CH6+INVENTORIES+09F (1)

# CH6+INVENTORIES+09F (1) - Ch 6 1 Acct 207 CHAPTER 6 ACCT...

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Ch 6 Acct 207 1 CHAPTER 6 - ACCT 207 – INVENTORIES I. FOUR METHODS of costing inventories: (tells us \$ amounts) - (see Because purchase prices change, there are different methods to value or "cost" the inventory. The methods represent cost effective way to assign the ever changing purchase prices to the items in inventory. A. FIFO first in-first out (periodic = perpetual) Assume the flow of goods sold (on paper, not the actual flow) are oldest items purchased are the first to be sold. Continue in chronological order of purchases. So, Ending Inventory is the newest items purchased by the company. B. LIFO last in- first out (periodic ≠ perpetual) Assume the flow of goods sold (on paper, not the actual flow) are newest items purchased are the first to be sold. Continue in reverse chronological order of purchases. So, Ending Inventory is the oldest items purchased by the company. Weighted average is periodic ≠ moving average which is perpetual You know how to do a weighted average from statistics. D. Specific identification - reflects ACTUAL flow of goods sold Periodic = Perpetual (usually used for unique, expensive items) E. If business use LIFO for taxes --must use it for financial statement purposes (LIFO conformity rule) F. Determine method(s) being used by reviewing the footnotes to the Balance Sheet. II. REMEMBER: (see p. 5 of handout for example with numbers from class problem).

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Ch 6 Acct 207 2 Purchases are always the same for every inventory method. The purchases are what uses the cash ; so the only differences in the cash used is a result of the income taxes of the seller. Cost of goods sold is a non-cash expense like bad debt expense and depreciation expense. Expenses NI Taxes so more Cash Expenses NI Taxes so less Cash Which method should you use? Usually the goal is to pay as little income taxes as possible now--try to postpone to the future when the dollar has less value. We want cash now . We will do cash flows for this chapter according to p.5 of this handout. III. LIFO provides the best MATCHING on Income Statement: “current costs expensed against current sales”. FIFO provides the most realistic Balance Sheet: current cost in the inventory. IV. Conservative constraint requires that before finally valuing inventory for the balance sheet, we must compare the cost (in ledgers) to the market. If cost drops below market then you must write down inventories. This procedure is called the lower of cost or market. Remember: Never write up inventories. By market, GAAP uses current replacement cost. B. Comparability is increased due to LIFO reserve. The LIFO reserve represents the difference between ending inventory using LIFO and ending inventory if FIFO were used instead. It is used to make financial statements more comparable. Remember insurance claims!
Ch 6 Acct 207 3 CLASS PROBLEM – FIFO Periodic (First In- First out) Assumed flow of goods SOLD: sell oldest (Cost of goods sold on Income Statement)

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CH6+INVENTORIES+09F (1) - Ch 6 1 Acct 207 CHAPTER 6 ACCT...

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