Beruflich Dokumente
Kultur Dokumente
Accounting
Prepared by
Coby Harmon
University of California, Santa Barbara
8-1
Valuation of Inventories:
A Cost-Basis Approach
Intermediate Accounting
14th Edition
Learning
Learning Objectives
Objectives
8-3
1.
2.
3.
4.
5.
Describe and compare the cost flow assumptions used to account for
inventories.
6.
7.
8.
9.
10.
Valuation
Valuation of
of Inventories:
Inventories:
Cost-Basis
Cost-Basis Approach
Approach
Inventory
Issues
Classification
Cost flow
Control
Basic
inventory
valuation
Physical Goods
Included in
Inventory
Costs
Included
in Inventory
Goods in
transit
Product costs
Consigned
goods
Purchase
discounts
Special sales
agreements
Inventory
errors
Period costs
Cost Flow
Assumptions
LIFO: Special
Issues
Specific
identification
LIFO reserve
Average cost
FIFO
LIFO
LIFO
liquidation
Dollar-value
LIFO
Comparison of
LIFO
approaches
Advantages of
LIFO
Disadvantages
of LIFO
8-4
Basis for
Selection
Summary of
inventory
valuation
methods
Inventory
Inventory Issues
Issues
Classification
Inventories are:
8-5
or
Manufacturer
Inventory
Inventory Issues
Issues
Classification
Illustration 8-1
8-6
One inventory
account.
Purchase goods
in form ready for
sale.
Inventory
Inventory Issues
Issues
Classification
Illustration 8-1
Three accounts
8-7
Raw materials
Work in process
Finished goods
Inventory
Inventory Issues
Issues
Classification
8-8
Illustration 8-2
Inventory
Inventory Issues
Issues
Inventory Cost Flow
Illustration 8-3
Inventory
Inventory Cost
Cost Flow
Flow
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.
8-10
Inventory
Inventory Cost
Cost Flow
Flow
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
8-11
Inventory
Inventory Cost
Cost Flow
Flow
Illustration: Fesmire Company had the following transactions
during the current year.
8-12
Inventory
Inventory Cost
Cost Flow
Flow
8-13
Illustration 8-4
LO 2
Inventory
Inventory Cost
Cost Flow
Flow
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
Inventory
200
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.
8-14
Inventory
Inventory Issues
Issues
Inventory Control
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.
8-15
Basic
Basic Issues
Issues in
in Inventory
Inventory Valuation
Valuation
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
8-16
Basic
Basic Issues
Issues in
in Inventory
Inventory Valuation
Valuation
Valuation requires determining
8-17
Physical
Physical Goods
Goods Included
Included in
in Inventory
Inventory
A company should record purchases when it obtains legal
title to the goods.
Illustration 8-6
8-18
Physical
Physical Goods
Goods Included
Included in
in Inventory
Inventory
Effect of Inventory Errors
Ending
Inventory
Misstated
Illustration 8-7
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.
8-19
Effect
Effect of
of Inventory
Inventory Errors
Errors
Illustration: Jay Weiseman Corp. understates its ending inventory by
$10,000 in 2011; all other items are correctly stated.
Illustration 8-8
8-20
LO 3
Physical
Physical Goods
Goods Included
Included in
in Inventory
Inventory
Effect of Inventory Errors
Purchases and
Inventory
Misstated
Illustration 8-9
The understatement does not affect cost of goods sold and net income because the
errors offset one another.
8-21
Costs
Costs Included
Included in
in Inventory
Inventory
Product Costs
Costs directly connected with bringing the goods to the
buyers place of business and converting such goods to a
salable condition.
Period Costs
Generally selling, general, and administrative expenses.
8-22
Costs
Costs Included
Included in
in Inventory
Inventory
Treatment of Purchase Discounts
Illustration 8-11
**
8-23
* $4,000 x 2% = $80
LO 4
Which
Which Cost
Cost Flow
Flow Assumption
Assumption to
to Adopt?
Adopt?
Specific Identification --- Average Cost
LIFO --- FIFO
Cost
Cost Flow
FlowAssumption
AssumptionAdopted
Adopted
does
doesnot
notneed
need to
toequal
equal
Physical
PhysicalMovement
Movement of
of Goods
Goods
Method adopted should be one that most clearly reflects periodic income.
8-24
Cost
Cost Flow
Flow Assumptions
Assumptions
Illustration
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%.
8-25
Cost
Cost Flow
Flow Assumptions
Assumptions
First-In-First-Out (FIFO)
Inventory Balance
= $ 45
Purchase on
2/25/12 for $20
Purchase on
2/15/12 for $15
Purchase on
2/2/12 for $10
8-26
$ 90
0
90
14
12
7
33
57
17
$ 40
LO 5
Cost
Cost Flow
Flow Assumptions
Assumptions
First-In-First-Out (FIFO)
Inventory Balance
= $ 35
Purchase on
2/25/12 for $20
Purchase on
2/15/12 for $15
Purchase on
2/2/12 for $10
8-27
$ 90
10
80
14
12
7
33
47
14
$ 33
LO 5
Cost
Cost Flow
Flow Assumptions
Assumptions
Average Cost
Inventory Balance
= $ 45
Purchase on
2/25/12 for $20
Purchase on
2/15/12 for $15
Purchase on
2/2/12 for $10
8-28
$ 90
0
90
14
12
7
33
57
17
$ 40
LO 5
Cost
Cost Flow
Flow Assumptions
Assumptions
Average Cost
Inventory Balance
= $ 30
Purchase on
2/25/12 for $20
Purchase on
2/15/12 for $15
Purchase on
2/2/12 for $10
8-29
$ 90
15
75
14
12
7
33
42
12
$ 30
LO 5
Cost
Cost Flow
Flow Assumptions
Assumptions
Specific Identification
Inventory Balance
= $ 45
Purchase on
2/25/12 for $20
Purchase on
2/15/12 for $15
Purchase on
2/2/12 for $10
8-30
$ 90
0
90
14
12
7
33
57
17
$ 40
LO 5
Cost
Cost Flow
Flow Assumptions
Assumptions
Specific Identification
Inventory Balance
= $ 45
Purchase on
2/25/12 for $20
Purchase on
2/15/12 for $15
Purchase on
2/2/12 for $10
8-31
$ 90
0
90
14
12
7
33
57
17
$ 40
LO 5
Cost
Cost Flow
Flow Assumptions
Assumptions
Financial Statement Summary
Inventory Balance
8-32
35
30
LO 5
Cost
Cost Flow
Flow Assumptions
Assumptions
Illustration: Call-Mart Inc. had the following transactions in
its first month of operations.
$ 8,000
Purchases:
6,000 x $4.40
26,400
2,000 x 4.75
9,500
$43,900
LO 5
Specific
Specific Identification
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
8-34
Average
Average Cost
Cost
Weighted Average
8-35
Illustration 8-13
LO 5
Average
Average Cost
Cost
Moving Average
Illustration 8-14
8-36
First-In,
First-In, First-Out
First-Out (FIFO)
(FIFO)
Periodic Method
Illustration 8-15
First-In,
First-In, First-Out
First-Out (FIFO)
(FIFO)
Perpetual Method
Illustration 8-16
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.
8-38
Last-In,
Last-In, First-Out
First-Out (LIFO)
(LIFO)
Periodic Method
Illustration 8-17
The cost of the total quantity sold or issued during the month comes
from the most recent purchases.
8-39
Last-In,
Last-In, First-Out
First-Out (LIFO)
(LIFO)
Perpetual Method
Illustration 8-18
8-40
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
LIFO Reserve
Many companies use
Reasons:
1. Pricing decisions
2. Record keeping easier
3. Profit-sharing or bonus arrangements
4. LIFO troublesome for interim periods
8-41
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
LIFO Reserve is the difference between the inventory method
used for internal reporting purposes and LIFO.
Illustration: Acme Boot Company uses the FIFO method for internal
reporting purposes and LIFO for external reporting purposes. At
January 1, 2012, the Allowance to Reduce Inventory to LIFO balance is
$20,000. At December 31, 2012, the balance should be $50,000. As a
result, Acme Boot realizes a LIFO effect and makes the following entry
at year-end.
30,000
30,000
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
LIFO Liquidation
Older, low cost inventory is sold resulting in a lower cost of
goods sold, higher net income, and higher taxes.
Illustration: Basler Co. has 30,000 pounds of steel in its
inventory on December 31, 2012, with cost determined on a
specific-goods
LIFO approach.
8-43
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
LIFO Liquidation
Illustration: At the end of 2012, only 6,000 pounds of steel
remained in inventory.
Illustration 8-21
Illustration 8-20
8-44
LO 7
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
Dollar-Value LIFO
Changes in a pool are measured in terms of total dollar
value, not physical quantity.
Advantage:
8-45
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
Dollar-Value LIFO
Exercise 8-25 (partial): The following information relates to
the Martin Company.
8-46
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
8-47
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
8-48
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
8-49
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
Comparison of LIFO Approaches
8-50
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
Disadvantages
Advantages
Matching
Reduced Earnings
Tax Benefits/Improved
Cash Flow
Inventory Understated
Physical Flow
Involuntary Liquidation /
Poor Buying Habits
8-51
Special
Special Issues
Issues Related
Related to
to LIFO
LIFO
Basis for Selection of Inventory Method
LIFO is generally preferred:
1. if selling prices are increasing faster than costs and
2. if a company has a fairly constant base stock.
Inventory
Inventory Valuation
Valuation Methods
Methods -- Summary
Summary
Illustration 8-31
Notice that gross profit and net income are lowest under LIFO, highest under
FIFO, and somewhere in the middle under average cost.
8-53
Inventory
Inventory Valuation
Valuation Methods
Methods -- Summary
Summary
Illustration 8-32
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.
8-54
Copyright
Copyright
Copyright 2012 John Wiley & Sons, Inc. All rights reserved.
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programs or from the use of the information contained herein.
8-55