Session 11--Inventory Part 1.pdf - Remember, operating...

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InventoryLIFO,FIFO,Averagecost:What’sthePoint?Remember,operatingcycle?WhatisInventory?All costs that are necessary to place theasset into its intended useful state.What’sincludedinthecost?InventoryT‐accountsInventory (A)Cash (A)Cost of Goods Sold (E)BBEBPurchaseson accountCost of GoodsSoldCash paidBBEBCash paidAccounts Payable (L)Purchaseson accountCost of GoodsSold
Focuson:InventoryEquationBeginning inventory (A)+ PurchasesCost of goods available for sale- Ending inventory (A)Cost of goods sold (E)$200$500$700$300$400end oflast yearSales (R)Less COGSGross Profit$750$400$350Income Statement:BI+PurchGoods Avail- EICOGS-COGSSGPphysicalcountFocuson:T‐AccountAnalysisBeginning inventory (A)+ PurchasesCost of goods available for sale- Ending inventory (A)Cost of goods sold (E)$200$500$700$300$400Inventory (A)Cost of Goods Sold (E)200 BB300 EB500 Purch400 COGS700GAFS400Overthelifeofthebusiness,allisinventorysold.TimeTheBusinessbegins.TheBusinesscontinuesindefinitely.Inventory costs change over time.Does physical flow = cost flow?Issues:Inventorypurchased=InventorysoldPurchases=COGSCostFlowAssumptionsAlternativeaccountingmethodsFIFO(first‐in,first‐out)LIFO(last‐in,first‐out)WeightedaveragecostSpecificidentificationGAAPdoesnotrequirethecostflowassumptiontocorrespondtothephysicalflowofinventory
INVENTORYVALUATIONWhatisEndingInventory?WhatisCostofGoodsSold?Therearemultiplepossibleanswers.Therefore,acompanymustmakeaCostFlowAssumptionforitsinventory.DateYear 1Year 2Beg. Inventory0 units1/1Buy 1 unit @ $52/1Buy 1 unit @ $84/1Buy 1 unit @ $13Buy 2 units @ $156/1Buy 1 unit @ $1412/1Sell 2 unitsSell 3 unitsINVENTORYVALUATIONMethodCOGSEnding InventoryFIFOYear 113 (5 + 8)27 (13 + 14)Year 242 (13 + 14 + 15)15LIFOYear 127 (14 + 13)13 (8 + 5)Year 238 (15 + 15 + 8)5Weighted Avg.Year 120 (2 × 10)[40 ÷ 4 = 10]20 (2 × 10)Year 237.5 (3 × 12.5)[(20 + 30) ÷ 4 = 12.5]12.5Specific IDYear 1DependsDependsYear 2DependsDependsDateYear 1Year 21/1Buy 1 unit @ $52/1Buy 1 unit @ $84/1Buy 1 unit @ $13Buy 2 units @ $156/1Buy 1 unit @ $1412/1Sell 2 unitsSell 3 unitsFIFOversusLIFOwithPriceInflation$‐$0.50$1.00$1.50$2.00$2.50$3.00$3.50$4.00$4.5020092010201120122013PriceperunitYearCostFlowAssumptionsQuiz 5 – Question 6:Assuming rising prices, which method will give the highest dollar value for cost ofgoods sold on the income statement?FIFOAverage CostLIFOAll of these give equal values for cost of goods sold
INVENTORYVALUATIONYear 2DependsDependsDateYear 1Year 21/1Buy 1 unit @ $52/1Buy 1 unit @ $84/1Buy 1 unit @ $13Buy 2 units @ $156/1Buy 1 unit @ $1412/1Sell 2 unitsSell 3 unitsCostFlowAssumptionsQuiz 5 – Question 6:Assuming rising prices, which method will give the highest dollar value for cost ofgoods sold on the income statement?

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