PDF_PP_Slides_08_(APSCW_-_F2009)

PDF_PP_Slides_08_(APSCW_-_F2009) - 11/23/2009 Objectives:...

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11/23/2009 1 Objectives: Handout 08 Understand the difference between product and period costs. Understand the basic “structure” of the inventory equation Describe the different inventory categories for manufacturing firms Understand the flow of product costs for manufacturing firms and how the accounting system records this flow. Distinguish between perpetual and periodic inventory systems. Compare and contrast cost flow assumptions used in accounting for inventories Understand the significance of a major inventory disclosure: the LIFO reserve. Explain the effects of LIFO liquidations Understand ratios used to analyze inventories Inventory Merchandising Firms: Inventory includes all goods held for sale in the ordinary course of business. Manufacturing Firms: Inventory includes: Raw Materials (RMI) Work-in-Process (WIPI) Finished Goods (FGI) Inventory is classified as a current asset and appears on the balance sheet at the lower of cost or market (LCM). Handout 08, p. 1
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11/23/2009 2 Inventory We will spend our time discussing the following 2 issues: 1. How do we measure the cost of inventory? 2. How do we measure the market value of inventory? The answer to question #2 is fairly simple. With certain exceptions, the “market value” of inventory is the current cost to purchase or produce the inventory (i.e., the replacement cost). The answer to question #1 can be quite tricky. Handout 08, pp. 1, 2 Inventory Product costs = Costs directly related to specific revenues or products. Matching principle here is straightforward Materials, Labor, and Overhead Costs COGS! Period costs = Costs directly related to a specific period. Allocated based on the passage of time Period costs help generate revenues during the period. According to the matching principle, these costs should be recognized as an expense when incurred. SG&A Expenses Handout 08, p. 2
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11/23/2009 3 Inventory There are two additional types of costs that are recognized as an expense in the income statement in violation of the matching principle: 1) Costs that are expected to benefit future periods, but the amount and timing of future benefits are highly uncertain. Future benefits are too uncertain to be recognized as an accounting asset, so the costs are expensed when incurred. R&D Costs and Advertising Handout 08, p. 2 Inventory There are two additional types of costs that are recognized as expense in the income statement in violation of the matching principle: 2) As new information becomes available, managers may learn about costs that relate to past periods, which have not been recognized as an expense yet. Recognize these costs as an expense when identified.
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PDF_PP_Slides_08_(APSCW_-_F2009) - 11/23/2009 Objectives:...

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