Lecture 13&14 Inventory and Cost of Goods Sold

Lecture 13&14 Inventory and Cost of Goods Sold -...

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Inventory and Cost of Goods Sold Understand cost flow assumptions and how they affect inventory valuation and Cost of Goods Sold. Learn how to calculate COGS and ending inventory under FIFO, average cost, and LIFO. Understand the tax consequences of LIFO vs. FIFO.
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Definition and Valuation Inventory is defined as goods held for sale in the normal course of business or items used in the manufacture of products that will be sold in the normal course of business. Inventory is recorded on the balance sheet at the lower of the cost or the market value.
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Three Types of Business Retailer – purchase inventory for sale Manufacturer – produce inventory for sale Service provider – no inventory for sale Inventory is very important to retailers and to a lesser extent manufacturers. Financial institutions, Internet firms, and service providers carry little or no inventory.
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Inventory as a percentage of total assets and current assets Inv / TA Inv / CA Manufacturing General Electric .02 .07 Chevron .03 .13 Retail SUPERVALU .23 .68 Tommy Hilfiger .09 .26 Internet Yahoo .00 .00 Cisco .04 .11 General service SBC communications .00 .00 Wendy’s .02 .13 Financial service Bank of America .00 .00 Merrill Lynch .00 .00
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Inventory Accounting  - Manufacturer Direct Labor Direct Materials Overhead Product 1 Inventory Product 2 Inventory What costs flow into each product's inventory account? Product 1 COGS and ending inventory Product 2 COGS and ending inventory When are costs transferred to the Income Statement? " Ins" Decision "Outs" Decision
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An Example of Inventory disclosure   -- Intel Inventories. Inventories are stated at the lower of cost or market. Cost is computed on a currently adjusted standard basis (which approximates actual cost on a current average or first-in first-out basis). Inventories at fiscal year-ends were as follows: (In million) 1997 1996 Raw Materials $ 255 $ 280 Work in Process 928 672 Finished goods 514 341 Total $1,697 $1,293
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Beginning balance of Inventory + Production or Purchase (= Cost of goods available for sale) - Cost of Goods Sold = Ending balance of Inventory Problem: companies do not produce or purchase just once. Instead, they do it multiple times at different cost or price. How do we determine which “units” go into Cost of Goods Sold and which stay in Inventory? We need to track the quantities sold and also assume a cost flow.
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This note was uploaded on 04/11/2009 for the course ACCT 410x taught by Professor Bonner during the Fall '06 term at USC.

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Lecture 13&14 Inventory and Cost of Goods Sold -...

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