Chapter 5- powerpoint class notes

Chapter 5- powerpoint class notes - CHAPTER 5 Reporting and...

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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 affects . . . Balance Sheet Income Statement The matching principle requires matching cost of sales with 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 Frequency in Use of Inventory Methods 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. 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) Last-In, First-Out (FIFO) 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 Advantages of Methods Weighted Average First-In, First-Out Last-In, First-Out Smoothes out price changes. Ending inventory approximates current replacement cost. Better matches current costs in cost of goods sold with revenues. Tax Effects of Costing Methods The Internal Revenue Service (IRS) identifies several acceptable methods for inventory costing for reporting taxable income. If LIFO is used for tax purposes, the IRS requires it be used in financial statements. Consistency in Using Costing Methods The consistency principle requires a company to use the same accounting methods period after period so that financial statements are comparable across periods. Lower of Cost or Market Inventory must be reported at market value when market is lower than cost (FIFO/LIFO Weighted Average etc.) Defined as current replacement cost (not sales price). Consistent with the conservatism principle. Can be applied three ways: (1) (2) (3) separately to each individual item. to major categories of assets. to the whole inventory. Lower of Cost or Market A motorsports retailer has the following items in inventory: Lower of Cost or Market Here is how to compute lower of cost or market for individual inventory items. Lower of Cost or Market Here is how to compute lower of cost or market for the two groups of inventory items. Lower of Cost or Market Here is how to compute lower of cost or market for the entire inventory. Adjusting Entry for LCM Adjustment (Similar to Shrinkage) If LCM is applied to inventory as a whole: Financial Statement Effects of Inventory Errors Income Statement Effects Exh. 5.10 Financial Statement Effects of Inventory Errors Balance Sheet Effects End of Chapter 5 ...
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