ch11.pptماليه متوسطه ماجستير محاسبة فصل الثامن
- 1. Chapter 8: Valuation of Inventories: A Cost Basis Approach Intermediate Accounting, 11th ed. Kieso, Weygandt, and Warfield Prepared by Jep Robertson and Renae Clark New Mexico State University
- 2. 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. Identify the items that should be included as inventory cost. After studying this chapter, you should be able to: Chapter 8: Valuation of Inventories: A Cost Basis Approach
- 3. 5. Describe and compare the flow assumptions used in accounting for inventories. 6. Explain the significance and use of a LIFO reserve. 7. Explain the effect of LIFO liquidations. 8. Explain the dollar-value LIFO method. 9. Identify the major advantages and disadvantages of LIFO. 10. Identify the reasons why a given inventory method is selected. Chapter 8: Valuation of Inventories: A Cost Basis Approach
- 4. Inventory consists of: 1. Finished goods held for sale in the ordinary course of business. 2. Goods held or consumed in the production of finished goods. Inventory Classification
- 5. Merchandising Operations Cost of goods sold $$$ Merchandise Inventory Purchases C/G/Sold Inventory Cost Flows
- 6. Flow of Costs through Manufacturing and Merchandising Companies
- 7. Inventory control is important for: 1. Ensuring availability of inventory items 2. Preventing excessive accumulation of inventory items The perpetual system maintains a continuous record of inventory changes The periodic system updates inventory records only periodically Inventory Control
- 8. • Purchases are debited to Inventory account • Freight-in, Purch. R & A and Purch. Disc. are recorded in Inventory account. • Debit COGS and credit Inventory account for each sale. • Purchases are debited to Purchases account. • Freight-in, Purch. R & A and Purch. Disc. are recorded in their respective accounts. • COGS is computed only periodically: COGAS - Ending Inventory COGS Perpetual Method Periodic Method Inventory Systems
- 9. Legal title to goods typically determines inclusion. The following goods are included in “seller’s” inventory: 1. Goods in transit (FOB Destination) 2. Goods on consignment with consignee 3. Goods, sold under buy back agreements 4. Goods, sold with high rates of return 5. Installment sales (if bad debts can not be estimated) Items to be Included in Inventory
- 11. Error in Effect on Effect on Ending Income Balance sheet Inventory Items Items Under- COGS (over) Inventory (under) stated Net income (under) Retained Earn (under) Over- C/G/sold (under) Inventory (over) stated Net income (over) Retained Earn (over) Effect of Inventory Errors
- 12. Generally accounted for on a cost basis. • Product costs are “inventoriable” costs, whereas • Period costs are not inventoriable costs Costs Included in Inventory
- 13. The objective is to most clearly reflect periodic income. Cost flow assumptions need not be consistent with physical flow of goods. The cost flow assumptions are: 1 Specific identification 2 Average cost 3 First-in, first-out (FIFO) and 4 Last-in, first-out (LIFO) Cost Flow Assumptions
- 14. Susieworld reports the following transactions for 2004: Date Purchases Purchase Cost May 12 100 units $1,000 Aug 14 200 units 2,200 Sep 18 120 units 1,800 420 units $5,000 On December 31, the company had 20 units on hand and uses the periodic inventory system. What are the cost of goods sold and the cost of ending inventory? Cost Flow Assumptions: Example
- 15. Given Data: Date Purchases Cost May 12 100 units $1,000 Aug 14 200 units $2,200 Sep 18 120 units $1,800 420 units $5,000 Steps: 1. Calculate per unit average cost: $5,000/420 = $11.905 2. Apply this per unit average cost to units sold to get COGS: 400 x $11.905 = $4,762 3. Apply the per unit average cost to units remaining in inventory to determine Ending inventory: 20 x $11.91 = $238 Average (Weighted) Method
- 16. Given data: Date Purchases Cost May 12 100 units @ $10 $1,000 Aug 14 200 units @ $11 $2,200 Sep 18 120 units @ $15 $1,800 420 $5,000 Cost of goods sold $4,700 20 * $15 = $300 Ending inventory $5,000 Cost of goods available Cost of goods sold (FIFO) $1,000 (100 sold) $2,200 (200 sold) $1,500 (100 sold; 20 end inv) $4,700 First-In, First-Out (FIFO) Method
- 17. Cost of goods sold $4,800 20 * $10 = $200 Ending inventory $5,000 Cost of goods available Cost of goods sold (LIFO) $ 800 (80 sold; 20, end inv) $2,200 (200 sold) $1,800 (120 sold) $4,800 Given data: Date Purchases Cost May 12 100 units @ $10 $1,000 Aug 14 200 units @ $11 $2,200 Sep 18 120 units @ $15 $1,800 420 $5,000 Last-In, First-Out (LIFO) Method
- 18. • The ending inventory in units is the same in all three methods: the cost is different. • The cost of goods sold and the cost of ending inventory are different, but • The cost of goods available is the same in all three methods. • LIFO would result in the smallest reported net income (with rising prices). Cost Flow Assumptions: Notes
- 19. LIFO Reserve (Allowance) account is used, when: LIFO is used for external reporting and a non-LIFO basis is used for internal reporting. An Allowance to Reduce Inventory to LIFO is used to reduce the cost to a LIFO basis. LIFO Reserve
- 20. Jeppo Inc reports the following balances: Inventory (FIFO basis) on Dec 31, 2004: $50,000 Inventory (LIFO basis) on Dec 31, 2004: $20,000 Adjust the cost of ending inventory to the LIFO basis Cost of goods sold Dr. $30,000 Allowance to Reduce Inventory to LIFO Cr. $30,000 Balance Sheet (Assets): Inventory (FIFO) $50,000 less: Allowance to Reduce Inventory ($30,000) Inventory (LIFO) basis $20,000 LIFO Reserve: Example
- 21. Under the LIFO approach, a business may build up layers of inventory from prior periods. A layer liquidation occurs, when: • Earlier costs are matched against current sales. • Such matching results in distorted income. LIFO Layers
- 22. Use the specific goods pooled LIFO approach: a pool is a combination of similar items. • reductions in one item, compensated by increases in other items. Use dollar-value LIFO where: • changes in pools are determined in terms of dollars, not quantities. Methods to Alleviate Layer Liquidation Problems
- 23. Given: Base layer (Dec 31, 2003): $20,000 Inventory (current prices) on Dec 31, 2004: $26,400 Prices increased 20% during 2004. Determine dollar value LIFO at Dec 31, 2004 Dollar Value LIFO: Example
- 24. Dec 31, 2003 Dec 31, 200 Price increase, 20% At EOY prices: $26,400 $26,400 / 1.20 At base $: $22,000 Net increase at base $: $22,000 less $20,000 Restate at current $: $2,400 (layer added) $2,000 * 1.20 $20,000 plus $2,400 = $22,400 Dollar value LIFO Inventory Dollar Value LIFO: Example
- 25. When the ending inventory (at base year prices) is less than the beginning inventory (at base year prices): • the decrease must be subtracted from the most recently added layer. • Once a layer is eliminated (peeled off), it cannot be rebuilt. Dollar Value LIFO: Notes
- 26. • LIFO matches more recent costs with current revenues. • With increasing prices, LIFO yields the lowest taxable income (assuming inventory does not decrease). • With reduced taxes, cash flow is improved. • Under LIFO, the need to write down inventory to market is lower. Advantages of LIFO Method
- 27. • LIFO does not approximate the physical flow of goods except in special situations. • LIFO yields the lowest net income and therefore reduced earnings (when prices rise). • Under LIFO, the ending inventory is understated relative to current costs. • LIFO involuntary liquidation may result in income that is detrimental from a tax view. • LIFO may cause poor buying habits (because of the layer liquidation problem). Disadvantages of LIFO Method
- 28. COPYRIGHT Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.