Lecture12 2010.10.20 PostClass

Lecture12 2010.10.20 PostClass - Lecture 12 Inventory...

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1 Lecture 12 Inventory Accounting
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Announcements Exam 1 Re-grade request deadline: 10/27 @ 4:30pm Exam 2 notification of conflict deadline: 10/29 Upcoming events – HW #2: 11/7 9am – Exam 2: 11/8 6-8pm 2
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3 Key Issues in Inventory Accounting 1) How should the inventory be valued at acquisition? 2) How should the cost of goods sold (used) be determined? – How should the inventory be valued subsequent to acquisition? 3) What happens if inventory loses value? 4) What costs are included in inventory? Lecture 13 Today’s Class
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Goals of Today’s Class Accounting for inventory acquisition Accounting for use of inventory – FIFO – LIFO LIFO Reserve LIFO Liquidation – Weighted Average Cost 4
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Accounting for Acquisition of Inventory 5
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6 Accounting for Acquisition Inventory XXX Cash (or Accounts Payable) XXX
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Accounting for Use of Inventory 7
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Accounting for Use of Inventory What we have seen so far: Sale (use) Cost of Goods Sold (Expense) YYY Inventory YYY 8
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Issues: Since historical cost is used as the basis for valuing inventories, then identical goods purchased at different times may have different values associated with them. – How do you decide between how much to allocate for COGS and how much to inventory? There is also a timing issue as to when inventory use should be recorded. 9 Accounting for Use of Inventory
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Timing: When should the Cost of Goods Sold be Recorded? The Perpetual Method: Both purchases and sales (use) of inventory are recorded as they occur. Both the inventory account balance and the cost of goods sold (COGS) account balance are always up to date, reporting the cost of inventories on hand and the cost of goods sold to date, respectively. The Periodic Method: Purchases are recorded as they occur, but COGS are recorded only at the end of the period (as an adjusting entry). Thus, the inventory account balance and the COGS account balance are only up to date at the end of the period, after the adjusting entry, to record COGS, has been recorded and posted. For financial reporting, most firms use the periodic method.
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11 Under the periodic inventory method… Inventory Cost of Acquisitions Cost of Beginning Inventory Cost of Goods Sold / Used Cost of Ending Inventory Cost of goods available for sale While, in general, the quantity of goods sold and the quantity of goods held in the ending inventory are known, the cost of goods sold and the cost of the ending inventory must be determined
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12 Allocating Cost of Goods Available for Sale
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13 If there are identical items included in goods available for sale that were purchased at different costs, then we need to answer the following questions: Which costs are to be associated with the ending inventory and which are to be associated with the goods sold?
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