Unformatted text preview: CHAPTER 5 Reporting and Analyzing Inventories Determining Inventory Items
Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted.
Items requiring special attention include:
Goods in Transit Goods Damaged or Obsolete Goods on Consignment Goods in Transit
FOB Shipping Point Public Carrier Seller Ownership passes to the buyer here. Public Carrier Seller FOB Destination Point Buyer Buyer Goods on Consignment
Merchandise is included in the inventory of the consignor, the owner of the inventory.
Thanks for selling my inventory in your store. Consignee Consignor Goods Damaged or Obsolete
Damaged or obsolete goods are not counted in inventory if they cannot be sold. Cost should be reduced to net realizable value if they can be sold. Determining Inventory Costs
Include all expenditures necessary to bring an item to a salable condition and location. Inventory Costing Under a Perpetual System
Inventory Inventory affects . . .
Balance Balance Sheet Sheet Income Income Statement Statement The matching principle requires matching cost of sales with sales. sales Inventory Costing Under a Perpetual System
Accounting for inventory requires several decisions . . . Costing Method Specific Identification, FIFO, LIFO, or Weighted Average Inventory System Perpetual or Periodic Inventory Cost Flow Assumptions
First-In, First-Out (FIFO) Last-In, First-Out (LIFO) Weighted Average Assumes costs flow in the order incurred. Assumes costs flow in the reverse order incurred. Assumes costs flow at an average of the costs available. Frequency in Use of Inventory Methods Specific Identification When units are sold, the specific cost of the unit sold is added to cost of goods sold. First-In, First-Out (FIFO)
Oldest Costs Recent Costs Last-In, First-Out (LIFO)
Recent Cost Oldest Cost Weighted Average
When a unit is sold, the average cost of each unit in inventory is assigned to cost of goods sold.
Cost of Goods Units on hand Available for ÷ on the date of Sale sale Financial Statement Effects of Costing Methods FIFO
Ending inventory Ending approximates current replacement cost. replacement LIFO
Better matches Better current costs in cost of goods sold with revenues. revenues. Weighted Weighted Average Average
Smoothes out Smoothes price changes. price Financial Statement Effects of Costing Methods In a period of rising prices…….. FIFO LIFO COGS END INVENTORY NET INCOME EQUITY INCOME TAXES Tax Effects of Costing Methods
The Internal Revenue Service (IRS) The identifies several acceptable methods for inventory costing for reporting taxable income. reporting
If LIFO is used for tax If purposes, the IRS requires purposes the it be used in financial statements. statements. Consistency in Using Costing Methods
The consistency principle requires a The consistency company to use the same accounting methods period after period so that financial statements are comparable across periods. across Lower of Cost or Market
Inventory must be reported at market value Inventory when market is lower than cost market lower (FIFO/LIFO Weighted Average etc.) (FIFO/LIFO
Defined as current Defined replacement cost replacement (not sales price). (not Consistent with the conservatism principle. Can be applied three ways:
(1) (2) (3) separately to each separately individual item. individual to major categories of to assets. assets. to the whole inventory. Lower of Cost or Market
A motorsports retailer has the following items in motorsports inventory: inventory: Lower of Cost or Market
Here is how to compute lower of cost or Here market for individual inventory items. individual Lower of Cost or Market
Here is how to compute lower of cost or market Here for the two major categories of inventory items. the Lower of Cost or Market
Here is how to compute lower of cost or market Here for the entire inventory. the Adjusting Entry for LCM Adjustment (Similar to Shrinkage)
If LCM is applied to individual inventory items: If LCM is applied to major categories of inventory : If LCM is applied to inventory as a whole: Misstatements in Inventory
Understating Ending Inventory Overstating Ending Inventory Financial Statement Effects of Inventory Errors Income Statement Effects Financial Statement Effects of Inventory Errors Balance Sheet Effects End of Chapter 5 ...
View Full Document
- Spring '07
- Accounting, financial statement effects