Lecture 8 Inventory and COGS

Lecture 8 Inventory and COGS - Click to edit Master...

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Unformatted text preview: Click to edit Master subtitle style 9/13/11 LECTURE 8 Inventory & COGS MGCR 211 9/13/11 Overview Importance Components Valuation criteria Inventory systems Cost flow assumptions Inventory estimations Internal Controls 9/13/11 Importance Inventory is at the core of many businesses Inventory includes many costs : direct & indirect Proper tracking helps management make business decision and monitor profitability 9/13/11 Inventory - Definition Item purchased by a company for re-sale to customer Depending on company, item purchased can be produced, modified or sold as is. Company will re-sell item to customer by charging a profit. Until sold, inventory is an asset. Once sold, inventory is a Cost of Good Sold 9/13/11 Record Store Inc. How should we record our inventory of CDs? 9/13/11 Valuation Historical Cost l Cost at the date inventory was acquired l No estimates or bias l No adjustment if value of the inventory goes up 9/13/11 Valuation Market Value l How can you define market value for inventory? Sales price (retail price) Defined by the market Replacement cost Cost to reproduce or replace the item in inventory given the market conditions today. Net realizable value (NRV) 9/13/11 Valuation Canadian GAAP Indicates that inventory should be recognized at Lower of Cost or NRV In line with principle of being conservative Reduces the amount of bias or estimates that are included in the inventory figure 9/13/11 Valuation of Inventory Remember that investors do not like bad surprises Therefore, what would be their reaction if they found out that your inventory CD at $5, was not realistic. Certain events can happen that can change the value of the inventory 9/13/11 Types of events that could indicate Decrease in value Change in retail price Change in market conditions l Competition, regulation Change in costs to sell Change in customer taste Change in currency Change in customer (loss of a major customer) 9/13/11 Inventory - Impairment When the NRV of the inventory becomes lower than the cost, the inventory is said to be impaired To be in line with GAAP, a company must...
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This note was uploaded on 09/12/2011 for the course MGCR 211 taught by Professor La rocca during the Fall '08 term at McGill.

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Lecture 8 Inventory and COGS - Click to edit Master...

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