ACCT303 Chapter 9 teaching pp

ACCT303 Chapter 9 teaching pp - Chaptger 9: Inventories...

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Unformatted text preview: Chaptger 9: Inventories Learning objectives 1. The relationship between inventory valuation and cost of goods sold. 2. The two methods used to allocate the total inventory cost between the COGS and the ending inventoriesperpetual and periodic. 3. What kinds of costs are included in inventory. 4. What absorption costing is and how it complicates financial analysis. 5. The difference between inventory cost flow assumptionsweighted average, FIFO and LIFO. 9-1 Learning objectives concluded 1. How LIFO reserve disclosures can be used to estimate inventory holding gains and to transform LIFO firms to a FIFO basis. 2. How LIFO affects firms income taxes. 3. How to eliminate realized holding gains from FIFO income. 4. Economic incentives guiding the choice of inventory methods. 9-2 Learning objectives concluded 1. How to apply the lower of cost or market method. 1. The key differences between GAAP and IFRS requirements for inventory accounting. 9-3 4 Main Types of Businesses Service Companies: Travel agency, Entertainment, Internet, etc . Merchandising Companies: Wholesalers and retailer: to buy and sell ready-to-sell merchandise. Manufacturing Companies Acquire and process raw materials into finished goods. 5 Main Types of Businesses For both merchandising and manufacturing companies, inventories are important assets. Therefore, inventory accounting is crucial to financial reporting. 6 Inventory types Wholesaler or retailer: Manufacturer: Manufacturer Merchandise inventory Customer Raw materials Work-in-process Finished goods Supplier Customer Includes other manufacturing costs ( Direct labor costs, direct materials, manufacturing overhead, etc.) Firm Firm Gross Profit: Sales Cost of Goods Sold Overview of accounting issues What kind of costs are included in inventory? How is the cost of goods available for sale split between the balance sheet and the income statement? Old unit New unit Issue: Issue: 9-7 Overview of accounting issues: Summary Weighted average FIFO LIFO GAAP does not require the cost flow assumption to correspond to the actual physical flow of inventory. If the cost of inventory never changes, all three cost flow assumptions would yield the same financial statement result. No matter what assumption is used, the total dollar amount assigned to the balance sheet and the income statement is the same ($640 in this example). Three methods for allocating the cost of goods available for sale: 9-8 Overview of accounting issues: Allocating the cost of goods available for sale Weighted average approach: Uses the average cost of the two units....
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ACCT303 Chapter 9 teaching pp - Chaptger 9: Inventories...

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