Notes Ch 9 - a LIFO Conformity Rule U.S income tax rule...

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Jorge Rossello Busi 100 Chapter 9 Notes I. The Necessity of Adopting a Cost Flow Assumption a. Various Cost Flow Assumptions i. Specific Identification: Method in which company physically identifies both its remaining inventory and the inventory sold to customers. ii. FIFO (First-In, First-Out): Assumption based on the oldest costs being transferred first from inventory to cost of goods sold so that the most recent costs remain in ending inventory. Assumes that oldest inventory items are sold first. iii. LIFO (Lasti-In, First-Out): Assumption based on the most recent costs being transferred first from inventory to cost of goods sold that that the oldest costs remain in ending inventory. Assumes that newest inventory items are sold first. iv. Averaging: Assumption based on the average cost being transferred from inventory to cost of goods sold so that the same average cost remains in ending inventory. II. The Selection of a Cost Flow Assumption for Reporting Purposes
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Unformatted text preview: a. LIFO Conformity Rule: U.S. income tax rule requiring LIFO to be used for financial reporting purposes if it is adopted for taxation purposes. b. LIFO Liquidation (PROBLEM): When current revenues are paired with past costs so that reported profits seem much higher than they actually are. Occurs when companies purchase and sell the same amount of product each year, leaving the original cost of inventory as the basis for computing COGS. III. Merging Periodic and Perpetual Inventory Systems with a Cost Flow Assumption a. For moving (perpetual) averaging, make a new average price every time company buys inventory at a new price. b. Gross Profit Percentage = Gross Profit / Net Sales c. COGS/365 = Cost of inventory sold per day i. Avg. Inventory/Cost on inventory sold per day = number of days inventory is held d. COGS/Avg. Inventory = Inventory Turnover...
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