates how to account for perpetual inventory using each of these three main costing methods. The effects of the different costing methods on ending inventory, cost of goods sold, and net income are compared. The document also discusses applying the lower-of-cost-or-market rule to inventory valuation and estimating ending inventory using the gross profit method.
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,
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.
This document discusses accounting concepts for merchandising businesses. It covers topics such as the nature of merchandising businesses compared to service businesses, accounting for inventory purchases using perpetual and periodic systems, purchases and sales discounts, transportation costs depending on FOB terms, analyzing financial statements including income statements, balance sheets, and calculating key ratios like net sales to assets. It also provides examples of class discussion questions about distinguishing merchandising from service businesses and interpreting financial information.
The document discusses inventory systems and accounting entries related to inventory. It covers two main inventory systems - perpetual and periodic. For the perpetual system, inventory balances are continuously updated as purchases and sales occur. For the periodic system, inventory is only adjusted at the end of an accounting period. The document also discusses inventory cost flow methods like FIFO, LIFO, and weighted average. It provides examples of journal entries for recording inventory purchases, sales, and returns under both systems. Finally, it covers topics like dollar value LIFO and required disclosures for using LIFO for financial reporting.
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3. 8-3
1. Identify major classifications of inventory.
2. Distinguish between perpetual and periodic inventory systems.
3. Identify the effects of inventory errors on the financial statements.
4. Understand the items to include as inventory cost.
5. Describe and compare the cost flow assumptions used to account for
inventories.
6. Explain the significance and use of a LIFO reserve.
7. Understand the effect of LIFO liquidations.
8. Explain the dollar-value LIFO method.
9. Identify the major advantages and disadvantages of LIFO.
10. Understand why companies select given inventory methods.
Learning Objectives
4. 8-4
Inventory
Issues
Physical
Goods
Included in
Inventory
Costs
Included
in Inventory
Cost Flow
Assumptions
LIFO: Special
Issues
Classification
Cost flow
Control
Basic
inventory
valuation
Basis for
Selection
Goods in
transit
Consigned
goods
Special sales
agreements
Inventory
errors
Product costs
Period costs
Purchase
discounts
Specific
identification
Average cost
FIFO
LIFO
LIFO reserve
LIFO
liquidation
Dollar-value
LIFO
Comparison of
LIFO
approaches
Advantages of
LIFO
Disadvantages
of LIFO
Summary of
inventory
valuation
methods
Valuation of Inventories:
Cost-Basis Approach
5. 8-5
Inventories are:
items held for sale, or
goods to be used in the production of goods to be sold.
Inventory Issues
LO 1 Identify major classifications of inventory.
Merchandiser Manufacturer
Businesses with Inventory
or
Classification
6. 8-6
One inventory
account.
Purchase goods
in form ready for
sale.
Inventory Issues
LO 1 Identify major classifications of inventory.
Illustration 8-1
Classification
7. 8-7
Three accounts
Raw materials
Work in process
Finished goods
Inventory Issues
Classification
Illustration 8-1
LO 1 Identify major classifications of inventory.
9. 8-9
Inventory Cost Flow
Inventory Issues
Illustration 8-3
Companies use one of two types of systems for maintaining
inventory records — perpetual system or periodic system.
LO 2 Distinguish between perpetual and periodic inventory systems.
10. 8-10
Inventory Cost Flow
LO 2 Distinguish between perpetual and periodic inventory systems.
Perpetual System
1. Purchases of merchandise are debited to Inventory.
2. Freight-in is debited to Inventory. Purchase returns and
allowances and purchase discounts are credited to Inventory.
3. Cost of goods sold is debited and Inventory is credited for each
sale.
4. Subsidiary records show quantity and cost of each type of
inventory on hand.
The perpetual inventory system provides a continuous
record of Inventory and Cost of Goods Sold.
11. 8-11
Inventory Cost Flow
LO 2 Distinguish between perpetual and periodic inventory systems.
Periodic System
1. Purchases of merchandise are debited to Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Beginning inventory $ 100,000
Purchases, net 800,000
Goods available for sale 900,000
Ending inventory 125,000
Cost of goods sold $ 775,000
12. 8-12
Inventory Cost Flow
LO 2 Distinguish between perpetual and periodic inventory systems.
Illustration: Fesmire Company had the following transactions
during the current year.
Record these transactions using the Perpetual and Periodic
systems.
14. 8-14
Inventory Cost Flow
LO 2 Distinguish between perpetual and periodic inventory systems.
Illustration: Assume that at the end of the reporting period,
the perpetual inventory account reported an inventory balance
of $4,000. However, a physical count indicates inventory of
$3,800 is actually on hand. The entry to record the necessary
write-down is as follows.
Inventory Over and Short 200
Inventory 200
Note: Inventory Over and Short adjusts Cost of Goods Sold. In practice, companies
sometimes report Inventory Over and Short in the “Other income and expense” section
of the income statement.
15. 8-15
Inventory Control
Inventory Issues
LO 2 Distinguish between perpetual and periodic inventory systems.
All companies need periodic verification of the inventory
records by actual count, weight, or measurement, with the
counts compared with the detailed inventory records.
Companies should take the physical inventory near the
end of their fiscal year, to properly report inventory
quantities in their annual accounting reports.
16. 8-16
Basic Issues in Inventory Valuation
LO 2 Distinguish between perpetual and periodic inventory systems.
Companies must allocate the cost of all the goods available
for sale (or use) between the goods that were sold or used
and those that are still on hand.
Illustration 8-5
17. 8-17
Basic Issues in Inventory Valuation
LO 2 Distinguish between perpetual and periodic inventory systems.
The physical goods (goods on hand, goods in transit,
consigned goods, special sales agreements).
The costs to include (product vs. period costs).
The cost flow assumption (specific Identification,
average cost, FIFO, retail, etc.).
Valuation requires determining
18. 8-18
A company should record purchases when it obtains legal
title to the goods.
Physical Goods Included in Inventory
LO 2 Distinguish between perpetual and periodic inventory systems.
Illustration 8-6
19. 8-19
Physical Goods Included in Inventory
LO 3 Identify the effects of inventory errors on the financial statements.
Effect of Inventory Errors
The effect of an error on net income in one year (2011) will be counterbalanced in
the next (2012), however the income statement will be misstated for both years.
Illustration 8-7
Ending
Inventory
Misstated
20. 8-20
Effect of Inventory Errors
Illustration: Jay Weiseman Corp. understates its ending inventory by
$10,000 in 2011; all other items are correctly stated.
Illustration 8-8
LO 3
21. 8-22
Costs Included in Inventory
LO 4 Understand the items to include as inventory cost.
Product Costs
Costs directly connected with bringing the goods to the
buyer’s place of business and converting such goods to a
salable condition.
Period Costs
Generally selling, general, and administrative expenses.
Treatment of Purchase Discounts
Gross vs. Net Method
22. 8-23
*
**
Costs Included in Inventory
LO 4
Treatment of Purchase Discounts
Illustration 8-11
* $4,000 x 2% = $80 ** $10,000 x 98% = $9,800
23. 8-24
Method adopted should be one that most clearly reflects periodic income.
Cost Flow Assumption Adopted
does not need to equal
Physical Movement of Goods
Which Cost Flow Assumption to Adopt?
Specific Identification --- Average Cost
LIFO --- FIFO
LO5 Describe and compare the cost flow assumptions
used to account for inventories.
24. 8-25
Young & Crazy Company makes the following purchases:
1. One item on 2/2/11 for $10
2. One item on 2/15/11 for $15
3. One item on 2/25/11 for $20
Young & Crazy Company sells one item on 2/28/12 for $90. What
would be the balance of ending inventory and cost of goods sold
for the month ended February 2012, assuming the company used
the FIFO, Average Cost, and Specific Identification cost flow
assumptions? Assume a tax rate of 30%.
Illustration
Cost Flow Assumptions
LO5 Describe and compare the cost flow assumptions
used to account for inventories.
25. 8-26
Purchase on
2/2/12 for $10
Purchase on
2/15/12 for $15
Purchase on
2/25/12 for $20
Inventory Balance
= $ 45
Young & Crazy Company
Income Statement
For the Month of Feb. 2012
Sales $ 90
Cost of goods sold 0
Gross profit 90
Expenses:
Administrative 14
Selling 12
Interest 7
Total expenses 33
Income before tax 57
Taxes 17
Net Income $ 40
Cost Flow Assumptions
“First-In-First-Out (FIFO)”
LO 5
26. 8-27
Purchase on
2/2/12 for $10
Purchase on
2/15/12 for $15
Purchase on
2/25/12 for $20
Cost Flow Assumptions
Inventory Balance
= $ 35
Young & Crazy Company
Income Statement
For the Month of Feb. 2012
Sales $ 90
Cost of goods sold 10
Gross profit 80
Expenses:
Administrative 14
Selling 12
Interest 7
Total expenses 33
Income before tax 47
Taxes 14
Net Income $ 33
“First-In-First-Out (FIFO)”
LO 5
27. 8-28
Purchase on
2/2/12 for $10
Purchase on
2/15/12 for $15
Purchase on
2/25/12 for $20
Inventory Balance
= $ 45
Young & Crazy Company
Income Statement
For the Month of Feb. 2012
Sales $ 90
Cost of goods sold 0
Gross profit 90
Expenses:
Administrative 14
Selling 12
Interest 7
Total expenses 33
Income before tax 57
Taxes 17
Net Income $ 40
Cost Flow Assumptions
“Average Cost”
LO 5
28. 8-29
Purchase on
2/2/12 for $10
Purchase on
2/15/12 for $15
Purchase on
2/25/12 for $20
Inventory Balance
= $ 30
Cost Flow Assumptions
Young & Crazy Company
Income Statement
For the Month of Feb. 2012
Sales $ 90
Cost of goods sold 15
Gross profit 75
Expenses:
Administrative 14
Selling 12
Interest 7
Total expenses 33
Income before tax 42
Taxes 12
Net Income $ 30
“Average Cost”
LO 5
29. 8-30
Purchase on
2/2/12 for $10
Purchase on
2/15/12 for $15
Purchase on
2/25/12 for $20
Inventory Balance
= $ 45
Young & Crazy Company
Income Statement
For the Month of Feb. 2012
Sales $ 90
Cost of goods sold 0
Gross profit 90
Expenses:
Administrative 14
Selling 12
Interest 7
Total expenses 33
Income before tax 57
Taxes 17
Net Income $ 40
Cost Flow Assumptions
“Specific Identification”
LO 5
30. 8-31
Young & Crazy Company
Income Statement
For the Month of Feb. 2012
Sales $ 90
Cost of goods sold 0
Gross profit 90
Expenses:
Administrative 14
Selling 12
Interest 7
Total expenses 33
Income before tax 57
Taxes 17
Net Income $ 40
Depends which one is sold
Purchase on
2/2/12 for $10
Purchase on
2/15/12 for $15
Purchase on
2/25/12 for $20
Inventory Balance
= $ 45
Cost Flow Assumptions
“Specific Identification”
LO 5
31. 8-32
Financial Statement Summary
FIFO Average
Sales 90
$ 90
$
Cost of goods sold 10 15
Gross profit 80 75
Operating expenses:
Administrative 14 14
Selling 12 12
Interest 7 7
Total expenses 33 33
Income before taxes 47 42
Income tax expense 14 12
Net income 33
$ 30
$
Inventory Balance 30
35
Cost Flow Assumptions
LO 5
32. 8-33
Cost Flow Assumptions
LO 5
Illustration: Call-Mart Inc. had the following transactions in
its first month of operations.
Beginning inventory (2,000 x $4) $ 8,000
Purchases:
6,000 x $4.40 26,400
2,000 x 4.75 9,500
Goods available for sale $43,900
Calculate Goods Available for Sale
33. 8-34
Specific Identification
Illustration: Assume that Call-Mart Inc.’s 6,000 units of inventory
consists of 1,000 units from the March 2 purchase, 3,000 from the March
15 purchase, and 2,000 from the March 30 purchase. Compute the
amount of ending inventory and cost of goods sold.
Illustration 8-12
36. 8-37
Average Cost
Illustration 8-14
In this method, Call-Mart computes a new average unit cost
each time it makes a purchase.
Moving Average
LO5 Describe and compare the cost flow assumptions
used to account for inventories.
37. 8-38
First-In, First-Out (FIFO)
Illustration 8-15
Periodic Method
Determine cost of ending inventory by taking the cost of the most
recent purchase and working back until it accounts for all units in the
inventory.
LO5 Describe and compare the cost flow assumptions
used to account for inventories.
38. 8-39
First-In, First-Out (FIFO)
Illustration 8-16
Perpetual Method
In all cases where FIFO is used, the inventory and cost of goods sold
would be the same at the end of the month whether a perpetual or
periodic system is used.
LO5 Describe and compare the cost flow assumptions
used to account for inventories.
39. 8-40
Illustration 8-31
Inventory Valuation Methods - Summary
Notice that gross profit and net income are lowest under LIFO, highest under
FIFO, and somewhere in the middle under average cost.
LO 10 Understand why companies select given inventory methods.
40. 8-41
Illustration 8-32
Inventory Valuation Methods - Summary
LIFO results in the highest cash balance at year-end (because taxes are
lower). This example assumes that prices are rising. The opposite result
occurs if prices are declining.
LO 10 Understand why companies select given inventory methods.