Handout_08_(APSCW_-_F2009)

Handout_08_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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BUSI W3013 Handout 08 | Page 1 F INANCIAL A CCOUNTING BUSI W3013 | F ALL 2009 H ANDOUT 08 PROFESSOR ANDREW SCHMIDT 1.0 Introduction ……………………………… 1 2.0 Types of Costs ……………………………… 2 3.0 The Inventory Equation ……………………………… 3 4.0 Inventory Systems ……………………………… 6 5.0 Inventory Cost Flow Assumptions ……………………………… 13 6.0 Inventory and the Statement of Cash Flows ……………………………… 21 7.0 Disclosure Requirements ……………………………… 22 8.0 Analyzing Inventory Disclosures: The LIFO Reserve ……………………………… 26 9.0 Financial Statement Analysis of Inventory ……………………………… 30 10.0 Practice Exercises and Solutions ……………………………… 34 11.0 Problem Set 07 ……………………………… 53 H ANDOUT O BJECTIVES : I NVENTORIES 1) Understand the difference between product and period costs. 2) Understand the basic “structure” of the inventory equation 3) Describe the different inventory categories for manufacturing firms 4) Understand the flow of product costs for manufacturing firms and how the accounting system records this flow. 5) Distinguish between perpetual and periodic inventory systems. 6) Compare and contrast cost flow assumptions used in accounting for inventories 7) Understand the significance of a major inventory disclosure: the LIFO reserve. 8) Explain the effects of LIFO liquidations 9) Understand ratios used to analyze inventories 1.0. I NTRODUCTION For merchandising firms , inventories include all the goods that are owned by the firm and are held for sale in the ordinary course of business. For manufacturing firms , inventories include Raw materials (raw materials inventory, RMI) Incomplete products (work in process inventory, WIPI) Complete products (finished goods inventory, FGI) Inventories are classified as a current asset and appear on the balance sheet at the lower of cost or market value. Two basic questions relating to inventory that commonly arise are:
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BUSI W3013 Handout 08 | Page 2 How do we measure the cost of inventory? How do we measure the market value of inventory? The answer to the second question is conceptually simple. The “market value” of inventory is measured as the current cost to purchase/produce the inventory, that is, the replacement cost of inventory on the balance sheet date. 1 The answer to the first question, however, is quite complicated. The remainder of this handout discusses and compares the different methods used in measuring the cost of inventory. 2.0. T YPES O F C OSTS 2.1. Cost Classifications Most costs can be classified as either product or period costs: Product costs: costs directly related to specific revenues or products. The application of the matching principle with respect to these costs is straightforward (e.g., the cost of inventory sold is matched with the related sales revenue in the same income statement). Period costs:
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This note was uploaded on 02/27/2011 for the course BUSINESS 101 taught by Professor S during the Spring '10 term at Columbia College.

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Handout_08_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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