Ch 9 - Why Does a Company Need a Cost Flow Assumption...

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Why Does a Company Need a Cost Flow Assumption in “Reporting Inventory? Chapter 9 CLASS PREP 1 If using LIFO makes a company’s income lower, why would any company want to use it? Why isn’t there just 1 acceptable inventory method? Which inventory methods are acceptable for international companies? What does a company do that has both U.S. and international inventories? A certain company has had a difficult time selling its product even though its sales are higher this year than last. How might a financial statement reader determine that there is a problem? I. The Necessity of Adopting a Cost Flow Assumption A. In the financial reporting of inventory, what is the significance of disclosing that a company applies “first in, first out,” “last in, first out,”, etc. CLASS PREP 1 Assume Kroger’s bought some cans of green beans during the year for .$50, $.51, and $.52 each. If Kroger’s has 20 cans of green beans left at the end of the year, how does Kroger’s know what the cost is of each can? B. What are the various cost flow assumptions and how are they applied to inventory? 1. Specific Identification 2. First-in, First-out (FIFO) 3. Last-in, First-out (LIFO) 4. Average cost (Averaging) CLASS PREP 2 Why is there more than 1 inventory method? If using LIFO makes a company’s income lower, why would any company want to use it? 9-1
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EXAMPLE 1: INVENTORY METHODS A summary of the purchases and sales of the Draper Sales, Inc. during 20x1 follows: Cost/unit Purchases Sold Beg. Inv 30 400 units Jan. 2 300 units Mar. 6 32 1,600 Apr. 10 1,000 June 1 34 1,000 Oct. 23 1,200 3,000 units avail 2,500 units -2,500 units sold = 500 units left A. Specific Identifcation--Assume that 200 units in the ending inventory were from the June 1 purchase and the remainder were from the Mar 6 purchase. 200*34+300*32=16400 (cost of EI)
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This note was uploaded on 04/15/2011 for the course ACC 2303 taught by Professor Jones during the Spring '08 term at Baylor.

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Ch 9 - Why Does a Company Need a Cost Flow Assumption...

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